Acme United Corp (ACU) 2009 Q4 法說會逐字稿

Good morning and welcome to Acme United's fourth quarter 2009 earnings call. As a reminder this call is being recorded.

At this time I would like to turn the call over to Mr. Walter Johnsen, Chairman and Chief Executive Officer.

Good morning. Welcome to the fourth quarter and year 2009 conference call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and Chief Executive Officer. 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 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. I'll turn the call back to Walter.

Thank you Paul. Acme United reported net sales of $13.4 million, in the fourth quarter of 2009, compared to $12.6 million last year, an increase of 7%. Earnings per share were $0.22 compared to $0.18, a 22% increase. There was some unusual items in 2008. The reversal of the earned bonuses and a gain from the sale of our former Bridgeport plant. In 2009 we donated medical supplies which lowered gross margins and operating income. And we gave some land to the City of Bridgeport. However, when these are netted operating income increased to $503,000 from $400,000 last year. And net income grew from $732,000 from $635,000. Last year at this time we implemented a tough expense reduction program. Our goal was to generate over $1 million in savings and fixed SG&A. And we exceeded that. We kept our core team, went full speed ahead with new product development, and focused on our customers.

During 2009, we launched our ceramic nonstick technology which we believe will change how people use cutting products. The development effort took three years and involved research in the US, Germany and China. We have a host of patents and patent applications and we continue to generate more. Ceramic nonstick scissors were introduced during 2009 and raised the entire plantogram performance in a down market at one of the most sophisticated office super store chains in the US.

In 2010, an entire family of these items is placed in the US, Canada, Europe, and other international markets. We introduced the iPoint Revolution pencil sharpener in mid 2009 at a major retail chain. This product has a titanium bonded cutting surface, is mounted vertically to permit shavings to fall of the blade and has superb design. In fact the iPoint Evolution won a Good Design Award from the Chicago Athenaeum, and other award winners included BMW, Apple and Mercedes-Benz. While the awards are nice, the iPoint Evolution is demonstrating outstanding sales performance with weekly sales up between 37%, and 60% over the product it replaced in a national chain. The Evolution will be in a number of domestic and international retail chains in 2010. The SpeedPak utility knife with a removable blade cartridge did well in 2009. Its distribution in 2010 is much broader. And revenues to a new customer with over 1,700 hardware stores begin in the first quarter of this year. We are also adding new cutting blade cartridges to our SpeedPak system and bringing them in to international distribution.

During the first quarter of 2010, we began to ship our new family of Camillus Knives, to a number of mass market retailers. The relaunch of this brand has been very well received. And we are looking forward to good growth from the Camillus family in 2010. When we began to implement new supply chain software a year, we were excited about the potential to more carefully manage our inventory as well as better analyze projected customer demand. We put a great deal of effort to make this investment pay off and it has. We improved service metrics beyond our historical excellent levels. And although there are many factors that work to reduce inventory, we did so by over 20% generating an excess of $4 million in cash.

I now want to focus on the future. We have a lot of new business for 2010. We expect sales and earnings in 2010 to show strong growth over 2009. But I'm not comfortable at this stage providing guidance. I will say however, and this is factual, sales in January 2010 were up 17%. I will now turn the call over to Paul Driscoll

Acme's net sales for the fourth quarter were $13.4 million, compared to $12.6 million in 2008, an increase of 7% or 4% in constant currency. Net sales for the year 2009 were $59.1 million, compared to $68.7 million, in 2008, a decrease of 14%, or 17% in constant currency. Net sales in the US segment increased 9% in the quarter, but declined 16% for the year. Sales in the fourth quarter were helped by increased sales of iPoint pencil sharpeners. Net sales in the fourth quarter for Canada decreased by 10% in US dollars, and 20% in local currency. Sales in the fourth quarter of 2008 included a one time promotion. Sales for the year decreased by 13% in US dollars but declined 6% in local currency. The decline in sales in 2009 and both the US and Canada was primarily due to the economic downturn.

Net sales for Europe increased by 9%, in US dollars but declined 4% in local currency in the quarter. Sales for the year increased by 2%, in US dollars and 8% in local currency. The sales increase in Europe was mainly due to higher sales of manicure products which resulted from increased distribution and product assortment. Gross margins were 39%, in the fourth quarter of 2009 versus 39% in the comparable period last year. For the year ended December 31, 2009, gross margins were at 37%, compared to 40% in 2008. The lower gross margin for the year was due to fixed cost spread over lower sales, higher costs in the Canadian business due to weaker Canadian dollar and lower product margin mix. SG&A expenses for the fourth quarter of 2009 were $4.9 million compared with $4.1 million, for the same period of 2008. Fourth quarter SG&A expense was higher than last year, mainly due to reversal of accrued incentive compensation, in the fourth quarter of 2008, and higher sales commissions and freight costs associated with higher sales in the fourth quarter of 2009. SG&A expenses for the year 2009 were $19 million, or 32% of sales compared with $20.8 million, or 30% of sales for the same period of 2008. The decrease was due to various cost reduction programs and lower sales commissions and freight costs associated with lower sales.

Operating income was $293,000 in the fourth quarter 2009 compared with $795,000 in the fourth quarter of 2008. Operating income in the fourth quarter of 2009 included a $210,000 write off of medical product donated to AmeriCares. Fourth quarter of 2008 included a benefit of $400,000 from reversal of incentive compensation liabilities. Excluding these items operating income was $503,000 in the fourth quarter of 2009 compared to $395,000 in 2008. Operating profit for the year ended December 31, 2009 was $3 million compared to $6.9 million in the same period of 2008. Operating profit for the US segment decreased by approximately $3.5 million. Operating profit in Canada decreased by $400,000 and the European operating loss stayed constant.

Pretax income in the fourth quarter of 2009 was $266,000 compared to $875,000 in the fourth quarter of 2008. Included in pre-tax income in the fourth quarter of 2008 was $265,000 of other income, related to the gain on the sale of the property in Bridgeport. Excluding the $210,000 charge associated with the donation of medical products in the fourth quarter of 2009 and the exceptional items in the fourth quarter of 2008, pre-tax income was $476,000, in the fourth quarter of 2009, compared to $210,000 in the same period in 2008. Income tax expense in the fourth quarter of 2009 included $500,000 of tax savings, related to the Company's donation of medical products to AmeriCares and the donation of land to the City of Bridgeport. The land which was adjacent to the property the companies sold in 2008 was donated in December of 2009. Net income for the fourth quarter of 2009 was $731,000, or $0.22 per diluted share compared to a net income of $634,000, or $0.18 per delude share for the same period of 2008. Net income for the year ended December 31, 2009, was $2.8 million, or $0.85 per diluted share, compared to $4.5 million, or $1.24, per diluted share in the comparable period last year. Bank debt less cash December 31, 2009, was $2.7 million, compared to $6.5 million on December 31, 2008, a decrease of $3.8 million. During the year, the Company generated $6.6 million of cash from operating activities, approximately $700,000 in dividends and repurchased $206,000 shares of Acme stock for $1.7 million. Included in cash, from operating activities, was a $4.4 million or 20% reduction in inventory.

Thank you, Paul. We will now open the call for questions.

(Operator Instructions) Bill Jones from Singular Equity.

Hi, guys. Just wanted to confirm the gross margin for the quarter is about 38.5%. But that would be quite a bit higher if we add back $210,000, correct?

That's correct.

Maybe you could just elaborate on the $210,000 write off, versus the past savings which is obviously much larger, I guess that has to do with the land. That's because of the land as well.

Let me start with the $210,000. We had some very high quality medical instruments that we were selling to the National Health Service in the UK. The UK began to migrate to reusing disposable instruments. So the business slowed down. What we decided to do was to donate that for relief efforts and exit that portion of the business at the end of the year. So that's what we did. Relative to the land to Bridgeport, that was appraised at $720,000. And it's water front property, but the market is soft. And the City of Bridgeport wanted to expand that into a park which we fully support. And as a result we donated it to the city. We carried it at no cost basis.

Okay. And great. It's good to see that the sales finally in the fourth quarter the sales are actually up year-over-year. And I guess look forward to these positive trends continuing in the first quarter and 2010.

Bill, I think that's the biggest message here. Is fourth quarter showed a rebound of 7%. We are trending as I mentioned 17% for one month. That's not a trend but it's an indication that we are moving in to a different direction. More importantly, the build up of our sales we can identify by customer and program and it supports substantial growth in 2010. So, we are optimistic right now.

Great, I don't think I have any further questions at this time. I will drop back. Thanks, guys.

Thank you. (Operator Instructions) We will go now to Chris Doucet, Doucet Asset Management.

Congratulations on a great quarter and great job managing the balance sheet by the way.

Thank you.

Just a few quick questions, Paul, if you could reconcile for me SG&A as a percentage of revenue was 36% and it was 32% last year. Can you kind of give me an idea what a normalized run rate going forward in the future is going to be?

More typically it's in the low 30%s. The reason for the higher amounts in 2009, was related to some of the expenses actually mostly because of 2008 included reversal of the incentive compensation. In 2009 we had additional pension related expenses in the fourth quarter. But typically it's around 33%.

Okay. That's helpful. If I back out the $210,000 charge or write off that you guys took in the fourth quarter, what would your gross margins have been in the quarter?

I think they would have been around 39.5%.

So, they would have increased by 100 basis points.

Right. On to new business.

Walter I know that you said in your last conference call or at least I think it was the last conference call, could have been the call before. You guys went to a hardware show in May and presented or represented Camillus to the public. Did we have any contribution in sales in 2009 from Camillus?

It was about $200,000 in the fourth quarter.

You want to venture a range of what we might think we might produce in Camillus Knives in 2010?

That's a tough one but it's going in to one of the big chains and it will be more than that.

Okay.

It would be multiples of it.

And I was excited to hear that we are going to finally go in to the 1700 mega hardware store with the SpeedPak. What kind of contribution did SpeedPak have in 2009 and how many of those 1,700 stores was SpeedPak in, in 2009.

Well I'm not sure we are going to break out that detail, there are all sorts of people listening. But we didn't have any distribution in those store as year ago and we do initial shipment this quarter.

That's wonderful,.

Next question is from [Rick Federman] with [Federman Investment].

Good morning everyone. Walter now that February is doing to be over in about 6 hours, is the early indication for revenue anything like revenue increase, anything like January?

I anticipated that, Rick. We are continuing to trend with strong growth. I expect it for the quarter.

Okay. Is a number for 2010 in the $70 million range an attainable goal?

That would the kind of goal I would love to have. But I don't want to give out projections yet because I read what the world is doing and it doesn't feel that way with our own Company. We feel as if we are really breaking through. But maybe I'm misreading that. If we kept at the paces we are going, that's the kind of number I would expect.

Okay. And lastly, can you just talk in generalities about the market for and the new opportunities you might see in the PhysiciansCare product line?

Well the first thing with PhysiciansCare is that it's a very consistent generator of earnings and cash. It's been growing. But the real challenge for us is to take that product line which is primarily in the office channel right now and school channel and move it in to also the industrial and hardware chains. And we are working on that. We call that the power of one. In other words one company, one customer, sell them a lot of items. There is real growth. There are new products we are introducing in the PhysiciansCare area related to professional unitized kits. And I'm optimistic that we will get some of that placement this year.

With that in new markets? Or are you still talking still in terms of schools and offices?

Schools and offices we just did gain a major office super store chain for the Physicians Care. And that started shipping this quarter. So that's good growth. But what I'm really talking about is the Clauss and Camillus distribution, which is hardware, sporting goods, industrial. And that area we are working on new products if we can sell, there is it's existing customers but it's a new market for us.

Okay. Thank you very much. Everybody there certainly deserve as big that a big "That a boy". I appreciate it.

We will take our next question from Jeff Matthews with Ram Partners. Please go ahead.

Hey Walter. Like that balance sheet. Congratulations.

We worked hard on that by the way.

I know you are. I love to see that net debt down. Put some hay in the barn and get some flexibility. I think that's wonderful especially in this environment. I have two questions. One is Wal-Mart announced changes in sourcing relationships in Asia or talked about it. And I wonder if that potentially might have an impact on your direct relationship with Wal-Mart?

Well the relationship you are speaking about is some of their consumer products they went to the large trading company Li & Fung. And I've been a little bit surprised by that because they have a very sophisticated and large sourcing global sourcing entity in Shenzhen, China. But we sell to Li & Fung. We sell to Wal-Mart through Shenzhen. So I'm not sure I know what to make of it. Other than they maybe trying to get competition from the outside relative to performance with their internal group. If Li & Fung wins, maybe they can save some money. But I don't, for our items, I don't see a change.

Okay. I don't -- I hate to do this, because I don't want to get too granular. And I know things change. So in general would you say that your Wal-Mart business the kind of return to growth that you've seen of late which may or may not continue but that you seen of late that your Wal-Mart business is somewhat in line with that?

Wal-Mart, we've gained some really good business in the sewing area and in the stationary area. In other areas, we've got less items. But I would say that in general it's about the same as last year.

Okay. My second question relates to the fact that a lot of companies that I'm listening to have started booking accruals again on bonuses and compensation for employees they pulled back on last year like 401k contributions. So, I was wondering if you did any of that?

Here's what we've done so far. For the senior guys we have not given a raise for three years. And there is no raise this year. We've set up pretty aggressive plans for performance this year. And I hope we can pass bonuses to our employees based on that performance. We relative to the 401k, that's about $60,000 a year that we've contributed consistently to all employees. I might be off with the number. But it's a relatively small amount. So the real incentive is for our guys, you are going to participate in the plan and you got some aggressive goals and if you hit them we want to pay you.

All right. Okay. Great, I guess one other question. All things equal, no more stock buy back or no acquisitions that come across the table. Would you expect your net debt position a year from now to be somewhat lower? Or would you expect it to be the same or? What I'm getting at is do you think free cash flow through the year, where growth resumes you will have somewhat lower free cash flow than last year?

Let me address it a little differently. We are going to have solid earnings as far as we can see. Depreciation is about $1 million a year. We will spend a little bit less than that. We are working hard on the inventory right now. There are some portions of the inventory for example SpeedPak inventory where we can finance growth with what we have in house. I would not really expect that much of inventory growth at year end given the way we are managing it today vis-a-vis a year ago or two years ago. So, if that happens or less than $3 million of net debt would shrink substantially.

Great. Thanks very much. Good luck.

Next question is from Tom Spiro with Spiro Capital Management.

Tom Spiro, Spiro Capital. Hello. Just wondered what your thinking is with respect to Europe. What do you see for 2010?

Europe has entered in to the mass market in a more substantial way during the past 12 months. If what I believe is happening, we will be seeing pretty good growth quarter by quarter in Europe. And this mass market or companies like Lidl and Aldi, Norma, Schlecker, who buy a lot of volume. So, we are seeing improvement. I'm expecting to see fair amount of improvement starting the first quarter. So I'm feeling better about it.

Are you feeling so good that we might break even?

Let's go look at the results. It's going to be better.

Thanks much. Good the luck.

Gentlemen, there appear to be no further questions in our queue at this time. I will turn the call back over to you for additional or closing comments.

I would like the thank you for joining us. If there are no further questions, this call is complete. Have a good day. Good-bye.

That does conclude today's conference. Once again, thank you for your participation.