Acme United Corp (ACU) 2011 Q1 法說會逐字稿

Good day everyone. Welcome to the Acme United first-quarter 2011 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 of 2011 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. 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. 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 first quarter of 2011 of $14.4 million, an increase of 10%. Net income for the quarter was $120,000 compared to $214,000 last year. On February 28, we acquired Pac-Kit Corporation, one of the oldest manufacturers of first aid kits, for $3.45 million. Its contribution to sales in the month of March 2011 was $569,000, which was better than planned. Acme United also expensed during the first quarter of 2011 approximately $100,000 of legal, accounting, consulting and financing costs associated with the acquisition.

Net sales in the quarter grew 5% without the impact of the Pac-Kit revenues. Every business unit had sales growth, which is the first time that has occurred in four years. We believe we are beginning to feel an overall improvement in customer strengths.

Gross margins for the first quarter of 2011 were 36.9% compared to 39% in 2009. This was primarily due to higher-than-usual sales of low-margin medications and a timing delay to the second quarter of normal office product sales.

The Pac-Kit business has lower gross margins than our other product lines, which reduced the gross margin in the quarter by approximately 0.3%. We expect corporate gross margins to improve in the second quarter as we return to a more normal product list.

The Company is in a stronger position in 2011 than 2010 as we move into back-to-school sales. We've already built much of the product that we expect to ship and have a substantial portion already in our warehouses. While the trade-off has been higher inventories in 2010, we anticipate substantial savings in expedited shipping and airfreight in the coming quarters.

Sales of the Clauss product family continue to increase with new placements and promotions in the hardware and industrial markets. Our SpeedPak utility knife is the featured Tool of the Month in April at one the largest hardware chains in the US. The Clauss knives are getting traction in both the US and Europe. We have been shipping Clauss garden tools to our early customers with excellent response.

The Pac-Kit business has now been substantially integrated into our order entry and corporate software systems. The work ahead is in executing our plan for increasing sales, improving component costs with our combined PhysiciansCare and Pac-Kit first aid volumes, leveraging our fixed costs, and seeking tax incentives for domestic production. While we are only six weeks into the purchase, we already have a new first aid promotion at a major hardware chain and are working on a number of exciting new business opportunities.

The results for the first quarter of 2011 were about in line with our planning. There was a greater impact of branded medication sales than expected and a minor delay in office sales, but overall we, at this stage, are on track for the year.

We are anticipating a stronger back-to-school than last year in both sales and profitability. Our earlier guidance of $72 million to $75 million in sales and earnings of approximately $1 to $1.05 per share in 2011 appear reasonable at this time.

I will now turn the call to Paul.

Acme's net sales for the first quarter were $14.4 million compared to $13.1 million in 2010, a 10% increase. Excluding the impact of the newly acquired Pac-Kit company, sales increased 5%. Net sales for the first quarter in the US segment increased 10%. Excluding Pac-Kit, net sales in the US increased by 4%, mainly due to higher sales of over-the-counter medications. Net sales in Canada increased by 18% in US dollars and 11% in local currency. The majority of the sales increase came from new placement of Clauss products. Net sales in Europe increased by 3% in US dollars and 4% in local currency due to higher sales in the mass-market channel.

Gross margins were 37% in the first quarter of 2011 versus 39% in the first quarter of 2010. The lower margin in 2011 was primarily due to unfavorable product mix as a result of higher sales of over-the-counter medications. We expect margins to improve in the second quarter with a better mix.

SG&A expenses for the first quarter of 2011 were $5.1 million, or 36% of net sales, compared with $4.8 million or 37% of net sales for the same period of 2010. The 2011 SG&A expenses included approximately $100,000 of transaction and integration costs associated with the Pac-Kit acquisition.

Operating profit was $185,000 in the first quarter of 2011, compared with $300,000 in the first quarter of 2010. Excluding the Pac-Kit acquisition costs of $100,000, first-quarter 2011 operating profit would have been approximately $285,000.

Net income for the first quarter of 2011 was $120,000, or $0.04 per diluted share, compared to net income of $214,000 or $0.07 per diluted share for the same period of 2010. The Company's bank debt less cash on March 31, 2011 was $13.2 million, compared to $3.4 million on March 31, 2010. During the twelve-month period, we spent $3.5 million on Pac-Kit, $1.7 million on treasury shares, paid $700,000 in dividends, and purchased $3.8 million more of inventory. We expect inventory to stabilize for the remainder of the year.

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

(Operator Instructions). Richard Dearnly, Longport Partners.

Good morning. Is the -- were the -- you stated the sales in Canada being driven by new Clauss placements. Was that new product, or was that just penetrating Canada more thoroughly with older product?

I'm happy to say that was Clauss garden products.

Good. Was that doing better in Canada than the US, or is it just that Canada is smaller?

No, it's just the timing of some customers, but the Canadian -- we've got a number of promotions in Canada that are working, and they were the first to get shipments.

Okay. You mentioned that AirShoc started shipping, yet most of the US gain in sales was Pac-Kit and PhysiciansCare. Did AirShoc not have much of an effect in the US yet?

What we have been -- I hope (technical difficulty) trying to convey is that US customers, there's a few of them who are shipping some of the garden items, but that's really a small [line] for this year until we get some traction. But yes, it's been shipping in the US.

The big sales growth, and I have no idea why this happens, was our over-the-counter medications, which we sell with the first aid kits -- Advil, Tylenol. I don't know if it was a tax (technical difficulty) issue because there tends to be a spike then, but it just skewed it, and those are fairly low margin. The other aspect was the DI business that we ship into the mass-market with office products were delayed by a couple of weeks and shifted into April. They tended to be higher margins than the branded items. So both of those are -- who are happy to sell the medications, the delay [will] catch up.

You're talking about gross margins getting back to normal. Is that just as back-to-school and regular products become a bigger piece of the sales pie?

Yes. The medications tend to have low margins, and that drags you down a little bit. With the office products coming right back in, I don't see a problem at this stage being right back where we've been [since] last year.

I got you. The annual report seemed to suggest that you were tiptoeing back into the medical hardware business through Camillus.

That's more of an opportunity. What you might figure is that, in the safety area in particular with the distributors and the emergency medical teams, there's a lot of cutting and knives that are used, and our antimicrobial technologies help there. So yes, we are selling some into it. That's not a big area in the overall model of the Company, but it's a value added with the Pac-Kit acquisition.

Rick Fetterman, Fetterman Investments.

Good morning everyone. Walter or Paul, could you talk for a minute or two about Europe, specifically revenues, level of losses and where things -- where you see or hope things are going for the balance of this year?

Paul, why don't you go over the financials?

The profitability improved in the first quarter, and we have taken some measures to cut costs over there. So although we are not expecting necessarily a breakeven this year, we are expecting to make a lot of progress.

Can you be more specific about the first quarter?

The first quarter we -- our operating profit was about a $50,000 improvement.

What was the revenue in Europe?

The revenue was $2 million, compared to $1.9 million last year.

Would you remind me what level of revenue is necessary to break even there?

It's about $10 million.

Okay. Are Pac-Kit -- do Pac-Kit margins have room to improve, or are they likely to remain at levels a bit lower or maybe somewhat lower than the -- I'm going to call it the old Acme margins?

I'll address that one. The Pac-Kit margins are lower, but the operating income tends to be about the same as we are right now. The reason is because there is less promotional activity, less catalog activity, in the Pac-Kit business model. We probably will get some operating improvement if we do nothing more than bring over some of the production from our North Carolina facility, which is also making first aid kits, into the Pac-Kit facility. We are starting to work through that right now.

The bigger area is in the cost of sales, in the components. That's when we combine the two volumes. There is a game plan to -- you can imagine, we'll look at our costs. We will look at Pac-Kit's costs. In many cases, they are comparable items. We're going back and negotiating with [just] costs where we are shifting over to alternative suppliers where we have at least double the volume. That is a project that is somewhat painless, because it's truly just negotiations. That's in process. So I would expect margins to be improving, but again, that would result in still lower margins than a regular business but it would raise our operating contribution above our normal.

What was the Pac-Kit volume -- sales revenue when you purchased the company?

Last year, they did $5.4 million. We figured that since two months had gone by, we would do about [10-12] to maybe around $4 million for the year. But the first month was $569,000, which was, frankly, as far as we could tell, a record. At least within the past five years, it was more than they had ever done. May, it's early, but April -- it is early, but it's having an excellent month as well.

Is their business seasonal at all?

Yes. It has more sales typically in the second quarter, so they are in the busy season right now. However, as we start to put together some promotions -- I'll give you an example. There are emergency kits that get tied to hurricanes. The new business that we've just gotten is in one of the major chains for a hurricane preparedness kit. There are similar things that can be done for earthquakes, for tornadoes. While that's regional, it's easy for Pac-Kit to pull together. So we expect to be picking up some of that later in the year that in general they've never even thought of.

Is their sales and marketing no longer separate? Is it under Acme's sales and marketing direction? I'm just curious. You just mentioned pulling together a hurricane response kit and things that they hadn't thought of. It's great to have it, but somebody has to know it besides Acme United. Customers got to know it.

Sure. Well, the answer is their sales reps, which were independent reps, now report to an Acme United person who is heading the healthcare business. We put a direct salesperson who used to work exclusively on the Clauss area to work on both now. So a lot of the potential Clauss accounts that are really Pac-Kit accounts are now being covered by him, and we are making presentations into the big-box stores where Pac-Kit never had a chance at all to even be considered. So I am comfortable with the base business, but the bigger picture is to get the volume up. Our goal is (inaudible) model it, but our goal is to put in a few million dollars and get this thing to be quite a bit bigger.

Okay. That's all I've got for right now. Thank you.

(Operator Instructions). Mitch Almy, McAdams Wright Ragen.

Good morning. My first question had to do with the seasonality of the Pac-Kit business. You've already addressed that.

The second had to do with the balance sheet, the increase in inventory and the repurchase of stock. How many shares do you have left under the current authorization, and in light of the balance sheet, do you plan to continue buying back stock?

Let me address the balance sheet first. Last year, we had over $600,000 in airfreight. It was primarily in the second quarter, a little in the third. It was because we'd reduced the inventory, and then we had a shortfall of labor in the beginning of 2010. It was very expensive for us. So we booked the inventory in advance; it's sitting here. We have a balance sheet and a bank line with the capability to handle that. It will work its way down somewhat as we ship the back-to-school. I am optimistic that at least a good portion, there will always be some, but a good portion of the $600,000 it was spent last year we won't spend in this current quarter, in the second quarter and a little in the third.

Regarding stock buybacks, well, we just purchased a good business, and one that I hope we can grow. We are expanding the sales from about $58 million to somewhere we're guessing and estimating somewhere between $73 million and $75 million. That takes some working capital. That all gets you to the stock buybacks, which are a good use of cash when they are generating it, but I think where we have availability to buy them back, buy shares back, I'd like to be holding that in the business as we execute the revenue and profits. Later in the year when the inventory is down and we've generated extra earnings, we will take another look at it. But the buyback program is still in place.

And roughly how many shares are left?

190,000 left.

Super. Thank you very much.

There are no further questions at this time.

Then I would like to have this call be completed, and thank you for joining us. Good-bye.

That concludes today's conference. We thank you for your participation.