Acme United Corp (ACU) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to Acme United's fourth-quarter 2011 earnings call. As a reminder, this call is being recorded. At this time I'd like to turn the conference over to Mr. Walter Johnsen, Chairman and CEO. Please go ahead.

Good morning, welcome to the fourth-quarter and year-end 2011 conference call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll who will first read a safe Harbor statement. Paul?

Forward-looking statements in this conference including, without limitation, statements related to the Company's plans, strategies and 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 year in 2011. We had record sales of $73.3 million. Operating income increased 43%. Net income was $2.8 million, an increase of 9% over last year. Earnings per share were $0.91 compared to $0.81 in 2010. The underlying trends were strong as evidenced by the 19% sales growth in the fourth quarter of 2011, and operating income increasing from $77,000-$522,000. Earnings per share increased 50% in the fourth quarter.

Our business has evolved during the past five years from one relying heavily on sales to the office channel to one much more broadly based. Our purchase and subsequent building of the Clauss line brought the industrial and hardware markets. The purchase of Camillus Cutlery gave us a strong brand to enter the knife and sporting goods markets. The acquisition of Pac-Kit Safety Equipment in 2011 added a base of industrial safety customers.

We have broadened our distribution to many departments in the mass market; we have also leveraged our coating technology and innovation to bring value-added products to our broader markets.

We grew in nearly every market segment in 2011. Our office channel increased due to gains in market shares with our non-stick scissors, iPoint pencil sharpeners, first-aid products and international expansion. There are indications that the office market in the US is slowly improving, which we hope will benefit us in the future.

The integration of the Pac-Kit Safety Equipment Company, which we purchased about a year ago, has been better than we anticipated. We've added mass-market distribution to its product line, captured new industrial customers and increased sales. We bid out the components utilizing the combined volumes of our PhysiciansCare first aid kits with Pac-Kits. We improved the efficiency of the factory. The gross margins of the Pac-Kit product family have increased and are continuing to improve.

The Camillus knife family has gained serious new placement in the sporting goods and mass markets. The new customers are a who's who in the outdoor world and shipments began in a meaningful way at the end of the first quarter of this year.

In February we announced that Les Stroud, whose Survivor Man series is carried on network TV in the US and Canada, has co-developed a line of new Camillus knives and survival tools. We have had an excellent reception to these products and anticipate that will make an impact in 2012 sales.

We have a strong order book for 2012. Of course there are many factors that impact sales. Our guidance for revenues in 2012 is $80 million to $85 million in revenues, but we will have a much better sense by the end of the second quarter. I will now turn the call to Paul.

Acme's net sales for the fourth quarter were $15.8 million compared to $13.4 million in 2010, an increase of 19%. Sales for the year ended December 31, 2011 were $73.3 million compared to $63.1 million in the same period in 2010, an increase of 16% or 14% in local currency.

Excluding Pac-Kit, sales increased 9% in the quarter and 8% for the year. Net sales in the US segment increased 22% in the quarter and 20% for the year ended December 31.

Excluding Pac-Kit, sales in the US increased 9% in both the fourth quarter and the year. The biggest contributor to the sales increase came from the iPoint pencil sharpeners and first aid kits on the existing business.

Net sales for Canada were constant in both US dollars and local currency in the quarter. Sales for the year in Canada increased 10% in US dollars and 5% in local currency.

Net sales for Europe increased by 10% in the quarter in both US dollars and local currency. Sales for the year in Europe decreased 2% in US dollars and 8% in local currency. However, because costs have been reduced, Europe's operating loss declined from $485,000 in 2010 to $125,000 in 2011, an improvement of $360,000. The revenue decline was due to the timing of shipments of promotional products to the mass-market business.

The fourth-quarter gross margin was 36% compared to 38% in the fourth quarter of 2010. The year-end gross margin was 36% compared to 37% last year. The 1% decline in the quarter and the year was mainly due to the addition of Pac-Kit. This was anticipated when we acquired Pac-Kit. However, we have been taking steps to drive the margins closer to company averages.

SG&A expenses for the fourth quarter of 2011 were $5.2 million or 33% of sales compared with $5 million or 37% of sales for the same period in 2010. SG&A expenses for the year ended December 31, 2011 were $22 million or 30% of sales compared with $20.4 million or 32% of sales in 2010.

The increase for the quarter and the year was primarily due to the added Pac-Kit business and higher sales commissions and delivery costs associated with higher sales. Additionally, there were nonrecurring transaction costs of $125,000 for the Pac-Kit acquisition in the first quarter.

Operating profit in the fourth quarter increased from $77,000 last year to $522,000 this year. Operating profit for the year ended December 31, 2011 increased by 43%. Net income for the fourth quarter and year-end increased by 49% and 9% respectively.

A 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 December 31, 2011 was $9.7 million compared to $6.9 million on December 31, 2010. During 2011 we spent $3.4 million on Pac-Kit, paid $800,000 in dividends and generated $2.1 million of cash from operations.

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

(Operator Instructions). Rick Fetterman, Fetterman Investments.

I got on the call just 2 or 3 minutes late and I caught in the release the reason for the slight decrease in gross profit margins being from -- the addition of Pac-Kit, which was expected. If I recall correctly, last conference call you said that the gross profit margin was expanding on Pac-Kit. And I wonder if you -- do you expect it to reach the Company average where it will get back up to the gross profit margin of last year, say?

Rick, this is Walter Johnsen. I think that while I know we are making substantial progress, and when we acquired Pac-Kit the margins were running somewhere around 27%, and given their proportion in the US that related to about a 1% decline.

Their margins are in the 30% at this point and climbing. And what I've seen in January and February suggests we should be able to get pretty close to the Company average margin, which is terrific.

When you look at what is no longer a $5 million business but is probably this year in the $7 million to $8 million range and you add 5 percentage point or 6 percentage point increases or more it's real money and that's happening. So I'm delighted with that aspect.

Okay. Is the plan currently to continue in Europe? I know things improved noticeably this year, but I mean, do you continued improvement or --?

Well, yes. Actually (multiple speakers) Europe had a customer whose last promotion was pushed into the first quarter of this year and if that had been in the proper sequence it would have been a profitable year. But Europe is continuing to improve. I think the most encouraging part is that it's both in the office area as well as the manager and the mass-market area.

So we've made some changes in people. We changed -- we clearly reduced our operating costs and the margins have slightly expanded. So, it's coming together. I mean, I'm being a little bit cautious here, but I'm happy right now in the first quarter.

Speaking of first quarter, can you give us any idea of how revenues are proceeding versus last year's first quarter since we're two months into the quarter at this point?

The fourth quarter had an indication of kind of the run rate we're running right now. And in the first quarter we're continuing at that pace. It's pretty much across the board, the office business is slowly moving up. But because of the iPoint pencil sharpeners and some of the non-stick and other new items that's expanding.

We have in the sporting goods area a customer that a year ago was quite small -- two years ago was quite small in the boating and fishing area that is now going to be maybe a $1 million customer this year, and some of that gets shipped in the first quarter.

The Camillus knives, a lot of those will be in the second quarter around Father's Day, but some of it will be shipped in March. So it's all building to a pretty good first quarter.

All right, that's all I've got for right now. Thank you and good luck, keep up the good work.

Well, Rick, thank you very much.

Howard Lu, First Wilshire Securities.

Good morning, guys, this is actually Dmitriy speaking. Could you talk about the growth opportunities for this year, the Walmart initiative and the garden tools and other things that you have?

Yes, but I'm not going to talk about specific customers because my competitors are listening to it all.

Sure, sure.

There is placement of the more iPoint pencil sharpeners both with office superstores as well as in the mass-market that we didn't have last year. And just off the cuff, it would be in the $2 million or more growth.

The Camillus knife business is a little bit more complicated because it's a pretty large fill into the retailers and of course you have then sell-through. But we're projecting somewhere between $2 million and $3 million of incremental growth with Camillus. And that will be across the board.

Part of it will be, we think, in -- should be in the outdoor hunting and fishing area. And you can think of companies like Cabela's and Bass Pro and companies alike that that do a lot of retailing into the outdoor area. And there are also mass-market accounts like Walmart that will be carrying some of the Camillus items and much of this is new business. So a $2 million to $3 million number for Camillus we believe is quite reasonable.

There's a new cutting toll that has gotten a lot of attention and we call it [Scissor Mouse] and that will be showing up in retail beginning in this quarter. And what a Scissor Mouse is is a tool that looks like a computer mouse but it's got a blade on it and it will cut very, very quickly, paper and several layers of paper.

The order book for that is $1.5 million to $2 million. We've got international expansion both in Europe as well as in the US and we're gaining in that aspect.

In the garden area we have had slower growth and it's quite a competitive market. But there will probably be about $1 million of pick-up there. The Les Stroud line is again an exciting opportunity. We've had a quite a number of orders that have been placed, but you have to get the sell-through and see where that goes, that will probably add at least another $1 million to that.

And very quickly, those numbers begin to add up some growth that we can identify. We've got the new line of paper trimmers that are placed in both the superstores and a number of the mass-market accounts. We've expanded in the educational area with more accessories that relate to cutting and measuring and we've gained accounts.

So the numbers that lead up to an $80 million to an $85 million number, you can start to identify where they are. The execution of that I'm confident in; the part that I don't know is the sell-through. But we, based on our experience, the $80 million to $85 million number seems reasonable right now.

Good and that also includes the pickup of $1 million or $2 million it sounds like from Pac-Kit too?

Here's another piece that I left off. Yes, and Pac-Kit has gotten some new placement at two major mass-market accounts as well as several industrial distributors that are [playing] new business.

Okay. And what about your Asian initiatives, how are those playing out?

The sales in Asia are progressing reasonably well. We've picked up in China some large US multinationals that will begin shipping this quarter and then throughout the year.

In Thailand and the Philippines we've picked up new business. It's still a small category in sales directly into Asia, but we'll exceed probably $1 million, maybe $1.5 million this year in that category, which two years ago didn't exist.

And then, of course, we have the direct imports business to accounts in Europe, the US, Mexico, South America and Asia. And those we don't count in our Asian sales, but they're also growing.

And could you maybe talk about the cost situation, China, the labor and the raw materials and also any price increases that you may be able to push through?

Well, we announced a 6% price increase to our customers in January on many items. I wouldn't -- if I were calculating I wouldn't say it's 6% across the board because it isn't. But there was a price increase that was accepted by our customers. I want to caution though that you can't keep increasing prices; there's a sensitivity that the customer has, the end-user, to what he'll pay for various items.

So there is elasticity, we're very sensitive to it, but we passed through a 6% increase on many items in January. We continue to have some pressure in China on cost, although in many areas it seems to now be slowing down. For example, the currency seems to have stabilized and that is a big improvement for us at least in cost.

There is still salary inflation. Raw materials, it depends. Oil-based right now are increasing, so plastics for example and plastic rulers are increasing. And we'll probably have to pass that through when that gets to -- into our product family. But in general I would say the cost pressures that we've had the last couple years have slowed down.

Okay, sounds good. Thanks very much.

Jeffrey Matthews, Ram Partners.

You kind of answered my -- the question I had about sourcing cost, but a little more color on what you might be doing outside of China, if anything. And then my second question is -- I thought I heard the gains -- sales gains being attributed to the iPoint and medical kits and I'm wondering what -- how the [courses or] business is looking at these days? Thanks.

Okay. First on the sourcing outside of China. The acquisition of Pac-Kit added -- will be this year $8 million of revenues that's entirely produced in the US. Our first aide business in North Carolina is also in the US. So that piece is a domestic product line that will stay in the US.

The bulk of the remainder though primarily is still in China, we have some in Pakistan, we have some in Italy, Mexico, Colombia. But by and large we're China-based and we've got an awfully good operation there and we're working hard on the costs.

You may remember that we hired an executive who had formerly been a manufacturing VP at Philips who's now running our Asia-Pacific business. The big part of what he's working on is improving productivity at the factories and that helps to -- especially with labor it helps to reduce the impact.

The ability to move to other places in the kinds of volumes we're doing takes time and, frankly, we haven't identified a place nearly as good as China even with the projections that we have currently for our product lines, especially scissors.

Getting to the second aspect, scissors, well scissors pretty much in our markets and our marketshare follow what happens in the office channel, because we have a very high market share, it's well over 60% or 65% in the office channel. And so if business is slow you would expect scissors to be kind of flat.

That's accurate except that we're not only in the office channel, we've expanded into the craft area both in the craft stores as well as the departments within the mass-market and that's all new business. So it gets -- the fundamentals of a slow office channel, again, are being offset by growth in areas that we weren't before and that continues. So even with scissors where we dominate office we've got growth.

Sounds good. Can I just follow up on the Les Stroud agreement? How did you come up with that? And is it a costly thing for you?

Well, again, our competitors are listening or they will be. I will tell you that there is a -- Fiskars has an endorsement by Bear Grylls who is also a survival person who has a different approach to surviving. He goes with a crew and then after the shoot takes a shower and has a nice dinner. And those that follow Les Stroud realize that he goes alone into the wilderness and films himself and truly survives.

Well, that distinction apparently is clear to the people that follow this segment and Les is a hero in a lot of places. He's a particular hero in Canada because he lives outside of Ontario -- outside of Toronto. And there's a lot of outdoor people in Canada and a lot of hunting and fishing and I was amazed at the popularity he has there.

In the US I was at the SHOT show in Las Vegas in mid-January. We had people lining up around our booth and going down the aisle as far as -- it wasn't that big of an aisle, but it was as far as the aisle went and it was quite crowded and I was amazed. So the line that Les has developed, we need to see what kinds of sales are generated from it, but the bulk of his competition is based on a royalty and so it's variable.

Okay, great. And just finally, are you going to have an analyst field trip with him, a survival thing -- we all have to figure out how to survive with our Acme tools?

Les will be at a number of places at our customers and I might do that.

It would be a great show. It would score higher on Wall Street; you know, the 1% -- 99%. Thanks, Walter.

Good idea, I'll think about it.

Tom Spiro, Spiro Capital.

A couple of questions. Walter, I know in the past we've had some challenges with the air freight expense running high. And I gather since you haven't mentioned it it wasn't a problem this year and we have the appropriate level of inventory as we go into this year so you don't foresee any such problems?

For those that don't know, when we're shipping things like scissors or knives they're mostly steel and they're heavy. So air freight means that we lose the entire profit pretty much of the product when we do it. And in some years we've had substantial air freight.

We have built a lot of the inventory for back to school in advance and it's sitting on our balance sheet and it's sitting in our warehouse in North Carolina. So that's doesn't have to get air freighted. We have a number of new products that are coming into play in the first quarter and second, particularly some of the Camillus knives which (technical difficulty) volume.

And we're hoping that we don't have air freight with those and we're clearly in production. But sometimes there are glitches with that. Last year, 2011, we've done terrifically and air freight was a minor, minor expense. That's the current plan. But as I said, we've got a lot of load in during the first -- the second quarter that we're on top of and we've got to execute.

Thank you, that's helpful. And lastly, you grew nicely in the year just concluded and you have high hopes for the next year. I was just kind of curious, Walter, whether you feel like you have adequate resources -- people, manufacturing space, talent say and great ideas to support a larger company?

In the summer and fall we went through a personnel assessment for basically doubling our business and where we have holes. And of course there are holes. There are -- where we feel that we're in pretty good shape for what we're projecting this year and if by chance there were an acquisition that would be the size of Pac-Kit, we feel we could handle that.

However, earlier today I was interviewing a candidate for another position here at Acme and we continue to be bringing in talent as revenues are coming in and the earnings are. The manufacturing is an issue, we are stretching the factories in production, both in knives and in scissors, and I don't see that being an issue in growth, but we are pushing constraints there and we've got to bring on additional capacity with our suppliers. That's not a new issue but we're continuing to work on that.

Relative to banking, we're looking at increasing our facility for the next five years to maybe $30 million and there seems to be very real interest in helping us do that. I think the real issue that I face and that we face is execution this year on a lot of details. And when we do that right air freight is a minimal amount and other metrics like on-time delivery and quality all fall into place. I think we're in a pretty good position right now.

Well, that's great. Good luck and thanks.

(Operator Instructions). Richard Dearnly, Longport Partners.

I probably heard the Scissor Mouse number wrong. You didn't say $8.5 million in orders, did you?

No, I didn't say that. I said maybe a $1.5 million in orders.

$1.5 million, that sounds better. Could you talk about non-stick, the current mix of relevant products that could be non-stick and what the trends are? And then what -- your capacity has been constrained, how is capacity and that whole area?

Well, the ability to put our non-stick coatings on not only cutting items but other things with a non-stick property means something; it's a pretty big opportunity. You could be putting them on paper trimmers; you could be putting them on our next-generation Scissor Mouse. Of course there are many different types of scissors.

Yes, anything that cuts I would think.

Anything that cuts. But there are limitations. For example, at this stage we can't put our non-stick coating on a drill bit because it just would get removed by the abrasion. And so the ability to adhere to a harsh environment is one that we still haven't achieved.

On the other hand we've got certain formulations that are going into the garden area both in the pruners and in the hedge shears and loppers, which is a coating that is different than what is on a craft scissor. And we've been able to segregate various properties so that some are optimized for tapes and some are for glues. It's quite a broad area.

On the cutting surfaces of, for example, a cutting mat, if there were a non-stick that could adhere and be resistant to cuts that might be an interesting use as well. But it's a broad application.

Relative to capacity, we currently have a dedicated facility that is ours with -- and it's staffed. We're mixing our proprietary coatings there, that's easily scalable. The application onto the blades currently in a dedicated factory to us and the capacity is hundreds of thousands of months and increasing.

So at least at our volumes today capacity is not an issue. One area that we need to work on is continuing to drop the per unit cost as we keep leveraging the throughput. We're hopeful that we can do that similar to what we did with titanium coatings.

Alrighty. Now that the turmoil of '08-'09 are over, can we take a guess that SG&A is kind of back to a new normal in the 30% range?

I think I'm going to leave that one to Paul because I don't know the facts on it. Paul?

The SG&A will -- it will run 32% going forward.

Where has the increase been from this year?

Well, we're going to add some more people --.

Development.

Development, yes, new products, spending on new products, advertising.

There's an advertising campaign that we've got in the Camillus knives that we didn't have last year to support and drive the placement that we have.

And when I looked through the Clauss catalog I was staggered by the number of different -- just products, but then the differences between them, the bent blade versus the straight blade, the whatever it was. Which I don't know if those catalogs are widely distributed, but a couple of those things I wouldn't have the foggiest idea where to go to get them if I wanted them.

One place that you could go is Granger; just one (inaudible) has a business there.

Do they have the whole catalog?

They have a lot of it.

A lot of it, I see.

That's the largest distributor in the United States for industrial supplies.

Okay, thanks.

And at this time there are no additional questions in the queue. Mr. Johnsen, I'd like to turn the call back over to you for any additional or closing remarks.

I'd like to thank you very much for joining us today. If there are no further questions then the call is complete. Good-bye.

This concludes today's conference. We appreciate your participation.