Acme United Corp (ACU) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Acme United second-quarter 2011 earnings call. As a reminder, this call is being recorded. At this time, I would like turn the call over to your host, Mr. Walter Johnson, Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the second-quarter 2011 earnings conference call for Acme United Corporation. I am Walter C. Johnson, 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 risk 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 had good performance in the second quarter. Our net sales increased from $20.6 million to $24 million, an increase of 17%. Operating income increased 26%. Net income grew from $1.57 million to $1.74 million, an increase of 11%. Since we have been repurchasing our stock, EPS increased 17% to $0.56 per share.

We had solid performance in all our business sectors. Back-to-school revenues increased strongly. Sales to the office products industry has been solid. The Pac Kit first aid acquisition contributed over $1.8 million in sales, which was stronger than we anticipated. Overall revenues in the US during the quarter increased 22% over last year.

Canadian sales increased 15% due to the office channel growth, new hardware distribution, and good reception of the AirShoc garden productline. In Europe, sales declined 20% due to timing of mass-market shipments.

Our gross margins were 36.1% compared to 36.7% during the second quarter of last year. We were generally successful in raising our selling prices to offset increased costs but the pressure remains. The Pac Kit margins are lower than our overall business, impacting gross margins by about 0.6 percentage points during the quarter.

We have controlled closely our SG&A expenses but have continued spending in new product development and building our sales team. SG&A expenses in the second-quarter declined from 27.2% last year to 25.9% in 2011.

The Pac Kit acquisition closed on February 28, 2011, so it is still a relatively new entity for us. However, we have quickly integrated the accounting, IT systems, and support and are focusing on building revenues through our distribution channels.

Sales have been exceeding our forecasts and we continue to bring in new opportunities. The order book is strong. We are working on improving gross margins by leveraging our combined purchasing and our global sourcing capabilities.

Our inventory at the end of the second quarter was $23.6 million compared to $18 million last year at this time. We have avoided significant airfreight by the increase in inventory and we have locked in our costs. However, this has increased net debt to $14.4 million from $8.9 million in the second quarter last year. We believe we have enough buffer stock now to hold or reduce our inventory levels going into 2012.

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

Acme's net sales for the second quarter were $24 million compared to $20.6 million in 2010, an increase of 17% or 14% on local currency. Sales for the six months ended June 30, 2011 were $37.1 million compared to $33.7 million in the same period in 2011, an increase of 14% or 12% on local currency. Excluding Pac Kit, sales increased 8% in the quarter and 7% for the six months.

Net sales in the US segment increased 22% on the quarter and 17% for the six months ended June 30. Excluding Pac Kit, sales in the US increased 10% in the quarter and 8% for the six months. The biggest contributor to the sales increase came from the iPoint pencil sharpeners.

Net sales for Canada increased by 15% in the quarter and 16% year-to-date in US dollars and 8% and 9% respectively in local currency.

Net sales for Europe decreased by 20% in the quarter and 10% year-to-date in US dollars and declined 30% and 17% in local currency. However, because costs have been reduced, Europe broke even in the second quarter. The sales decline was due to timing of mass-market promotional sales although overall sales to mass-market retailers are expected to be higher this year, more of the shipments will occur in the third and fourth quarters.

SG&A expenses for the second quarter of 2011 were $6.2 million or 26% of sales compared with $5.6 million or 27% of sales for the same period of 2010. SG&A expenses for the first six months of 2011 were $11.3 million or 29% of sales compared with $10.4 million or 31% of sales in 2010. The increase for the quarter and six months is primarily due to the added Pac Kit business and higher sales commissions and freight costs associated with higher sales. Additionally, there were nonrecurring costs of $125,000 for the Pac Kit acquisition.

Operating profit in the second quarter increased from $1.95 million last year to $2.46 million this year, a 26% increase. Operating profit for the six months increased by 18%. Net income for the second quarter and six months increased by 11% and 5% respectively.

The disparity in net income growth rates compared to operating profit was due to tax credits recorded in 2010 for the donation of property in Bridgeport. Approximately $180,000 was recorded in the six months ended June 30, 2010, of which $150,000 was recorded in the second quarter.

The Company's bank debt less cash on June 30, 2011 was $14.4 million compared to $8.9 million on June 30, 2010. During the 12-month period, we spent $3.4 million on Pac Kit, $900,000 on treasury shares, paid $700,000 in dividends, and purchased $4.4 million more of inventory. We expect inventory to decline slightly by year-end.

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

(Operator Instructions). Jeff Matthews, Ram Partners.

Thanks very much. Two things. Did Paul just say that you expect to inventory to decline slightly by year-end or did I miss that?

Yes, we will be -- Jeff, we will be reducing inventory between now and year-end.

Okay, so just where do you -- where would you guess it would be? Because March is your seasonal low. Where do you think it would be by next March? Do you think you would have any unusual extra inventory in there?

Paul, why don't you take that? You work the forecasts.

By next -- well, in the first quarter, we will have to buy more inventory for the back-to-school. So it will probably be higher than it is today, that's for sure. But from today till the end of the year, it will go down slightly and then it will build back up a little bit in the first quarter.

Okay, let me ask it a different way. Shouldn't it go down more than slightly by year-end?

Well, slightly, I'm talking about maybe $2 million.

And Jeff, we level load our factories and we bring things in in order to avoid air freight. Frankly we are locking in costs so we can match better our selling price and the cost that we have on hand. So that balance sheet that we've got is very important for managing our profitability.

Some of the back-to-school sales, the inventory that we are purchasing has to be purchased in November-December because we can't buy everything in January, February, and March. You've got Chinese New Year and the factories are at maximum capacity with our production during those months.

Okay, and then on that point, China, cost increases over there, any issues in terms of your supplies? A, your supplies, your suppliers, and deliveries from them? And B, cost increases that are -- that might lead to margin squeezes [down there].

Well, first on capacity, we are growing and we continue to be adding both new products and new product categories as well as putting increasing demands on our existing factories. So they need to expand and they are. We are also working on cost increases for next year and as with all of our competitors, we are notifying our customers now and giving them a heads-up that costs are increasing and that is in large part because the dollar continues to be devalued.

Okay, thank you.

Bill Jones, Singular Research.

I think you said that the European operations were breakeven despite the lower sales.

Yes.

And third and fourth quarter sales should be higher, so I guess we should see some profitability there?

Well, that's exactly the intent. And I can see where the orders are coming from and the revenues, so if we execute what we intend to execute, then that would be true.

Okay, and I know one of the challenges is higher cost. Maybe you could talk about potential or where you are at with price increases.

I can't talk specifically about that because we're in the process of contacting all of our major customers. But I can tell you that our major customers are under a lot of pressure not to pass through price increases and we are working hard with our suppliers to become more efficient. One of the things about labor is that by automating the factories and paying attention to automation, you ought to get productivity and that's part of the offset for increasing labor costs. And frankly depending on product design, you ought to be able to save some on raw materials.

However, all the major customers have been notified that we will be increasing prices and we're going to be working with them to do it as effectively as we can.

Okay, and then on the share buybacks, what do we have remaining on that program?

190,000 shares.

Okay, that's all I have for now. Thank you.

Tom Spiro, Spiro Capital.

Good afternoon, everybody. Just to go back to the issue of Europe for a moment, it looks like things have improved in Q2 and we are hopeful in the second half of the year. As I recall, Walter, we adopted a new strategy with respect to Europe this year involving I guess fewer personnel, lower costs. And earlier this year you thought that perhaps by the midpoint by now you might have a read on whether the strategy is a good one or not. Are we still in sort of an experimental stage or are you comfortable that it's a sustainable strategy?

Well, Tom, we are certainly trying to make it sustainable. And the guys in Europe cut out $400,000 to $500,000 of expenses. Much of that was staff. And so they are shorthanded, but they pulled together as a team and I'm very proud of what they have done.

What we have coming in the back half of the year are some solid promotions with large mass-market customers as well as some good new business in both the manicure and the office business. So I am encouraged and we have a breakeven now that's closer to $8 million rather than $10 million. So should we do what I hope we can do, we will be profitable in the second half.

That's great, that's great. Good luck with that strategy. Walter, you mentioned in the press release that the feedback on AirShoc has been outstanding. I wondered if you could just take a moment to give us a little flavor for what you've been hearing?

Well, some of the customers are saying they love the fact that tars and saps don't stick to the blades and because of the nonstick proprietary coatings, that's true. Others are saying they like the design of the handle and the feel and the locking especially of the small pruner.

Some like on the large lopper that cuts branches, they like the ruggedness of the handles and the ergonomics of the grip. I think where it's placed, we are seeing reorders at a pace faster than we expected, so not only are we getting the feedback that's positive, but we are getting reorders.

However, I want to caution that the distribution is still small there. We've got a lot of work to do to grow it.

Are we picking up much placement for 2012?

Yes, we are picking up placement. There's some accounts that are still evaluating it and working through their spring planograms. But we are picking up placement and when we start to get sales from them and they are out in the market, then I will share that with you.

I recall from the annual meeting, Walter, that you mentioned that there were some merchandising changes occurring in Walmart that might work in our favor or might not. I wonder what the -- how that is all shaking out?

Well, for those that aren't familiar, Walmart has been working on bringing new products into some of their categories and they are doing that because they have had same-store sales declining for eight quarters in a row. And we were one of many suppliers that were invited to show some of the innovative items that they currently aren't carrying or that we didn't even think to show them because it would have been outside their range.

They also wanted to see the items like our iPoint pencil sharpeners that sell everywhere else but Walmart didn't want them. And they are doing terrifically on the broader market.

Walmart is still going through much of that. We have picked up some new business that I am excited about for next year. I don't want to share that yet until we get a cleaner picture of it, but it is an initiative that they have talked about interacting on. So we've gotten some new business for next year from that.

Thanks much and good luck.

(Operator Instructions). Richard Dearnley, Longport Partners.

Good morning. Is the -- could you discuss the flow through the quarter of sales, how they went? Were they stronger, then weakened? What was the color through the quarter?

Well, I don't think you're going to get an accurate picture, because most of our customers, especially the back-to-school ones, really start selling the products -- depending on where in the country -- middle of July or in August. So much of what we are shipping to a Walmart or a Target or a Staples is then matching when they want it on the shelves. And so it's really the reorders that will be coming in July and August that tell us what the season is going to be like.

Typically May and June are far stronger than April and we had a -- in May, we had an incredibly strong month, but it was timing of when they could get product.

I see, right. And were promotions and back to school more important in '11 than they were in '10?

Well, we really haven't seen that yet. Where there will be promotions will be -- and this is always tricky for us, because sometimes a large customer will run a promotion and not talk to the supply chain or they won't plan these things and all of a sudden there is a lot of scramble. But the promotions typically start around now and so you -- in the West Coast and some other parts and by August, you've got a lot of promotional activity, much of which we don't have visibility for at this stage.

And then the -- you spoke last quarter about a supply-demand imbalance in nonstick. How is that going?

Now one of the things that is exciting for us is that the nonstick truly works, first. Second, it's proprietary. And third, we are getting increasing demand for the items that it's on, all of which created some backlog with our creation of nonstick material.

In March, we opened our own lab for a number of technology products. I think that's too big a word, but it's a building that we do our own proprietary mixing and we do some coatings. And it's now enabling us to open up some new channels or new manufacturers for applying the nonstick coatings.

So we have broken through some of those bottlenecks and that's pretty exciting to us, because I think we've got some good opportunities there.

Is that up in the Pac Kit real estate or is that down in headquarters area?

The lab?

The lab.

Our technology lab is in -- outside of Guangzhou.

Oh, in China, okay. Neither. And then in Pac Kit, you said the Pac Kit exceeded your expectations and it looks like the quarter was about the same rate that's you cited as the first month. I take it you'd expected Pac Kit to slow down a bit from its intro quarter. Meanwhile it's running -- if it is annualizable, which I don't think it is, because isn't it seasonally strongest in the second quarter?

Well, let me address that a little bit. The way Pac Kit traditionally ran first quarter and second quarter were seasonally strongest and it had -- I think its sales last year were $5.4 million. And we are running at over a $7 million run rate.

Now there's a couple of things that are going on that are changing how Pac Kit operates. The first is that we are broadening its distribution and I will get you an example. In a large hardware chain, as we speak right now, this Pac Kit hurricane preparedness kits, it was shipped in May. It is now in the stores. It's probably -- if it sells well, a reorder at the end of summer and then there will be another type of emergency preparedness prepared for the winter. That's a new business.

This is several large customers that right now are looking at the Pac Kit items to be replacing a current vendor and so that's new business. One of our large office superstores is looking at providing some customized Pac Kit products for its large industrial accounts. We are doing quite a bit more now in the transportation area and in particular, the kinds of (inaudible) companies like bus companies and car companies.

So there's a lot more activity on new business. I tell you that we are producing as we speak now as fast as we can and we are adding people to boost its production.

Sounds good. Back to back-to-school for just a minute, was the business with basically the same retailers and outlets that you were in last year? Or did you replace them? Or did they replace you?

As near as I can recall, it's about the same customer base. Products change. It's the same customer base.

Right, okay. All right. Thank you very much. I will reload.

Rick Fetterman, Fetterman Investments.

Good morning, everyone. Walter, what do you expect -- where do you expect the debt level to be at the end of the year with I guess inventory going to be a bit lower and of course sales and profits, where are you looking for the dept?

Paul has just gone over --

We expect our net debt to be between $8.5 million and $9 million.

And my other question -- everything else had been answered -- is what -- are your expectations for '11 revenues and profits unchanged, factoring in the apparent improvement in Europe?

They are unchanged and again, the year still has the opportunity to bring in new business. But we gave guidance of $70 million to $75 million in sales and $1.00 to $1.05 in earnings per share. That's what we believe we are tracking at right now.

All right, all my other questions were answered. Thank you very much from.

Jeff Matthews, Ram Partners.

The net debt question was what I was going to ask. Thanks a lot. Congratulations. Good luck.

Tom Spiro, Spiro Capital.

Walter, I recall we brought on a new executive in China a number of months ago and I wondered if he's begun to implement any changes that you would like to discuss with us.

Well, the first part of his responsibility was let's execute our back-to-school with very little air freight. That's really the first six months of the year and we have accomplished that. Now, that's not just an executive in China. That has been a full-blown effort here including obviously building inventory and holding it in place.

But the next part and a very powerful part of his responsibilities is now executing the productivity improvements and raising outputs and really taking us to another level in our manufacturing capabilities. I think that's very exciting and he will be with us for quite a bit of time in the next couple of months working through those strategies.

Well, that's great. Lastly I wonder how SpeedPak is doing?

SpeedPak is doing just fine. It's -- the nice thing with SpeedPak, particularly the cartridges, is you can place them in other things like scrapers and we've introduced that into the market and so that cartridge now has both a utility knife and a scraper that you use it and there will be other items as well. So it's a base product that we are building on. And its distribution -- it's doing well not just in the US and Canada but also in Europe.

That's great. I love the pencil sharpeners, Walter. I used one this morning.

Yes, we love them too and they are doing -- they're the single best-selling item in growth so far this year.

Thanks much.

Richard Dearnley, Longport Partners.

Could you talk about the price increases you implemented at year-end and break them down US and foreign? And then the sort of price increases you are doing now sort of the midyear class of price increases, break them down US and foreign? I realize there is an ask and a bid and bid fight, but some color on that please.

Well, Dick, I've got to be careful a little bit because I've got all my competitors listen.

That's true.

But in general, we put something through on the 5% 6% range at year-end. We are looking at numbers probably like that again for 2012. There are products that we might be able to take some features out to keep the price stable and we will work with our customers on that. Maybe we will do some things on our packaging to save some money. But costs have gone up and when the dollar is weak, commodities go up. So materials going into the products increase and of course labor does. And as I mentioned, we are working to improve our productivity with the labor force.

But still, 20% increases in labor lead to increased costs. So if you were to look at 5%, 6% increases, it wouldn't be unexpected and we are not the only ones with those kinds of numbers out in the marketplace. I would guess that every supplier as example to Walmart that is doing anything in Asia has the same issue.

Your -- getting Europe to breakeven even with slow sales is quite remarkable it seems to me. Way to go.

Well, it was -- I want to make sure that we deliver those numbers and then we can look back and be proud of them. But so far it's on the right track. We cut very deeply and the bet was that we either pull the team together and make it or we're not there. And the guys are making it, so that's terrific.

Good, thank you.

At this time, there are no further questions.

If there are no further questions, then this call is complete. Thank you for joining us. Goodbye.

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