Acme United Corp (ACU) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Acme United second-quarter 2009 earnings call. As a reminder, this 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, sir.

Good morning. Welcome to the second-quarter 2009 conference call for Acme United Corporation. I'm 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 plans, 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.

Thank you, Paul. Acme United reported net sales for the second quarter of 2009 of $19.2 million compared to $22.7 million last year. This was a decrease of 16%. Our net income for the quarter was $1.3 million compared to $1.7 million last year. Earnings per share declined 15% from $0.47 to $0.40.

Our sales continue to be behind last year, but there appears to be stabilization. We believe that our dealers, superstores, wholesalers and industrial distributors substantially reduce their inventories during the fourth quarter of 2008 and first quarter of 2009. It appears to us that our customers are operating so thinly that any increase in demand will result in orders. This is a difficult scenario for our customers because they must rely on their suppliers, including Acme United, to ship immediately.

Frankly, we anticipated this scenario, and we have adequate stock to fill the shelves with our products. During the next six weeks of back-to-school shipments, we expect a number of opportunistic sales due to unplanned and urgent shortages.

On a broader sense, we are seeing commitments from our customers for new products and programs, which is an improvement over the end of last year, end of the first quarter. This activity provides the avenues for growth. We introduced a proprietary titanium nonstick scissor family in May 2009. Three of these items are now in a major superstore chain throughout North America and are selling well. The technology behind the nonstick products was developed internally and is proprietary. This performance is truly outstanding, and we will be making a number of utility patents filings.

During the coming months, our nonstick technology will be extended to items intended for the school, craft, kitchen, garden and industrial markets. The results will be apparent in 2010.

Our Camillus knife family was formally relaunched at the National Hardware Show in May. The knives feature our high-performance titanium carbonite tried blades and outstanding designs. The responses has been strong, and we have sold more than we initially planned and have a backorder.

The first aid and safety category is expected to benefit in the fourth quarter of this year with the addition of 24 new items in one of the office superstore chains. We have also introduced a flu protection kit, which will begin shipping in September. There is high interest.

The SpeedPak utility knife is selling well and gaining distribution, and we continue to expect its sales to build. While it is difficult to forecast the impact of our new products and programs, we expect them to generate incremental growth next year. Our debt facility with Wachovia runs through June 30, 2010 and is very favorable. We have very few covenants, and the rate is one month LIBOR plus 7/8%, which translates to about 1.4% today. During the next several months, we will be working on a new line, and the relationship with Wachovia is very good.

I will now turn the call to Paul Driscoll.

Acme net sales for the second quarter were $19.2 million compared to $22.7 million in 2008, a decrease of 16% or 13% in local currency. Sales for the six months ended June 30, 2009 were $34.7 million compared to $37 million in the same period in 2008, a decrease of 18% or 14% in local currency. Net sales in the US segment decreased by 17% in the quarter and 19% for the six months ended June 30. Sales continue to be affected by customers reducing inventory as a result of the weak economy.

However, sales in the second quarter declined at a slower rate than the first quarter. Net sales for Canada decreased by approximately 15% in the quarter and year to date in US dollars but decreased only by 1% in local currency. Net sales for Europe decreased by approximately 5% in the quarter and year-to-date but increased by 10% 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 37.1% in the second quarter of 2009 versus 39.3% in the comparable period last year. For the first six months of 2009, gross margins were 37.4% compared to 40.3% in 2008. The lower gross margin in 2009 is primarily due to fixed cost spread over lower sales, higher cost in the Canadian and European businesses due to the weaker Canadian dollar and euro, and lower margin product mix.

SG&A expenses for the second quarter of 2009 were $5.1 million compared with $6.1 million to the same period of 2008. SG&A expenses for the first six months of 2009 were $9.3 million or 31% of sales compared with $11 million or 30% of sales for the same period of 2009. The decrease was due to various cost reductions and lower sales commissions and freight costs associated with lower sales. Operating profit was $2 million in the second quarter of 2009 compared with $2.8 million in the second quarter of 2008. Operating profit for the six months ended June 30, 2009 was $2.1 million compared to $3.9 million in the same period of 2008. Operating profit for the US segment for the six months ended June 30 decreased by approximately $1.4 million. Operating profit in Canada decreased by $330,000. The European operating loss was $380,000 in the first six months of 2009 compared with an operating loss of $350,000 in the first six months in 2008.

Net income for the second quarter of 2009 was $1,341,000 or $0.40 per diluted share compared to a net income of $1,730,000 or $0.47 per diluted share for the same period of 2008. Net income for the first six months ended June 30, 2009 was $1,383,000 or $0.41 per diluted share compared to $2,482,000 or $0.68 per diluted share in the comparable period last year. The Company's bank debt less cash on June 30, 2009 was $8.9 million compared to $11.3 million on June 30, 2009. During a 12-month period, the Company repurchased 208,000 shares of Acme stock for approximately $1.9 million.

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

(Operator Instructions). Jeff Matthews, Ram Partners.

I can endorse the scissors for you if you want, but I don't think hedge funds are too popular these days.

Thank you.

But they are quite good. I wanted to know what your thoughts were on cash flow and free cash flow for the full year. Where do you think net debt might end up at year's end?

We have got probably somewhere around $3 million to $3.5 million in receivables that relate to back-to-school, or we will have that, and that will be collected by November, which means if we are currently at net debt of $8 million, $9 million, we would probably be in the $6 million range, maybe $5 million.

Okay. Do you foresee any significant issues with your Wachovia -- (multiple speakers)

I really don't see any issues. The trade-off is obviously you cannot get too close to the edge with your bank debt. On the other hand, at 1.4% interest we have not had an incentive to quickly do something. We will be bringing several banks, although the relationship with Wachovia is very good and they have been very supportive.

So I would guess that in the next several months we will wrap up a new line.

Okay. And then finally, any sense of how back-to-school might have started out?

Our customers are buying very, very close to their actual sale. And as an example, normally in May, end of May, we will see large orders and then a little bit less in June. Here we found some orders in May and then in June. As those started to fill and they started to get better reads on their stock, they started to re-price with new orders.

The big back-to-school for chains like Staples starts about July 15. And right now we are getting calls from our customers saying, we underplanned, can you ship? And it's very hard to assess how big that back-to-school will be, but it is bigger than they originally thought.

Okay. Thanks. Good luck.

[Tom Philpot], private investor.

Yes, I was wondering on the European operations, I was wondering what your timetable is for that being profitable?

The European operations will probably have a very strong third quarter. There is a possibility that it will be profitable that quarter. Fourth quarter tends not to be that. We are doing a lot more promotions right now with our innovative items to the mass channel in Europe. And that is helping to fill in some of the revenue gap to breakeven. So we are driving in the direction where I suspect we will be seeing some quarters now beginning to turn into profitability, and then there will be others where it simply won't happen. During the second quarter, the operating loss declined almost in half. So we made progress there.

Okay. And the other question, did you do any share buybacks this quarter?

In the second quarter, we did not. We wanted to conserve cash and just see how we were generating cash. Although we were very pleased with the outcome of that in that we paid down $2.4 million of debt, and we expect that to continue.

Have you considered maybe increasing the dividend versus share buybacks as a strategy going forward?

We have increased the dividend about every 18 months, and the last increase was in the fourth quarter of 2008. My belief is that we will keep the dividend at the level we are at right now, continue to work on the balance sheet, opportunistically buy some shares, but really work on the balance sheet.

Okay. That's all my questions. Thank you very much.

(Operator Instructions). Richard Dearnly, Longport Partners.

A couple of questions if I may. Product questions. Does the titanium nonstick scissor replace an existing line, or do you get another facing in the store?

I would suggest, Richard, that you, and those listening, walk into a Staples store near you and look at the arrangement of scissors. What you will see is at the premium end, three nonstick titanium scissors, and the price is at a slight premium over the regular titanium scissors, which is another line of facing. And then below that will be the medium range scissors and then finally at the lower end the value scissors.

I think the real question is, will you be getting some cannibalization?

Right.

And I don't know. They are priced by several dollars apart in selling price. What we have found is that the nonstick has done very well. The remainder of the products continue to be performing. And so that reset, at least at that chain, has been successful.

I see. Do you supply all four lines of scissors?

Yes.

And do you make the YCL line in Wal-Mart?

I'm not familiar with YCL, but that is not ours.

Oh, not. Okay. And then in the sales breakdown you gave, the numbers seem different from what was in the press release. Specifically in the quarter the press release had Canada down 12 and you said 15, and Europe was down 3 in the release and 5 in the verbal. Did I hear this incorrectly?

No, I was approximating the effect of Canada was 12 and 17 in the release, and what I said today was approximately 15% in US dollars. It is an average of what I released in the earnings release.

I see. Okay. And then do school orders that come in on a just-in-time basis, i.e. later than last year, are they -- do you get a premium for those, or are they on the same sort of list price?

Well, it is not really school orders; it is back to school orders. (multiple speakers) -- retail chains. And we have got prices set with the retail chains, and generally they come in at the prices we have set. Sometimes you have got to substitute items.

For example, if we sell out and there are empty bins at one of the big retailers, we make substitutes, and that may be repriced. But, as a standard practice, we try to make our customers look good, and we ship them at the price that they contract us.

Right. On the last quarter's call, you talked about 130 basis points of gross margin pressure from fixed costs and implied that you would be recapturing that and, who knows maybe more, in the second quarter, and yet gross margins actually declined quarter to quarter. Was that a surprise, did something happen, or did I just misunderstand what you were saying in the last conference call?

No, the effect of -- the deleveraging effect of the fixed cost on the gross margin it continued and it was expected to continue if sales declined by 15% or 20% in the first quarter. So that was expected to continue.

The second quarter is typically a much more competitive pricing quarter, so it is not unusual for the margin to be less than the first quarter. It is because of the back-to-school season.

Okay.

That 1.3 points that we talked about in the first quarter, that continued into the second quarter because the sales were down 16% compared to 22% in the first quarter.

Was it still about 130 basis points?

Yes.

And what kind of sales do you need to recoup that 130 basis points? Do you need sales to be flat year over year or --?

Correct.

I see. Okay. Thank you.

Chris Doucet, Doucet Asset Management.

It is actually David from Chris Doucet's office. Congratulations on the quarter and continued strong performance in this environment. Can you give us any color on -- I did not hear you mention anything specifically on SpeedPak. But that is something we would like any kind of color you can provide.

SpeedPak is distributed now nationally at one of those large hardware chains. We are shipping somewhere around 50,000 a month in replenishments to that and a number of other chains right now. And it has gotten distribution now in some industrial catalogs into some hardware catalogs for next year. And so it is getting placements.

In one of the hardware co-ops, it has also now been placed. So it is gaining distribution. But where it is already being distributed, it is selling quite well.

So would you say it is meeting your expectations or exceeding expectations?

Well, it is meeting our expectations on selling the body of the SpeedPak, of the utility knife. What is surprising to me is we are selling more of the blades. As you may remember, some are snap point, some are sharp, some are serrated, some are hook blades, and they are all in the cartridges. We are selling about two cartridges for every utility knife blade, and we were surprised at that kind of extra pickup on the blades.

I think you put some price increases through at the beginning of the year that you have spoken on on the past calls. But -- and you are contracted with your customers. But are you seeing any kind of pushback at this point or through the last few months on pricing or any kind of pressure on your pricing that you can talk about?

There is a lot of pressure on pricing, and it seems almost relentless. We may have pushed through some price increases relative to items that truly went up in cost, but by and large we are very competitive in the marketplace, and our customers are unrelenting in pushing on price.

But still respecting the contracts?

Sure. Oh, yes.

The length of the contracts?

Sure.

One last question. You said, just so I'm clear, you said you expected to have your bank debt by the end of the year in maybe the $6 million range net debt --

Net of cash, right.

Net of cash. Okay. Well, that is all my questions, and good luck next quarter.

Tom Spiro, Spiro Capital Management.

Number one, in these difficult economic times, Walter, I was curious if you're seeing much trade down from the premium end to the value and?

We have seen some. We are tracking that quite closely. We are seeing that on our value scissors, which tend to have lower margin. They are increasing modestly, and some of our higher ones are down 5%, 7%. So there is some trade down.

Having said that, it has not been radical. But after all we are talking about primarily scissors, rulers and things that are not very expensive.

Also, with respect to both our customers and our competitors, are you aware of any of them that are in real financial distress, serious financial problems?

There was one office superstore chain that I was concerned about that was a reasonably large customer. But they've recently completed a private equity investment, and that was comforting. All of our major accounts are current, and they really have not shifted out in days outstanding. Frankly, I'm a little bit surprised, but that really has not happened. There is a distributor in the UK that right now is going for a refinancing, but it is a small customer. So by and large, at least with our customers, they are on time with payments, and they are working their way through any problems they have. With our competitors, unfortunately I think they were all just doing about like us, and they are not falling by the wayside.

Finally, how are your acquisition initiatives if any?

There are quite a number of candidates that we continue to be evaluating. Many of them for many reasons aren't quite the fits that we want, and we are actively out in the market. But there is nothing that I can tell you right now is close to happening.

Are these mainly companies or product lines?

Well, a few of them are companies that have had financial problems, so they are not competitors. But they are allied businesses. We've tried to buy some product lines and sometimes brands. So it is a mix.

Well, thanks much and good luck.

Jeff Matthews, Ram Partners.

I just wanted to follow up on the CIT situation. I wonder if Acme has any exposure there or if any significant customers have exposure there that you might be looking at and if you have any of your own take on how important that situation is in general?

Well, we may have exposure to CIT, but I'm not sure I know it. My belief is they were mostly dealing with medium-sized businesses, not larger ones. Perhaps some of our dealers were financing with CIT, but I'm not aware of it.

Okay. Okay, great. Thanks.

Richard Dearnly, Longport Partners.

To follow up on the price question, you had guessed that '09 pricing would be up 3% to 5%. Is that still a reasonable guess?

One of the things that is very difficult is when we introduce new products, for example, the nonstick items, we tend to reprice categories. And so when you're looking at that mix of business, you may depending on what is selling be moving up a category in either value or in its selling price. And it is very difficult to point to a product that was selling, say, two years ago because it may have been replaced in the current product arrangement. I would tell you that the nonstick scissors are the most expensive of the general range scissors that we sell, and they are selling very well. So --

Right. The mix will go to higher ASP items?

Well, those will. And then we will have some trade down with our medium priced ones to devalue, and that pulls you down.

But on a comparable scissors where the line did not change at all, will the prices be up, or across your line on comparable items, ex replacement or new products, will it -- is 3% to 5% a good number?

I would have to get back to you on that, Richard. I would think that 3% to 5% would be a good number, but again, in this competitive environment I could not tell you that some of those have been executed.

And then do you still estimate that you will decrease inventories by year-end $2 million?

Well, we have already done it.

Yes, not from this point. Maybe we will go down another $1 million, but we have already decreased by $2 million. I think that is where --

Right.

-- we talked about earlier in the year.

Tom Philpot, private investor.

I just wanted to follow up on the European question. I was wondering do you see it as being profitable in 2010, and what do you see as the possibility for that market going forward?

I have not pulled the budget together for next year. But I can tell you that we expect the losses to be declining. The prospects to the European business are improving as we are getting some of the global accounts to leverage our new product development. And just this morning we were going over some fairly large globals where we are bringing in promotions into their European business, frankly, as well as some of their Asian businesses. And so it is in the right direction. But until I get a little bit deeper into this year, I would be hesitant to say that they are going to be profitable next year.

Is it mainly a matter of scale to reach profitability as far as getting more customers or just improving on what you have?

It is sales.

With the existing customers?

There's plenty of customers. So it's existing customers, new customers both building the revenue lines.

At this time, gentlemen, there are no further questions.

If there are no further questions, then this call is complete. Thank you for joining us. Good-bye.

Thank you. That will conclude today's conference. We thank you for your participation.