Acme United Corp (ACU) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Acme United second 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 Acme United second quarter 2010 conference call. 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?

The forward-looking statements in this conference call, including without limitation, statements relating 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 that sales of $20.6 million for the second quarter of 2010, an increase of 7%. Net income for the quarter was $0.48 per share, an increase of 20%. For the year, our sales have increased 11% and earnings per share 32%.

While Acme United has grown in every reported segment of the business, the US office and school markets have not had the strength we would like. Our customers are being cautious, making purchase decisions later than last year and carefully trying to keep inventories low. We believe overall demand in the US office channel is about flat, and the school supplies segment lower than last year.

In Canada, overall sales increased 10%, in part due to a strong currency and also due to new customers. We continue to add new programs at a number of the largest mass market Canadian chains, and our new products there are doing very well.

The European business increased 64%, driven by new mass-market programs, growth in our office business and increased manicure sales. We continue to make inroads in these channels with our new products, and we are leveraging our product line across an increasing customer base.

There are a number of initiatives that we believe will enhance sales. We have strengthened and are continuing to build our e-marketing program with the largest mass-market, office supply and Internet distributors in the US. We are promoting cross sales. We call it the Power of One, where our marketing and sales programs bring a full spectrum of products to the end-user. We're also building our sales forces in Asia and Europe.

Our new products continue to gain distribution. Our non-stick scissors are now carried in many of the largest retailers in the US, Canada and Europe. The iPoint pencil sharpeners have momentum in the office and school channels, and we are broadening the line. The Clauss family of professional cutting tools continues to gain, growing over 50% year to date. Our line of professional Clauss food processing knives have been very well-received in the US and in Europe. The Clauss garden tools have had an excellent reception, and we are now in full production. While sales are just beginning, we're hopeful that this will become a major growth initiative.

The Camillus Knives product line has opened a number of new sporting goods chains. This is still small business, but growing nicely.

One area of concern is the labor shortage at our factories in China, which delayed our products when they were ready for shipment. Since we have delivery windows for our back-to-school customers, we had to airfreight some of our products. This was expensive and resulted in approximately $250,000 in unbudgeted expenses.

Here's what we are doing. We're adding capacity currently, adjusting inventory levels for future sales and making decisions now for next year's back to school. Airfreight expenses are part of our business, so we hope to minimize them as soon as we can.

Our balance sheet is strong, and we continue to generate cash. During the first six months of this year, we repurchased about 2% of the Company and continued to pay a dividend. There are also a number of acquisition candidates that would be logical for Acme, and we continue to pursue these opportunities.

I will now turn the call to Paul Driscoll. Paul?

Acme's net sales for the quarter were $20.6 million compared to $19.2 million in 2009, an increase of 7%, or 8% in local currency. Sales for the six months ended June 30, 2010 were $33.7 million compared to $30.5 million in the same period in 2009, an increase of 11%, or 10% in local currency.

The biggest contributors to the year-to-date sales increase were iPoint pencil sharpeners and the new non-stick titanium scissors. Net sales in the US segment increased by 1% in the quarter and 5% for the six months ended June 30. Second-quarter back-to-school sales in the US were impacted by the slow economic recovery. Net sales for Canada increased by 10% in the quarter and 14% year to date in US dollars, but were relatively flat in local currency.

Net sales for Europe increased by 64% in the quarter and 46% year to date in US dollars and increased by 75% in the quarter and 49% year to date in local currency. The higher sales were mainly due to market share gains in the mass-market and office channels. Gross margins were 36.7% in the second quarter of 2010 versus 37.1% in the comparable period last year. The lower gross margin was due to higher airfreight costs of $250,000 related to production delays. This was partially offset by higher margins in the Canadian business due to the stronger Canadian dollar.

For the first six months of 2010, gross margins were 37.6% compared to 37.4% in 2009. SG&A expenses for the second quarter of 2010 were $5.6 million compared with $5.1 million for the same period of 2009, or 27% of sales for both quarters. SG&A expenses for the first six months of 2010 were $10.4 million compared with $9.3 million, or 31% of sales for both periods.

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 2009. Operating profit was $1.9 million in the second quarter of 2010 compared with $2 million in the second quarter of 2009. Operating profit for the six months ended June 30, 2010 was $2.25 million compared to $2.1 million in the same period of 2009.

Due to strong sales in the second quarter of 2010, the operating loss in Europe was only $10,000 compared to $140,000 in 2009. Net income for the second quarter of 2010 was $1.6 million, or $0.48 per diluted share compared to a net income of $1.3 million, or $0.40 per diluted share for the same period of 2009. Net income for the first six months ended June 30, 2010 was $1.8 million, or $0.54 per diluted share compared to $1.4 million, or $0.41 per diluted share in the comparable period last year.

The effective tax rate for the three- and six-month periods ended June 30, 2010, was 17% compared to 34% in the same periods of 2009. The decrease in the effective tax rate was mainly the result of tax credits of approximately $180,000 related to the donation of land to the City of Bridgeport.

The Company's bank debt, less cash, on June 30, 2010 was $8.9 million compared to $8.9 million on June 30, 2009. During the 12-month period, the Company repurchased 241,000 shares of Acme stock for approximately $2.25 million, paid $650,000 in dividends and generated $3 million in cash flow from operations.

Receivables are up 10%, which is consistent with the sales growth, and inventory decreased 7% as a result of the reduction program in 2009.

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

(Operator instructions) David Ratliff, Doucet Asset Management.

Good afternoon, gentlemen, and congratulations on a very solid quarter. Let's see, to start out with, you gave your European update. And, did I hear you correctly that in the first six months of the year, you've only -- the loss is only $10,000?

That was the second quarter.

Okay, second quarter, so I know you don't give a lot of forward projections, but obviously it sounds like we are very close to breakeven in Europe. Is there anything -- for the most part, the reports out of Europe have been improving. But all the talk with austerity measures -- do you have any kind of pullback on your expectations out of Europe?

Well, first, our European business has been growing for the last several years. And, as we continue to broaden our product family here in the US, there's more items to sell in our European base.

The second thing is that we added a real effort into the mass-market in Europe. And those are companies like Metro and [Revay] and [Legal] and Alvi, all of which are the equivalent of a Wal-Mart and Target here in the US. They have the potential to add millions of dollars of business, or euros of business, but they're also very price competitive and very demanding.

So in the first six months we've done pretty well, and that seems to be a continuing trend for the back half, and we're optimistic about the revenue line. I'd caution, though, that we are under some pressure in margins because the euro has lost its buying power versus a year ago. So margins have been somewhat constrained. Nevertheless, we're making a lot of progress there.

Well, thank you for the update. For your new products, do you have the total contribution, sales contribution from new products? Do you have that number handy, like the (multiple speakers) --?

Roughly 30%.

Yes, 30%.

And then, last question, back to your margins, if you back out that $250,000 worth of air freight, it would move your margins up to about 37.9%. You've mentioned the Canadian dollar contributed in a positive way, but do you think that 37.9% or, say, mid-37% is a good run rate for your margins?

Yes.

Actually, one last question -- we're almost through July. Could you say that what you saw in the second quarter has carried into the month of July, projecting out third quarter?

It seems as if the US business has picked up a little bit, and Europe continues to be pretty good, and Canada is having a decent month. So at this stage, we seem to be about on plan with what we're expecting.

Well, according to Bloomberg, your $0.48 in diluted earnings this quarter is the best second quarter you've had dating back to -- as far back as it goes, like 2000. So again, congratulations on the solid quarter.

Well, David, I'd just like to add to that thank you, but we could have been a lot better, and it's very frustrating to have something like airfreight get in your way. But we're working on it.

Michael Wasserman, Moors & Cabot, Inc.

If I understood you correctly, you said that you're going to partly address the airfreight issue by looking a little further ahead in manufacturing earlier. If that's correct, do we infer that we're going to see a greater inventory build and cash use for that purpose?

Well, I'll give you an update as recent as what we did this morning. We're adding capacity to our production, and that's in anticipation of some new business that we hope occurs in the hardware chain. And the way you add capacity is you qualify and bring on new factories. So, that's not capital, but it sure is -- it's a lot of work to bring them on.

Relative to inventory, our plan is to add about $1 million of inventory, if we can, between now and year end. But we will have generated the cash to pay for that. It's very important that we get some of these B and C items in stock. These are the ones which don't sell that much, but you have to break your production line to get them out. And they slow out -- slow up your big volumes. So that's underway right now.

Okay, thank you.

(Operator instructions) Richard Dearnly, Longport Partners.

Picking up on that last comment, was the shortage primarily in B and C items?

Well, no. The shortage was across the board, but the B and C items mean you complete an order. And the metrics of our customers are -- you ship first time as complete as you can be, and we typically run well in the 99% range in that. That's very important to do. But if the B and C items get in the way, they delay the big ones, too.

On the first quarter call, you said that April had started strong in the US. Can I suppose that it has slowed down through the quarter?

I don't think I would assume that. It may have started slowing relative to the previous April, but the big, big volumes go in end of May and the entire month of June, and you just ship as fast and as hard as you can.

Was that -- you're shipping back to school, and I noticed this week when I was looking at stores, that some of them were already bringing in Halloween and moving back to school around. Has back to school gotten earlier?

No. In fact, it's gotten later.

It's gotten later?

Yes. No; if you go into a store that's working with Halloween, then they must have slept for a year. This right now is the prime time, and they should be fully stocked. If they are not fully stocked, then they are missing the back to school.

Yes, that's what I would have guessed. And it looked, just from eyeballing your square footage -- it was, on most products, flat to down, I would say, in a sampling of Wal-Mart, A.C. Moore -- I didn't get to Target. Is that a decent read? That doesn't say --

I don't think that's really across the board. Some, like Wal-Mart, have narrowed their product selection and they think, by narrowing their selection, they can increase the volumes of what they have, and then they can get a higher what they call GMROI, which is gross margin on inventory turns. The problem with that is they don't necessarily get more sales. And there has been a lot of things that companies like Wal-Mart have been doing recently to address what they did, because it wasn't the right decision.

Were you in Wal-Mart back to school last year?

Oh, I'm sure.

Oh yes, definitely.

Because this year, it looked like only Fiskars had a $1.50 kind of price point.

Well, I don't want to talk about specific customers --

Okay.

-- at that detail level. But the answer is, sure, we are in Wal-Mart. We are in (inaudible) in back to school.

Right, okay. It also appeared -- you seem to be in some new outlets -- West Marine, you showed up with the titanium pliers and fishing snips and whatnot, under what looked like -- is that a private label for them, the BLACKTIP?

Well, for those listening, we opened up the West Marine chain to Acme this spring, and we began shipping in May. I'm delighted that you noticed the product. The Black Fin (sic) is a brand of West Marine, and it's powered by Clauss, which is our brand. And it's a line of knives and pliers and tools for fishing.

I might add that they are incredibly rust resistant, and we are delighted with both their performance by use as well as seeing good sales sell-through.

Great, well, I hope they work. Thank you.

(Operator instructions) Richard Dearnly.

The back to school, you said, was still being affected by the economy. And the last time you -- last quarter, your read was that the economy was probably stable to maybe up a little, and the trade-down had also eased. Could you talk about that in a micro sort of way?

Sure. We are seeing our customer base migrating upward toward our better-quality products, and we addressed that in the first quarter, and that continues to be the case, whether that's our titanium items or our best-selling non-stick items or our iPoint pencil sharpeners. Clearly, they are making those purchase decisions, and we see them in the numbers.

However, in the first quarter we didn't ship yet our back to school, and now, looking at it, I think what has happened is our school districts are broke. And I think they're having a very difficult time placing orders for basic supplies (multiple speakers) [to get] things like furniture. So to get a back to school that's sort of flat in the US, I think you've got a combination of school softening a little bit and the other items continuing to migrate forward.

And yet, with the customers migrating up in the product, you characterize the office segment as flat. And since your gross margins are up some, but not dramatically relative to a product trade-up, what's hurting?

Well, let me give you the basics of that. First quarter, United Stationers, which is the largest wholesaler in the country of office supplies, had 3% growth -- 3%. That, to me, is boring and flat. And SP Richards, the second-largest, just reported in its breakout down 2% for office supplies. So, when I say the office channel appears flat, that's the basis of it.

Yes, okay; thank you, good color.

Well, if there are no further questions, then this call is complete. Thank you for joining us, good bye.

This does conclude today's conference call. We thank you for your participation.