Acme United Corp (ACU) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Acme United first-quarter 2009 earnings call. As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Mr. Walter Johnsen, Chairman and CEO. Please go ahead.

Good morning. Welcome to the first-quarter 2009 earnings conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a Safe Harbor statement. Paul?

Forward-looking statements in this conference call, including, without limitation, statements related to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, without limitation, the following -- one, the Company's plan, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; two, the Company's plans and results of operation will be affected by the Company's ability to manage its growth; and three, other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission.

Walter?

Thank you, Paul. Acme United reported first-quarter 2009 sales of $11.3 million compared to $14.3 million in 2008, a 21% decrease. Net income was $42,000 in the first quarter of 2009 compared to $753,000 last year. We had a slowdown of orders across nearly all our markets and customers, whether in the school mass or office markets or industrial and professional accounts. Many of our retailers are reducing inventory. We saw end-users trading down to inexpensive products from our higher-quality ones.

It has been difficult to get new products launched. Our customers have shown great interest in many of the new items, and we're quite excited about them. However, the time from commitment to shelf has lengthened. Many of our customers are reducing old inventory at a slower than normal rate due to slow sales, delaying new introductions. Others are concerned about the cost to reset planograms in their stores. Some customers have had so many layoffs and job changes that nothing new seems to happen.

We're doing things to address the soft market. Our marketing team has been carefully reviewing sell-through of our items to best address current demand. Our sales team has been in front of most of our customers during the past quarter. They're working on new promotions, sales incentives and assistance in implementing new introductions. We view ourselves as partners with our customers and see our job as making them successful in our categories.

On the cost side, we continue to review each line item of expense. We believe we were lean to begin with, but this focus has been revealing savings. And here are some examples. Global videoconferencing has reduced our travel costs. Then we reduced our travel budget by bidding it out and reduced lodging expenses about 20%. Our communication costs have been reduced by bundling services and eliminating unnecessary lines. We halted incentive pay and put a freeze on new hires and salary increases.

The first quarter of 2009 had the worst sales falloff in our recent history, and we broke even. So now let's look forward.

The second and third quarters are historically stronger than the first quarter due to back-to-school shipments. We have a solid book of business for the coming two quarters, and we believe we are seeing an uptrend in the underlying order rates. We have gained five large mass-market industrial and hardware accounts during the past six months, and they are now placing orders. We have shipped our SpeedPak utility knife to a major do-it-yourself chain nationwide, and it has a prominent place on the planogram. Reorders are coming in. SpeedPak is also now carried at major industrial distributors, catalogs and online. It took a year longer than we expected, but we're seeing momentum for the SpeedPak utility knife.

The iPoint pencil sharpeners are now in full gear, going to school accounts, mass retailers and office superstores. Our next-generation nonstick cutting implements will be on the market for back-to-school in this quarter.

New product development continues, and we look forward to introducing a broad array of new items in September. We intend to provide guidance after the second quarter, when these initiatives show results. We believe we are now on the upside and have confidence in the coming quarters and that they will be much stronger.

I will now turn the call to Paul Driscoll.

Acme's net sales for the first quarter were $11.3 million compared to $14.3 million in 2008, a 21% decrease, or 19% in constant currency. Net sales for the first quarter in the US segment decreased 22%, mainly due to customers reducing inventory as a result of the weak economy.

Net sales in Canada decreased by 24% in US dollars and 5% in local currency. Although the economy is also soft in Canada, we were able to offset some of the sales decline with new business.

Net sales in Europe decreased by 8% in US dollars, but increased 6% in local currency.

Sales in the office business were down by approximately 10%, but this was more than offset by higher sales of manicure products, which resulted from increased distribution and product assortment.

Gross margins were 38.1% in the first quarter of 2009 versus 42% in the first quarter of 2008. The lower margin in 2009 is primarily due to an unfavorable product mix and higher costs in the Canadian and European businesses due to the weaker Canadian dollar and euro. Also, the fixed costs were spread over lower sales, resulting in a 1.3-point gross margin decline.

SG&A expenses for the first quarter of 2009 were $4.2 million or 37% of net sales compared with $4.9 million or 34% of net sales for the same period of 2008. The decrease was due to lower sales commissions and freight costs associated with lower sales and various cost reductions.

Operating profit was $82,000 in the first quarter of 2009 compared with approximately $1.1 million in the first quarter of 2008. Operating profit for the US and Canada decreased by approximately $860,000 due to the lower sales. The operating loss in Europe increased by $100,000 due to lower gross margins.

Net income for the first quarter of 2009 was $42,000 or $0.01 per diluted share compared to net income of $753,000 or $0.21 per diluted share for the same period of 2008.

The Company's bank debt, less cash, on March 31, 2009, was $8.6 million compared to $7.9 million on March 31, 2008. During the 12-month period, the Company repurchased 208,000 shares of Acme United stock for approximately $1.9 million.

Thank you, Paul. I will now open the call to questions.

(Operator Instructions). Chris Doucet, Doucet Asset Management.

Walter, can you tell us how trends are going in the month of April versus March?

Well, there's really two trends, Chris. The first is the underlying office rate, and the second is the back-to-school orders, which are the normal back-to-school orders.

The office business continues to be soft, but not, at least so far in April and not in March, at the levels we had in February and January, although they are still down. But I would say they're more like down 10% to 12%.

The school business, and that is really the shipments of so many compasses, rulers, Microban kids' tools, that is a pretty solid piece of business. I think it will be this year comparable to last year. There's also a lot of iPoint pencil sharpeners in the back-to-school. So that piece is picking up.

There is one trend that may be a positive, and that is the SpeedPak was placed in a large chain during March, and the reorders are coming in now. It is in all stores nationwide. I am delighted with the placement. It is right at eye level. So maybe that will help a little bit, too.

Okay. Exactly where do you think that gross margins will come in this quarter versus last quarter? I know last quarter they were 38%. Do you expect them to improve this quarter or stay about the same?

Well, one part of that was the 1.3 points that related to spreading the cost of those products over a limited sales volume. I would expect that to be improving because we traditionally have much stronger sales in the second and third quarters. And we will have much stronger sales. So that 1.3% should be leveled out and closer to zero, on a decline.

The remaining piece, it is sort of a mix issue. Normally, the back-to-school has a little bit lower margin because it is very competitive. And you may remember last year, when we shipped a great deal from Asia, margins were compressed a little bit, but on the other hand, we didn't have the warehousing costs and some of the extra handling expenses here in the US.

So I would tell you that I would think the margin would be up a little bit from where it was this past quarter.

And maybe this is a question for Paul. Paul, do you expect inventory to build in the second quarter over the first quarter?

Well, because of the back-to-school, we are probably going to build more. We're pretty heavy in the third quarter with back-to-school sales. With the recent decline in sales, it has been very recent. And because we have such long leadtimes and we're carrying five to six months of inventory, it takes a little bit of time to correct the inventory levels. So I would expect it to increase in the second quarter, but the turns to remain pretty much the same as the first quarter.

Just two more quick questions and I will jump back in the queue. Walter, any comments on the European operation?

Well, the European operation has been frustrating to us. And I think it is unfortunate right now that, particularly in the UK, they are having a more difficult time with their economy than the US. So we're fighting a headwind there. We see some promotions coming in, in the second and third quarter, in the mass-market with the mass retailers, particularly in Europe, as well as those in the UK. But I wasn't happy at all with the performance in the first quarter.

And the manicure product, is that a new product for you guys, and under what brand do you market it?

The manicure product is not a new brand. It's sold to Schlecker, which is the largest drug chain in Europe. It's got about 17,000 outlets. It's a really big number. And we provide the private-label Schlecker-branded manicure items throughout their chain. Several years ago, it was a small part of the European business, but it has continued to grow, in part because we have gained position at Schlecker, and in part because they have completed a fairly large acquisition just under a year ago, which is now fully integrated and moved over to our brand.

Okay. And one last question -- how much room do you have left on your stock buyback program?

We have -- I think it is over 125,000 shares.

Yes, it's exactly 125,000.

Okay. Thank you, guys.

(Operator Instructions). Mitch Almy, McAdams Wright Ragen.

Just wanted to -- had a couple questions. I wanted to see if I could get your take. I mean, from my perspective, and sort of an unexpected dropoff in sales -- I think everybody is seeing a little bit of that -- but in February, the firm hired a communications firm to broaden investor exposure. And we're doing this at a time when, three months later, you're taking pretty much across-the-board measures to try and reduce expense. Earnings are off. We have been through a year where, in terms of the reported sales, there hasn't been one insider purchase. You just got done saying that the time from commitment to a final sale has lengthened, while part of the strategy has been to make tuck-in acquisitions, albeit at very low prices, and introduce new products.

I guess what I'm trying to do is have you, maybe in light of the dropoff in sales, see -- strategically, I don't understand what a communications firm to broaden the investor base has to go with right now? Do you see my question?

I think it is a very poignant question. I think that one quarter is not representative of what we have been doing. And just to be a little bit proud of the performance, we knocked the cover off last year ending in December for a year -- that was pretty tough, particularly in the fourth quarter -- with both record sales and earnings. We were surprised by the decline in January and February, but I don't think that that is representative of either the long-term potential for the Company. And I think for some investors, this might be an incredibly good time to be taking the position, particularly because we think we are now bottoming out and we're on the upside of this.

Okay. Great. It would give us confidence, and I know it would give a communications firm confidence, if we saw officers, the Board, purchasing shares in addition to the Company buying shares while officers have been selling.

On an unrelated topic --

Incidentally, Mitch, I think that has been noted. I will be bringing that up.

On the bank, is there anything that this quarter, since it's somewhat unexpected, is -- are we getting close to triggering any covenants in your bank agreement?

No. The bank agreement -- there's hardly any covenants. There's an earnings covenant, but we, even at this level, cover it.

Okay, just was asking. The outlook for acquisitions -- this will be my last question -- are we getting close on anything?

There has been a handful of reasonably significant things we have looked at. It is premature to say any of them will come to fruition. And honestly, I'm as careful with that as I have always been. But there's a lot of opportunities that we're looking at, and we are trying hard to find something that is good. But I wouldn't say right now next quarter we are closing something because that may not happen.

I would like to get off and let somebody ask a question, but please understand that I feel the firm did perform very well in a market where sales dropped off. I was only questioning the timing of hiring a communications firm while that is taking place.

Understand, and it is noted.

Jeffrey Matthews, Ram Partners.

I was just going to make the note that you hire people when you hire people. And the fact is, you got through a very tough environment making money. And I am looking at my Bloomberg here -- [Newell Corp.] lost $250 million last year. So my guess is, your stock is probably more of a value at $7.50 than it was at $21. And I don't see what it matters when you hire a communications firm if you guys think that internally things are cooking along to the point where you're going to be able to really grow the business once the environment gets better. I don't think you can control the environment, and you do what you've got to do. And if it's hiring a communications firm in February, as far as I'm concerned, so be it. So that's all.

Well, we are watching our expenses, Jeff. And I think Mitch's comment is one I am sensitive to. I believe we have bottomed out, and what we're looking at is something much more exciting going forward. But if that is not the case, then we will continue to ratchet that down in spending.

Sure. And my other -- my actual question is, as always, your relationships with your larger mass-market vendors like Wal-Mart and Target, anything going on along those lines?

Well, we're probably going to have a record back-to-school with Target. I am delighted with that. We work closely with all of our major customers. What I am focused on particularly right now with some of the new (technical difficulty), some of those new ones are, like a Home Depot or like a Grainger or an Orchard Supply or a Northern Tool -- and there, we are working very hard to not only build them, but get lots more products into them. So the relationships are good.

Okay. Good luck.

(Operator Instructions). Michael Wasserman, Moors & Cabot.

Do you guys have a figure for the annualized amount of savings from the recent cost cuts you have taken?

Over $1.5 million.

Okay. And in retrospect, do you feel you began cutting as quickly as you should have, given what the economy was doing, or might you have started a bit earlier?

We cut the bonuses and rolled them into the fourth-quarter earnings when we saw that it was softening in the fourth quarter. I would say we really grappled with costs around October/November. We are continuing that, but honestly, in August and September we weren't seeing issues that we have experienced now. So I wish maybe we had done it earlier, but we were doing it very actively in the fourth quarter.

I think it is great that you've got all these new customers now. And I think as gentlemen have previously suggested, though, when the economy picks up, I think you could see some pretty good numbers flowing to the bottom line. And I am hopeful that will occur in the not-too-distant future. So good luck, and thanks.

Mike, thank you. But it really is frustrating to me to be blaming the economy on something. We have always managed our business. And in this case, it truly was our customers just not buying what they had been. So it is picking up, but a very frustrating quarter for us.

Yes, I can understand. Thank you.

Currently, we have no questions in the queue. I will turn the conference back over to our hosts for any closing or additional remarks.

I would like to thank you very much for joining us at the conference call. If there are no further questions, then the call is completed. Thank you.

And that does conclude our conference call. Thank you for joining us today.