Acme United Corp (ACU) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Acme United's fourth quarter and year end 2010 conference call. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Mr. Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the fourth quarter and year 2010 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. If you are following our slide presentation, please turn to slide two. Paul?

Today's conference call may contain certain forward-looking statements 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 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.

Thank you, Paul. Acme United had a solid year in 2011 in the face of a difficult office supply market. I would ask you to turn to slide three. Our net sales were $63.1 million in 2010, compared to $59.1 million in 2009, an increase of 6.7%. For the fourth quarter, sales in 2010 were $13.4 million, which was the same as last year.

Please turn to slide four. Our net income in 2010 was $2.57 million, compared to $2.84 million in 2009. Acme United was solidly profitable, but earnings declined for the year.

Please turn to slide five. Our earnings per share were $0.81 in 2010, compared to $0.85 in 2009, which reflects the impact of our stock repurchases.

Please now turn to slide six. While the overall office supply market in 2010 in the United States declined from the prior year, mostly due to weak employment, Acme United grew its market share in all its key categories. Scissor, rulers, pencil sharpeners, and first aid. We continued to invest in the hardware and industrial channels through the Clauss brand. These markets in the US are also under pressure from the weak economy, but our gains and placement are meaningful. Today we sell Clauss products to many of the major domestic hardware chains and industrial distributors. The Clauss family grew approximately 40% in 2010, and we continue to increase product placement.

During 2010, Acme United launched its garden product line. These items are innovative, exciting, and just garnered six Good Design awards from the Chicago Athenaeum. It took over 2.5 years to develop and produce these products. We began shipping them in late 2010.

The Camillus knife line is continuing to be placed at major retailers and distributors. There is a long way to go, but momentum is building.These knives have proprietary titanium carbo-nitride coatings which keep the blades sharper longer than traditional stainless and carbon steels. We expanded our proprietary titanium nonstick coatings across many of our product lines. These included office scissors, arts and crafts shears, utility knife blades, Camillus knives, even pencil sharpeners to cut colored pencils and crayons. We believe we are truly adding value to these products and enhancing the user experience. Finally, we just closed the purchase of Pac-Kit Safety Equipment Company which was the result of a great deal of work during 2010.

There were many challenges in 2010, as well. And I would now like to turn to slide seven. The biggest issue last year was an unanticipated labor shortage to staff the factories in China, which impacted us in the spring of 2010, just after we had completed reducing inventories by over $3 million in 2009. The factories were operating at perhaps 80% of their expected output, which delayed production during the time sensitive back to school period. The net result was over $600,000 of air freight expenses beyond normal levels. To address air freight issues going forward, we have made a concerted effort to build additional inventory, and we have done it. This year, we have most of our back to school stock already in our warehouses, and much of it is ready to ship. We strengthened the operational leadership in Asia, and we enhanced our capacity and demand planning capabilities. There will still be air freight issues, but we expect them to be at much reduced levels in 2011.

In our European segment, we increased sales 14% in 2010, but we continued to lose money. This year, we have reduced staff, readjusted trade show and advertising expenses, and increased prices. The net-net is we expect a stronger performance in Europe this year.

Please turn to slide eight. Our single biggest issue in 2011 is increasing costs. Nearly all of our product costs have increased due to a weak US dollar, inflation in Asia, continued shortages of labor in China, and increased shipping costs. We increased prices in January, 2011, to our customers. There was, of course, push-back, but we believe we continue to provide our customers among the lowest costs in the global markets. We anticipate another price increase at mid year, as well.

There are opportunities to improve the product mix for our customers, and ourselves, with innovative products such as the nonstick scissors and shears, iPoint pencil sharpeners, and our industrial products. Our marketing teams are working closely with our customers to drive performance. We have also launched an intensive manufacturing efficiency improvement program. YB Pek, who recently joined us as Vice President and General Manager of Asia-Pacific, is leading this effort. While we are not able to impact global inflation, we certainly can improve factory automation, scrap rates and speed of production, and we intend to do that.

Please turn to slide nine. We announced this week the acquisition of Pac-Kit Safety Equipment Company. Pac-Kit was started in England in 1890 as part of the Burroughs Wellcome Company, which pioneered medicines in tablet form with uniform dosages. Its early first aid kits included these tabloids of single dosage medicines, uniform packages of gauze, and standardized bottles of antiseptic, each tailored to a specific use. The Pac-Kit's first aid kits provided emergency care for the first time in convenient carrying cases. And they became essential to the early explorations. Explorers carrying Pac-Kits included Theodore Roosevelt on his expeditions to Africa, Fridtjof Nansen exploring the Arctic, Sir Henry Morton Stanley in Africa, Captain Robert Scott in his failed Antarctic conquests, Sir Ernest Shackleton on the Nimrod, Admiral Byrd's flights to the North and South Poles, and many others.

Pac-Kit's unique history provides a rich face for new products geared to hunting, fishing and outdoor activities. After World War II, Pac-Kit began providing standard first aid kits to the emerging phone companies, such as American Telephone and Telegraph Company, and to the auto and truck industries. It developed standard kits for the defense and military uses. Its standardized kits and components became the basis for ANSI standards for use in American factories. Today, Pac-Kit provides a line of first aid kits and components for the industrial, transportation, and marine markets.

Please turn to slide 10. Here, you see a wall-mounted industrial kit for factories. A neatly packaged protection kit with unitized color-coded components, an eye wash station, and a travel kit. The Pac-Kit transaction was completed on February 28, 2011.

Please turn to slide 11. Sales in 2010 were approximately $5.4 million, and it was profitable. The purchase price was $3.4 million, and it included the inventory, accounts receivables, equipment, brands, and historical records. It extends Acme United's reach into the safety distributor market, increases the range of products we sell to our existing customers, and provides the opportunity to cross-sell our products. The acquisition is expected to generate between $100,000 and $150,000 in pre-tax income in 2011, with the upside to leverage our purchasing and generate operational efficiencies.

I would now like to provide a high level view of 2011. Please turn to slide 12. We are forecasting that 2010 sales of approximately $63 million will be maintained, and that organic growth will be between $5 million and $7 million. Since we will have owned Pac-Kit for 10 months in 2011, we are forecasting between $4 million and $4.5 million of incremental sales. The total sales estimate for 2011 is between $72 million and $74.5 million. If we achieve these sales, the net income is projected to be between $3 million and $3.2 million, or between $1.00 and $1.05 per share. I will now turn the call to Paul Driscoll for a more in-depth financial discussion of 2010. Paul?

Acme's net sales for the fourth quarter were $13.4 million, compared to $13.4 million in 2009. Net sales for the year 2010 were $63.1 million, compared to $59.1 million in 2009, an increase of 7%, or 6% in constant currency. Net sales in the US segment were constant in the quarter, but increased 5% for the year. Major contributors to the growth were iPoint pencil sharpeners and nonstick products. Net sales in the fourth quarter for Canada increased by 11% in US dollars, and 8% in local currency. Sales for the year increased by 10% in US dollars, and remain constant in local currency.

Net sales for Europe decreased by 10% in US dollars for the quarter, but declined only 2% in local currency. Sales in the fourth quarter were affected by delayed shipments, due to severe weather conditions in Europe in December. Sales for the year increased by 14% in US dollars, and 22% in local currency. The higher sales were mainly due to market share gains in the mass market and office channel. Gross margins were 38% in the fourth quarter of both 2010 and 2009. For the year ended December 31, 2010, gross margins were 37%, compared to 37% in 2009. The increased leveraging effect from fixed costs on higher sales and the strong Canadian dollar were offset by higher air freight expense incurred mostly in the second quarter.

SG&A expenses for the fourth quarter of 2010 were $5 million, compared with $4.9 million for the same period of 2009. SG&A expenses for the year of 2010 were $20 million, or 32% of sales, compared with $19 million, or 32% of sales for the same period of 2009. The increase in SG&A was due to higher personnel-related costs and higher sales commissions, and freight costs associated with higher sales. Operating profit was $77,000 in the fourth quarter of 2010, compared with $293,000 in the fourth quarter of 2009. The lower operating profit on constant sales was mainly due to lower margins in Europe, due to a weaker Euro, and higher recruiting costs. Operating profit for the year ended December 31, 2010, was $3 million, compared to $3 million in the same period of 2009. Profit from the higher sales was offset by the higher air freight and higher personnel related expenses.

Pre-tax income in 2010 was $2.9 million, compared to $3.9 million in 2009, a reduction of approximately $500,000. The lower pre-tax income in 2010 was due to recording $460,000 of other income in 2009, related to reducing the environmental remediation liability associated with the property in Bridgeport. This was the result of cost under-runs in 2009. Net income for the fourth quarter of 2010 was $180,000, or $0.06 per diluted share, compared to net income of $731,000, or $0.22 per diluted share, for the same period of 2009. The fourth quarter of 2009 included approximately $464,000 of tax credits related to the donation of land to the city of Bridgeport, and medical products to AmeriCares.

Net income for the year ended December 31, 2010, was $2.6 million, or $0.81 per diluted share, compared to $2.8 million, or $0.85 per diluted share in the comparable period last year. Net debt on December 31, 2010, was $6.9 million, compared to $2.7 million on December 31, 2009. During the year, the Company paid approximately $700,000 in dividends, repurchased 150,000 shares of Acme stock for $1.5 million, and added inventory of $4.8 million. The additional inventory was put in place for the 2011 back to school season, to compensate for potential production shortages and delays in China. On February 23, we renewed our loan agreement with Wells Fargo. The new two-year facility provides for borrowings up to $20 million, at an interest rate of LIBOR plus 2%. The increase in the line was due to the Pac-Kit acquisition.

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

Thank you. (Operator Instructions)We will go ahead and take our first question from Jeff Matthews with Ram Partners.

Hi, everybody. Walter, I wondered if you could look back on 2010 and then look ahead to 2011. What was -- how did things surprise you? What were the biggest surprises in 2010? And looking ahead at 2011, how do you think you've prepared yourself for what might be out there?

We were surprised when, in 2010, about this time a year ago, when our factories didn't have the people they needed to produce. And I think we were not alone in that. But we were caught flat-footed in some regards, because we had just done a really good job in lowering inventory, generating cash, paying down debt, and then the factories didn't have workers to finish the production we needed for our back to school. That was the single biggest thing that we didn't see, that we do see now. Now, the result is we've added almost $5 million of inventory so our back to school is sitting, literally, to a large extent, in our warehouses right now. We're still producing, of course, but you don't have the air freight when you've already got the product on hand.

The other thing that we expected, we expected the office channel to be more robust than, in fact, it has turned out to be. Part of what we're doing is we've got a head wind in the office channel, we've got a very profitable business, and we're investing in some other segments that get around the office channel that have what we think are great growth prospects. Some of those relate to the garden introduction, which over two and a half years, the past two and a half years, we've invested in, and now launched. Others, for example the Clauss line in the industrial area. It is also a weak area, but the SpeedPak utility knives. First they were introduced and they got into one of the major hardware chains. Then it got into another major hardware chain. Then we started to get scissors placed in those chains. And they're high margin accounts that, frankly, are part of the reason the Clauss line is now up 40% year-over-year. But it is still -- Clauss is about a $6 million business today. So for it to become $20 million, we need a couple more years of that kind of growth. I hope we get it. And if we do, all of a sudden, the head winds we've had so far in office begin to be less important in the overall mix of our business.

One last thing, and that's the Pac-Kit acquisition. It's domestically based, it's a manufacturer in Norwalk, Connecticut, about 20 minutes from our headquarters. And it gives us the ability for very rapid turnaround of first aid components. I would expect that that business, when we begin to combine our operational efficiencies with North Carolina, and when we begin to shake out our product costs in comparison to Pac-Kits, we'll be able to generate some pretty good savings, well over the $100,000 to 150,000 that we're currently fairly certain we'll generate this year.

Okay. Fair enough. And if I could just follow up with a question. As of today, I imagine the inventory decision you had to make some time ago, as of today, given the lay of the land, given the rise in oil prices, and I don't know what factories are seeing in China right now in terms of being able to ramp up post Chinese New Year's versus last year, but as you sit today, how do you feel about your inventory bit?

I know we did the right thing. First we've laid in some inventory at six months ago prices, which is a hedge against the currency and inflation that was experienced. And we put the price increase through on the first of the year. So that's good. The factory issues in Asia, I don't think are a short-term issue. And they have had the same kinds of levels of employment after the Chinese New Year as last year. I'm leaving for China tomorrow morning. And we're working with the factories, and I know what I'll see, and that's that we will be glad we brought the inventory here now.

Okay, good. Good luck. Thanks.

(Operator Instructions)And we'll go to our next question with Bill Jones from Singular Research.

Hi, guys. Congratulations on the acquisition. I wanted to ask a little bit, you mentioned AirShoc, which you're shipping currently. Maybe you could give us little more color on what we should expect, where it might be, and what kind of impact that might have in 2011.

I would expect that AirShoc will probably be a small impact this year, on the order of between a $0.5 million and $1 million. It's currently being sold in a number of places, but I can tell you that our competitors are watching this carefully, and so I don't want to name names. But we're producing it right now about as fast as we can ramp up. However, the actual garden placement has already been accomplished for 2011, so where we've got it is where it is. The selling season for next year is around May, and you can bet that we're in front of a lot of chains. But you can account probably for $0.5 million to $1 million in the AirShoc line this year.

Okay. And for the quarter, maybe I missed this, but there is the $108,000 in the other income line. Could you give a little color on that?

Yes. We -- because of evaluating our liability for the environmental remediation in Bridgeport, based on what we've done thus far, we are able to reduce the liability by $100,000. And we recorded that in the fourth quarter.

Okay. And then, do you have the number of shares bought, and maybe the price paid off of Q4, repurchased?

For Q4, I don't have that off the top of my head. It wasn't very many in Q4. Most of the 150,000 were purchased in the first three quarters.

Okay. All right. Thank you.

And we'll take our next question from Tom Spiro from Spiro Capital.

Good morning, everybody. First, on Pac-Kit, how has it been doing over the last two, three years? For example, sales over the last couple, three years, flat, down, up? What's it been doing?

It varies between a low of $4.8 million and a high of $5.4 million over the past three years. Its profitability, remember, it is a privately-held company, but its profitability has generally run somewhere around $100,000 to $150,000.

And its gross margins compared to the gross margins we earn on our first aid lines are comparable, or much different?

That's a very good question. Pac-Kit's business model right now has lower margins than we do corporately. But it doesn't have the advertising and support expenses that we do. So its operating income tends to be in line with ours. We think, however, that as we start to innovate some of the products and start to work with some of the programs that we have in place, that there will probably be an opportunity to increase margins.

That's helpful. Thank you. Focusing for a moment on Europe, Walter, the sales are up there nicely. We've been able to grow the sales the last several years. And I recall not so many years ago, when we thought that if we could just grow the sales a bit, we would break even, and it seems that target remains elusive. What are your thoughts?

It's not going to be elusive anymore. Sales grew. They were impacted, in part, because of currency, and the margins were lower. But we've done a couple of things. First, we've raised prices. And we've done it with a pretty serious intent, that if our customers find us of value, they will pay for the product. The second thing we've done -- and by and large, we've been able to make that occur in Europe, so as of the first of the year, that went into place. We also reduced head count by eight people. And cut out expenses totaling, including the head count, somewhere between EUR400,000 and EUR600,000. That's a lot of money, so if we are successful in building that top line, we should be able to turn to a break-even sooner rather than later. It is fairly dramatic steps we've taken.

I don't mean to be argumentative but weren't we adding people in Europe only a couple of years ago in an effort to grow the top line?

Yes, we added people in the sales area. And what we've done is we've narrowed down some of the products, we pulled out some people in the warehouse, we've gotten rid of an outside warehouse. So when you look at the overall people, they've declined, but the sales portion has increased.

Got it. Okay, thank you. Thanks. And then lastly, manufacturing, we have a pretty substantial reliance on China as our manufacturing base. And I'm curious, Walter, whether the turmoil over there, whether it is a change in currencies, inflation, labor shortages, what have you, is causing you to perhaps revisit the subject of a manufacturing strategy.

Well, that's quite a question. The manufacturing in China continues to be unsurpassed, in my view, globally, and that's a difficult statement to make. But relative to labor costs, yes, they've gone up. We've faced between, on average, maybe 18% labor costs increase this year, or last year, and that will continue. That's a big number. But labor today at our factories is $250 a month for 11 hour days, six days a week. It is still a far cry from most areas that we can go to. Yes, we can go to Vietnam at $125 a month, but the infrastructure is not there. Our Chinese operations, despite the hiccups we had in our back to school last year with labor shortages, is still pretty darn good. What I do think is important is that we get our Asian business to be more and more automated, and we focus on the scrap and the throughput and the material composition. What YB Pek brings from Phillips is 20 years of that experience in running 1,500 people in his factories. That's an opportunity, and it will take time, but we're hopeful that he'll staff and then execute that kind of productivity improvement in China.

Are you adding alternative contractors in China?

We are always adding manufacturers. But there is a big difference between adding one and making it a main one, where you've gone through all sorts of factory audits and compliance and social upgrades. So that's a big deal when you do that kind of increase, and we have been.

Well, that's great. Thanks much and good luck.

(Operator Instructions)And we will take our next question from Ralph Marash with Manhattan Company.

Hi, good afternoon. Just wanted to clarify on the Pac-Kit acquisition, that the Norwalk facility comes with it?

The Norwalk facility will be leased. So while we will be using the equipment there, and keeping the people there, we didn't buy the building.

And how long is the lease for?

They're a series of one-year leases.

Okay, so that essentially you have a lot of flexibility.

We have a lot of flexibility. I'm hopeful that as we begin to add more volumes to that facility that we look at that facility in particular, as one that we keep. But there are a number of alternatives we can do.

Thanks.

(Operator Instructions)We will go ahead and take our next question from Chris Doucet with Doucet Asset Management.

Hello, guys. Congratulations on the renewal of the bank line and the acquisition. My first question is about the acquisition. With $100,000 to $150,000 in profit, it seems like you're going to have to cut a lot of costs for this to be actually an accretive acquisition for us. What kind of range do you see of profitability for the Company in 2011 and cost cuts that we can make?

In Pac-Kit?

Correct.

First, it is a private company, so the P&L that they generate is reflective of a private company. But the $100,000 and $150,000 is after financing, and it is basically an amortization of some goodwill. But it is the baseline before we work on the freight, work on the UPS rates, work on the cost of components, before we lay on, probably, a doubling of the throughput in the factory. There's a lot there that when we execute it, we should be picking that up. So when I talk about $100,000 to $150,000, it is before any impact of that. But it is a lot safer to say that than to have expectations early in the process. The pricing of the products are, perhaps, modest, and perhaps there is some room there. And there's clearly the opportunity to take some of the products and bring them into our distribution channels, as a more industrial brand and product family. And the margins there would be higher.

Can you break down how much of the purchase price was actually for receivables and inventory?

Paul, you can do that.

The inventory was approximately $1.2 million. And the receivables $600,000. The equipment was about $200,000.

So more than half, okay. Next question. Walter, you may have already said this in your comments, but how much money did Acme lose in Europe in 2010?

It was approximately $500,000, $490,000 actually.

Okay. Is management going to receive bonuses for 2010?

No.

Okay. Did they receive a salary increase in 2010 over 2009?

No.

Okay.All right, well, good luck with the quarter, guys. Thank you very much.

And we will go to our next question from Bill Jones with Singular Research.

Hi, guys. Just a follow-up. You gave a little guidance for next year. And I know you had some tax benefits in 2010. Are those primarily used up now? And should we be assuming a more normal tax rate or are there still some -- ?

Yes, you will see a more normal tax rate in 2011.

Okay. Thank you.

And there are no other questions in queue at this time.

Okay, then this call is complete. I would like to thank you for joining us. Goodbye.

And that does conclude today's conference. We thank you for your participation.