Acme United Corp (ACU) 2010 Q1 法說會逐字稿

Good day everyone, and welcome to Acme United's first quarter 2010 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 CEO. Please go ahead sir.

Good morning. Welcome to the first quarter 2010 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.

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.

The 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 operations 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 $13.1 million in the first quarter of 2010, an increase of 16% compared to last year.

Net income was $214,000, or $0.07 per share, compared to $42,000, or $0.01 per share last year.

Acme United sales increased across all business segments. Our US sales increased 13%, Canadian sales were up 22%, and Europe increased 26%. There was a favorable impact due to currency, but nonetheless growth was very strong.

There were a number of contributors to the sales increase. Our customers almost across the board reduced their inventories last year. They continue to have low stocks and are purchasing for what appears to be increased demand by the end users of our products.

So our core business is growing. New products added to the growth. We have had an excellent reception to our proprietary micro-ceramic non-stick scissors. These performed extremely well last year at a major office superstore chain and are now being carried across a much broader portion of our global customer base.

Sales of our award-winning iPoint Evolution pencil sharpeners continued to outperform in the category, and our placement in 2010 is much wider than last year.

The Clauss line of industrial and professional cutting tools continues to make inroads, and sales are benefiting from increased Speed Pak utility knife sales.

The Camillus knife segment is still small but growing rapidly, and demand is outstripping our forecast.

New customers also contributed to growth. Our efforts in Europe to increase our mass-market customer base were large contributors to our growth in the quarter. However, the office channel also grew. In Canada we added a new mass-market account that was of some size. In the US the Clauss line, particularly the Speed Pak utility knife and our industrial shears, added major do-it-yourself chains. Shipments of new rotary trimmers and non-stick scissors to the craft market gained. The Camillus knife family is building a customer base in outdoor recreation and law enforcement markets.

Gross margins in the first quarter were 39% compared to 38% last year. We've had leverage of our fixed costs due to increased sales and a migration to higher-margin, proprietary and new products.

Acme's debt net of cash was $3.4 million at the end of the quarter compared to $8.6 million last year. This was despite the repurchase of more than 5% of the company's stock and payment of dividends.

The average price of the stock repurchase was $8.54 per share.

The underlying reason for our growth and our strong balance sheet provides a basis for optimism in the coming quarters. I would note that we are having a very strong April to this point.

I will now turn the call to Paul Driscoll.

Acme's net sales for the first quarter were $13.1 million compared to $11.3 million in 2009, a 16% increase, or 13% in constant currency. Net sales for the first quarter in the US segment increased 13%, mainly due to higher sales of iPoint pencil sharpeners, the new non-stick titanium scissors, and the Speed Pak utility knife. Net sales in Canada increased by 22% in US dollars, and 2% in local currency. Net sales in Europe increased by 26% in US dollars and 20% in local currency. The majority of the increase was due to new mass-market business and growth in the office product channel.

Gross margins were 39% in the first quarter of 2010 versus 38% in the first quarter of 2009. The higher margin in 2010 was primarily due to the leverage of fixed costs and higher sales, a stronger Canadian dollar which reduces cost of goods in the Canadian operation, and an improved product mix and Europe.

SG&A expenses for the first quarter of 2010 were $4.8 million or 36.7% of net sales, compared with $4.2 million or 37.3% of net sales for the same period of 2009. The increase was due to higher sales commissions and freight costs associated with higher sales and the scale-back of certain cost reduction programs from the first quarter of 2009.

Operating profit was $300,000 in the first quarter of 2010 compared with $80,000 in the first quarter of 2009, an increase of $220,000. Operating profit in the US increased by $[50,000], and operating profit in Canada increased by $70,000.

The operating loss in Europe decreased by approximately $100,000, mainly due to the sales growth.

Net income for the first quarter of 2010 was $214,000 or $0.07 per diluted share compared to net income of $42,000 or $0.01 per diluted share for the same period of 2009.

The company's bank debt less cash on March 31, 2010 was $3.4 million compared to $8.6 million on March 31, 2009.

During a 12-month period the company repurchased 175,000 shares of Acme United stock for approximately $1.5 million, paid $600,000 in dividends, and generated $7.4 million in cash flow from operations. Receivables are up 6%, which is consistent with the sales growth. And inventory decreased [50]%, mainly as a result of the reduction program in 2009.

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

(Operator Instructions). Howard Lu, First Wilshire.

This is Dmitriy actually. Congratulations on a good quarter. Could you provide a little bit more detail on the three new products you mentioned in the press release, the iPoint pencil sharpeners, non-stick scissors, and Speed Pak utility knives? And just give us some idea of what kind of contribution do you think they can make this year and what you are seeing so far in April.

Well, I have to be careful, because I assure you that all our competitors listen to these calls.

Having said that, the iPoint pencil sharpener line is now looking to be about a $10 million category compared to about $7 million last year. So we are showing substantial growth, and it's coming from its placement in large chains. You'll be seeing quite a number of those in the second and third quarter as back-to-school rolls out. So that's one strong driver.

In the case of the non-stick scissors, it was in one superstore chain last year, and I don't want to break out that amount, but you can assume pretty much it will be in broad distribution throughout the -- all of our customer base this year. So it will have substantial growth.

The Speed Pak utility knife is now carried in both Lowe's and Home Depot. And during the first quarter we began shipping it to Lowe's. The reception is now a year of -- we've got a year of experience with Home Depot, and we continue to be increasing presence there. So Speed Pak opened up two major do-it-yourself chains in the past 12 months for us. More importantly, it is now also in major industrial catalogs, whether that's McMaster-Carr or Grainger, Fastenal, it's getting legs.

Following that, there is quite an opportunity to be able to sell our regular Clauss lines to those customers that it's opened, and we're working on that right now.

Great. And could you comment on your inventory levels change? It's -- I see it went down from 21.7 million to 18.5 million year-over-year.

Yes. About a -- 16 months ago we had installed a number of software (inaudible - background noise) which was a fairly major investment. But we did -- we put these tools in to more carefully first work with customer demand, and second, then correlate that into aggregate purchasing. And it gave us tools that we didn't have before. So part of the improvement came from better forecasting and control of our inventory.

Another piece was that we consciously narrowed the stock on some of the B and C items, in other words, the ones that aren't major product families. And that generated a good chunk of the savings.

So between those two, the new software and active management of it, and second, looking at the B and C items, resulted in about a $[3] million reduction in inventory.

Okay. And then your growth, is that coming mostly from success of new products? Are you seeing some economic recovery that's hitting your customers as well?

The economic recovery -- I mentioned that our core business is up. And I believe right now that we see it directly, because I know that our customers do not have excess stocks. They've already run them down. So when they are getting demand, it's coming right through to us. And my -- this is going to be I guess. My guess is that level of business is probably up maybe 4% -- 4% or 5%.

The rest is new products and new customers. For example, if you roll out Lowe's in the first quarter, well, that's going to be consistent perhaps for the year, and increasing, but it's a whole new account. We did a promotion with a major mass-market retailer in Europe. It was the first time we shipped to them and -- in size. That's a new account with a fairly new product. It was one of the pencil sharpeners.

It's a lot harder to get new customers than it is to introduce new products. And what we are doing is both.

Sounds good, thank you.

William Jones, Singular Research.

Congratulations on the quarter. I wanted to ask you, you gave us detail on the stock repurchases, but I don't think -- I didn't hear for the quarter. Can you give the stock repurchases for the quarter and maybe the amounts?

We did not make any stock repurchases during the quarter. And so we didn't spend anything this quarter.

Okay. Do you anticipate further stock repurchases?

Oh, I am sure there will be opportunities. A lot of times we will get a call from -- in the past year and a half with either individuals or institutions that needed to move a block, and they want to do it as least disruptively as they could. We are active buyers for those situations, generally at a discount.

Okay, fair enough. And then maybe you could comment on any acquisition opportunities that you may have, given your strong balance sheet and your strong results and an improving cash position.

We have a number of opportunities we are looking at, and they're -- we're careful with them, and there's nothing to announce at this point.

Okay, fair enough. Thank you.

(Operator Instructions). Richard Dearnly, Longport Partners.

I'd like to understand better the comment about -- which was actually in the year-end conference call -- about how the iPoint was creating a -- call it a midpoint of 50% sales increase in the category. Does that mean if a retailer has two linear feet of pencil sharpeners, when the iPoint goes in there, that those two feet are -- the sales from those two feet have gone up 50%, presumptively because the iPoint is both higher-priced than the average pencil sharpener that was there, but also because you sold more iPoints? But is that what you're saying?

Well, I said that, and 50% is not a sustainable category increase.

Yes. It's a one-time bump.

Well, no, it's not a one-time bump, but it's not sustainable as you build it across more and more of our distribution. But that concept, whether it's 25%, 30%, the retailers are experiencing that kind of increase in that two-foot space. It's huge.

Yes, which I'm sure -- and is it safe to suppose that the iPoint took a lot of share from the other pencil sharpeners that were there?

Well, it's gaining share quickly, and that's the reason, because it's profitable growth for our customers.

Right. By the way, I use fewer mechanical pencils now that I have an iPoint. I keep it here and grind away on my old pencils.

That's good.

And could you talk about the -- in '09 there was constant trade-down that hurt margins. What's the state of the trade-down in the core business? And then to what extent are the new products beginning to offset the trade-down, if any?

I think I'll break it into several pieces. In particular, the back-to-school last year, we found that we were selling more of the commodities like (technical difficulty) and scissors and (technical difficulty) than we had in previous years. In other words, things like antimicrobial or titanium or higher performing items really didn't have as favorable a mix as they had in the past.

I can't speculate at this point what the back-to-school will be like this year, although what we see on order is a lot more of the innovative items. So I would say the trade-down has stabilized or it's beginning to move back in the higher performance areas, newer product areas for back-to-school. And we can certainly see it with the iPoint pencil sharpeners.

Now, the base business -- in the corporate and retail world, that trade-down has some disadvantages because when you get the product, perhaps you are disappointed with it -- I am making this up (multiple speakers) if you've been getting our titanium office shears, which perform terrifically, and all of a sudden you're given a value scissor that I would be insulted to get as a trade-down, you might start to see pushing back on that. And we are seeing a migration back up to our higher-margin items with our office customers.

The other thing that's happened is our non-stick scissors, which truly outperform anything on the market, really cut, and they perform against tapes and [gluers] in the office better than any that are out there. And that category is just plain gaining.

Good.

So we are not seeing a trade-down anymore. I think we are stable, probably a little bit up in back-to-school for the school items, and then for the core it's clearly moving back up.

Great. And have you started -- in SG&A have you started to accrue bonuses for '10 yet?

We have not to date. I hope we can pay bonuses to our employees, and we intend to, and we've got them focused on pretty aggressive goals. The first quarter is an indication of the kinds of things we expect. And we'll start accruing as we see how the rest of the year plays out.

Okay, thank you.

There are no further questions.

Well, if there are no further questions, I'd like to thank you for joining us. This call is now [completed]. Have a good day.

That concludes today's conference call, we thank you for your participation.