Acme United Corp (ACU) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to Acme United's third-quarter 2011 earnings call. As a reminder this conference 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 third-quarter 2011 conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, who will first read our 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. 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 had a strong third quarter. Our sales increased 18% to $19 million, operating income grew 70%. Net income was $683,000, or $0.22 per share, representing 16% growth in EPS.

The components of growth included a strong back-to-school performance, increased sales of first aid kits and impact of the Pac-Kit acquisition. We had excellent sales of our kids' scissors, glues and pencil sharpeners, and they were distributed through many of the leading mass-market and office supply chains in North America and Europe.

We introduced new emergency first aid kits tailored to hurricanes and natural disasters. Frankly, they were sold out during the quarter and we are now re-shipping.

Finally, the Pac-Kit acquisition contributed about $1.6 million of sales during the quarter. But more importantly it focused our sales effort on our entire line of first aid and safety products.

We continue to build sales momentum for 2012. Our award-winning line of garden products getting additional placement for next year. Camillus [knives] are growing. We are broadening the pencil sharpener assortment, expanding our math tools area and introducing new nonstick scissors.

Although it is too early to quantify the growth, we are achieving success, and it appears that 2012 will be a very strong year. Our gross margins were 35% for the quarter, which is comparable to last year. Although the Pac-Kit line is lower than gross margin -- average gross margin, we are being successful in leveraging our combined volumes and resourcing components as GAAP and margins is narrowing between Pac-Kit and our existing businesses.

Operating income increased substantially due to leveraging our increased volumes over fixed SG&A costs, at least SG&A costs which were held tightly. Last year we received tax credit for the donation of the land in Bridgeport, Connecticut which was our former manufacturing site. This resulted in zero tax in the third quarter last year and enhanced our cash flow and earnings.

In 2011 we recorded taxes of $348,000 in the third quarter. If we had paid a similar percentage of pretax income in 2011, the third-quarter earnings would have increased 68%.

Remediation of the Bridgeport property is progressing well. We have about $300,000 remaining in the reserve, which appears to be adequate. We also hold a $1.8 million amortizing mortgage paying 6% interest that is current. The mortgage is due one year after completion of the remediation but there are about three or four years left before we receive the payment of the then-outstanding balance.

I'll now turn the call to Paul.

Acme's net sales for the third quarter were $19 million compared to $16.1 million in 2010, an increase of 18% or 16% in local currency. Sales for the nine months ended at September 30, 2011 were $57.5 million compared to $49.8 million in the same period in 2011, an increase of 15% or 13% on local currency. Excluding Pac-Kit, sales increased 8% on the quarter and 7% for the nine months.

Net sales in the US segment increased 22% in the quarter and 19% for the nine months ended September 30. Excluding Pac-Kit, sales in the US increased 9% in the quarter and 8% for the nine months. The biggest contributors to the sales increase came from the I-point pencil sharpeners and first aid kits on the existing business.

Net sales for Canada increased by 3% in US dollars in the quarter, but declined 3% in local currency. Year-to-date sales in Canada increased 13% in US dollars and 6% in local currency.

Net sales for Europe increased by 3% in the quarter in US dollars, but declined 6% in local currency. Year-to-date sales in Europe decreased 6% in US dollars and 13% in local currency. However, because costs have been reduced, Europe was slightly profitable in the third quarter. The revenue 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 fourth quarter.

The gross margin of 35% in the quarter was the same as Q3 last year. Year-to-date gross margin was 1 point lower than last year, mainly due to the addition of Pac-Kit. SG&A expenses for the third quarter of 2011 were $5.5 million or 29% of sales compared with $5 million or 31% of sales for this same period of 2010. SG&A expenses for the first nine months of 2011 were $16.9 million or 29% of sales compared with $15.4 million or 31% of sales in 2010.

The increase for the quarter and nine months was primarily due to the added Pac-Kit business and higher sales commissions and freight costs associated with higher sales. Additionally, there were non-recurring transaction costs of $125,000 for the Pac-Kit acquisition of the first quarter.

Operating profit in the third quarter increased from $658,000 last year to $1.120 million this year, a 70% increase. Operating profit for the nine months increased by 30%. Net income for the third quarter and nine months increased by 11% and 6%, respectively. The disparity in net income growth rates compared to operating profit was primarily due to tax credits recorded in 2010 for the donation of property in Bridgeport.

The Company's bank debt less cash on September 30, 2011 was $11.9 million compared to $8.2 million on September 30, 2010. During the 12-month period we spent $3.4 million on Pac-Kit, paid $700,000 in dividends, purchased $1.6 million more of inventory and generated $1.3 million of cash from operations.

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

(Operator Instructions). Michael Wasserman, Moors & Cabot.

What changes are you seeing, if any, in the general accounts you are selling to, given the uncertainty in the economy? I know that in balance of the better times and worst times of late and it keeps going back and forth, so what are your customers telling you or how are they reacting to the overall environment and the changing moods of their consumers?

That's a very broad question, Michael. I'll try to answer it. First, all of them are facing a difficult retail environment. And that really doesn't matter whether it's the office channel or the home hardware channel. It frankly doesn't matter. It's a tough retail environment.

There are areas where they are seeing growth. For example, in the superstores, the [gen san] area which would be including first aid kits would also includes their coffee and their general cleaning supplies, tends to be overwhelmingly growing whether that's a Staples or OfficeMax, Office Depot, [United Stations]. So, our first aid kit businesses is one of the few sections that is growing within the office channel.

In the Home Depot/Lowes world, housing hasn't gone anywhere and it's a tough retail environment. But because we have a low penetration, for us it's a growth environment and we're seeing growth. One of the first aid kits that Pac-Kit made wound up being placed at one of the major, major hardware chains in June sold out, they came back, they wanted more, we put together first aid kits, they sold out. This is for hurricane preparedness. And now it's going in line chainwide -- that's exciting growth for us.

We're also seeing them pushing back very hard on cost increases. And you can see why, because they're under a lot of pressure trying to have -- stress retail customers purchasing from them. So in many cases, we are working and with our customers on packaging, product changes, we're putting more value on what features are important and which ones we might be able to pull out, and we put through price increases, but we will also work with the vendors there.

Finally, we have been monitoring the balance sheets and the payments of our customers. And I can tell you that all the major superstores are current -- and I am relieved to say that -- and at this point don't see any receivables being stretched any more than normal. I hope that helps.

Can I just follow-up with sort of an unrelated question? How is Europe doing currently, relative to your expectations over the past couple of years? I know you've made some progress there, but how do you feel things are going?

My feeling is that Europe's doing a lot better -- and it's better than we budgeted. And they made some money in the -- a small amount of money in the third quarter, which is tremendous progress over last year. But I am cautious about it.

The fourth quarter in Europe has some promotions that, assuming things go as planned, will lead it to have a very good Q4. And that's encouraging. We are finding the Clauss product line, the industrial and professional tools, particularly resonating in Germany, Switzerland, Austria, Holland, Netherlands, Holland, Belgium, and we've got accounts like [Liddell and Albee] that are really responding to it. So -- I am very very careful about saying I am optimistic, but they are doing far better than we expected this year.

And with some luck we could have a pretty good year in Europe.

Okay. Lastly, can you comment on cost pressures on the commodity side of the business and improvement or lack thereof?

The first part of it is I just got back from a three-week trip in China and Hong Kong and part of what we were working on was costs. Labor in -- almost across the board is up 18%, 19%. Now in our products it's still a fairly small portion of overall costs. But nevertheless, even if it's 10%, that's 2%, 3% -- it's 2% of the overall costs going up.

Steel and plastics, which goes into most of our products, seems to have leveled out relative to last year. That's not much of an issue. The US dollar has depreciated 6.5% from September of last year till this September. And that's something that's -- since we buy in dollars, that's a problem.

So net of it all, our costs are going up without productivity in the factories -- which we are getting some -- 6, 6.5%, and that's not across the board, but it's a pretty general guideline. And so we are pushing through as we've done for quite a number of years price increases, we're coming out with new products. As I mentioned we are working on new products and products that we are substituting and changing packaging.

To put this in perspective, since 2007, the RMB has dropped -- the dollar has dropped against RMB about 30%. And we have managed this every year, so I would guess we're going to manage it again.

And you know, when you put everything back and put it in perspective, our operations in China are doing a really good job, and despite the labor costs, which are real, we seem to be able to, each year, adjust and make it work.

Okay, thank you.

Moving onto Jeff Matthews, Ram Partners.

(technical difficulty). Great quarter, guys. I'm a fan, because analysts don't run companies and I never understood why analysts congratulate managements on running the business. But I've got to say, you must feel pretty good given what you did in this environment.

As Mike Wasserman so rightly asked about it, it's a tough retail environment. And so we are -- portions of this are just plain gaining share, gaining shares with iPoint pencil sharpeners, we are gaining shares internationally. We are doing some sales in Asia for the first time. That'll be about $700,000 or $800,000 this year. These things are accumulative, but it's a tough environment.

The other part was the integration of Pac-Kit. Nothing goes smoothly, but within six weeks we had the systems in place and they were functioning quite well. Within eight weeks, we were on to the next portion of the project, which was let's get our cost rationalized, let's get our product family rationalized, and then let's go out and sell. And as we look at it now, Pac-Kit, the margins are increasing, the sales are up -- I'm going to make an estimate of 15% to 18% over what we expected. And we've held the costs on it.

So -- we've been a little bit lucky because we didn't realize how good we could make it. But we see a lot of runway here.

So thank you for the compliment. I think part of it is our Pac-Kit acquisition has worked beyond our expectations.

But you've also been doing some other working pretty hard behind the scenes in things like Europe as well. So -- I appreciate that.

I wanted to ask, I always ask about inventory, and this time I want to ask about inventory and receivables. Because I've noticed at least one or two of your big vendors or customers, their stock prices have gotten down to levels where it suggests Wall Street doesn't have much confidence in their business plans longer term. And I wonder on the receivables side, are they healthy? Number one.

Number two, on the inventory side, how is your inventory build versus what you had been thinking it would be?

Let me address the accounts receivable, and I'll turn it over to Paul on the inventory. The reason I would like to do that is because I literally have been personally involved in watching those receivables.

The account that some people are concerned with is Office Depot. And our current balance is we've collected the bulk of the back-to-school and they are current. So I'm very relieved with that, and I'm looking forward to hopefully building that business with them. Going to the other accounts, I don't think there are any that come to mind as being as stressed. But the Office Depot one because the stock has been down so far, and they haven't made too much money, I have been concerned.

Paul, do you want to cover the inventory?

The inventory I think is up 14% year over year and our sales are up 18%. So it's consistent with the sales growth and the expected sales growth. So we are starting to hold our inventory more tightly. You may remember that last year we purposely built inventory early, in part so that we could avoid airfreight, which we did in the back-to-school.

And the second reason was to hedge for some of the expected price increases which, in fact, was a smart thing to do. And since we are borrowing at about 2.5% interest and the RMB went up 6.5% compared to the dollar. That arithmetic kind of works.

But we are not anticipating that continued build of the inventory. I think we've got sufficient stock now, with some exceptions, that it won't be as aggressive as we have been.

Thanks. One final if I could. There's a comment in the press release about deliveries to mass merchants in Europe hitting later than last year. Is there anything unusual there or different or new or just seasonal stuff?

What it is is some big Christmas promotions that we didn't have last year and some from the third quarter. We delivered a little bit early last year and they're going to be in the fourth quarter. It's really just new business.

Great. Thanks very much.

Bill Jones, Singular Research.

Just to follow up on the Europe question for Q4, you mentioned that the promotions and that you are optimistic about the fourth quarter. But seasonally that's usually a lower quarter. So just trying to get a sense as to the magnitude.

Can you do as much in Europe in Q4 as you did in Q3? Or it will still be down sequentially?

I think I want to hold that one off a little bit. There's some things that are pending that will push it well above last year, if they come into place. Otherwise it will just be business as normal.

But I think Europe is making a lot of progress, and I think when we see Q4 if we can execute what I hope we can, then that would be the best fourth quarter we've ever had in Europe. But again, we have to put some things in place, and I think we can do it.

For the Company as a whole, Q4 should be pretty good. We've got the Pac-Kit growth, we've got more first aid sales, we've got some promotions with the mass market here in the US, we've got growth in Asia. So I'm optimistic.

Would you say --? On the prior call you had given some guidance. Would you say we are still within that range?

I think we are somewhere in that range. Mike Wasserman put his finger on the one thing I can't really assess is, what's the Christmas season going to be looking like, what's the sell through on that, are we holding what we had? If we are at the same levels as we had been, then I think the guidance is well within reach.

But -- while I was in Asia, all we heard about the US and Europe was problems. And so if you listen to news, you would think we're -- and that would be a terrible situation. But that's not what we are seeing.

So I think I am confident we can do a very good quarter, and I think we can be within that guidance.

Okay. And you had mentioned on a continued gain market share with iPoint pencil sharpeners, any other areas in particular where you're seeing market share gains in the office and school markets?

Yes. We are gaining in the safety area, the first-aid area. It's amazing to me. But these markets aren't growing at enormous percent if they are at all. And so for us to be booking numbers in first-aid, we have a line called PhysiciansCare which is our first-aid business that normally was in the office channel. And doing well.

Now we are getting some of that placed in some of the industrial accounts. We are getting it placed in the hardware chain. And that's in part because of refocus and effort in a broader product capability than we had before. We never expected that. Well, maybe we thought about it but we didn't expect.

The other areas, we brought in accounts with Pac-Kit that are in the safety distributor area, in the transportation area, the emergency medical area, where they need our cutting tools, things like [vantage sheers and pre-edge] scissors and I never thought we would sell them. But in fact we are. So that's driving it as well.

Thank you, and I look forward to seeing you next week.

(Operator Instructions). Richard Dearnly, Longport Partners.

Good morning. Actually my question got answered, but I would also have to add an Atta boy for the progress you've made in Europe. That was quite a turnaround.

As you may know, I'm cautious about it but we are making progress. And I keep telling the guys just take it one month at a time and make it occur. And they're doing it.

It's easier when you're starting from the black. So well done.

Thank you.

Jeff Matthews, Ram Partners.

Walter, you mentioned Clauss gaining some traction in the industrial side. I was wondering if you could spend a second talking about Clauss, what it is, what size brand it is today versus where it started out. And what do you think potential might be down the road? Because it seems like it's a pretty no-brainer that we're going to have an industrial renaissance in the United States as China costs go higher and people look to tighten their supply lines. So, I'm just wondering what you see there.

Let me just start with the base business. When we bought Clauss, it was making all metal scissors, and they were going into the hardware accounts and a little bit -- the industrial accounts a little bit, and they were going into the professional [florist] market. And the view we had was we would be able to take that and rejuvenate the product family.

We branded professionally, and then expand off that cutting expertise. And we have done that. In part when you look at not just scissors but then you look at tinsmiths and aviation's sheers, these are things that are heavier duty, we are able to apply the titanium nitride and carbonitride coating to the edges so they really are professional high-performance tools. We took the small amount of knives and we enhanced the line of those for poultry processing, and then we started to bring in scissors as well for the poultry processing area. That all kind of grew.

Then we bought Camillus, merged it in with it, and added the capability to sell within that area, not just scissors and some major tools, but we had the oldest knife company in the US, with all sorts of steels that we learned to use, and then we started to sell some of that also into the sporting goods market. We never talk about it, but if you go into West Marine, you'll see the Blacktip line of professional tools. We make them all.

And it's cobranded Clauss. So that sort of had a genesis partly from Camillus because we were doing the knives, and it was partly Clauss and it was partly our technology. And that Clauss family is much more than you think. It winds up into maybe rebranded as Westcott, but it could be in the craft area.

And if you go into Michael's today, you'll see in some stores quite a number of our scissors, all branded Westcott, with the Genesis with the performance of Clauss.

Frankly, the garden area came because we had the high share in the professional wholesale market of cutting tools. And we levered off that for the tools that we currently have introduced, the AirShoc family, that we are moving into the garden centers and into we hope some of the hardware chains.

So it's an area and a series of brands that has real potential for us. In the coming year, there are potentially $5 million to $10 million of potential business for Clauss, and it's all new if we can pull it off. So will it happen? You've got to put a probability on it, and the answer is maybe half.

But it's got real power to it. I'm not sure I truly answered your question, Jeff, but it's something that this little product line we started with has really spawned some high-performance products that are across the board in our sales.

That's great. I appreciate that, and I would ask for the pruning shears.

Thank you.

(Operator Instructions). Chris Doucet with Doucet Asset Management.

This is actually David from Chris Doucet's office. But again we'd like to -- like the momentum we see in your top and bottom-line. And another great quarter.

Just a couple questions with -- first, Pac-Kit. You might have given this information out, but did you say how much of your sales this quarter were contributed by the Pac-Kit? Or the acquisition?

Actually, I did. I think I said it was $1.6 million.

And you said you're seeing -- that's a level of sales that is better than you projected, but did you say that your margins are better than you projected as well?

Yes. The plan was to take our existing first aid components and the Pac-Kit components, compare them, and look at the quality and look at the cost and get the best value for our customers. And we did that. Then we rebid the components out to some suppliers and we also started to do some sourcing with our Asian operation.

And the net of all that is, we were able to deliver I think frankly better quality than some of the areas of the components and lower cost. And that's showing up in margin.

Good. Another question is new products over the last -- probably your history but definitely over the last few years have been big contributors to your topline. It's been a couple quarters I guess since we -- we see a continued rollout of new products, but is there anything you can talk about in reference to your pipeline of new products that might excite us and excite the stock, even?

Wow. Well, yes. The way I am going to answer it is the products we have shown to customers this fall, they would know what they are. There is a line of new cutting tools that are similar to SpeedPak in the utility knives, but they are very quick change. And that's being shown throughout the whole hardware area.

We've got some nonstick coatings that are factors -- the word is not factors -- multiples better than we currently sell in the market, and we are by far the best in the market today. We've got some tools that are used for cutting Kevlar and fiberglass that we developed, frankly, for the defense industry. But we're finding companies like Boeing just loving those items. Now that's not millions of dollars, but it's an example of something pretty interesting.

In the fishing area, which we never really talked about on conference calls, we've now got the biggest chain in the boating industry as a customer, and we are growing it very, very nicely. And expanding that set of tools. At Walmart and some of the mass-market guys, we are making potential -- we are making penetration with our Camillus and our Clauss product.

And we're gaining big chunks of office selling crafts, so there's a lot of tools here that are coming in from basic innovation. In iPoint lines we started a couple of iPoints. Today there's one area that we are a little bit weak in, and that's in the higher-performance items. We've shown those into the market, new ones, they're in the same kind of design language as our current iPoints, and they're terrific. So we are hoping that we can gain there. And looking into next year, we know we already have the mass chain.

So without being able to show you product by product, I can tell you that that pipeline is actually probably broader than it's ever been. And we've we're getting a very good reception from it.

That is exciting. I think you guys have shown the ability to be accretive with your products and with your relationships with your clients, and we are seeing it in the topline. That's all I have, and good luck in the fourth quarter.

Thank you very much, David.

We have no further questions at this time. I'd like to turn it back over to our speakers for closing remarks.

Thank you very much. I will be speaking at the Singular Research conference on October 26, and so if there's anybody that's onboard and interested in that, you should be aware of it. If there are no further questions, then this call is complete. And I'd like to thank you for joining us. Goodbye.

This does conclude our conference call for today. We would like to thank you for your participation.