Acme United Corp (ACU) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Acme United Corporation second-quarter 2012 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Walter Johnsen, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning. Welcome to the second-quarter 2012 earnings 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. 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 reported second-quarter 2012 sales of $27.6 million, an increase of 15% over last year. Our net income was $2.06 million for the quarter, an increase of 18%.

Acme's six-month sales increased 16% with net income increasing 25%. The results for the quarter and for the six months of 2012 were the best the Company has ever achieved. All of our major brands performed well.

The Wescott school and the office product family had record back-to-school sales. The iPoint pencil sharpeners and paper trimmers were particular standouts. The Clauss industrial and professional tools set sales records with strong results from heavy-duty scissors and other cutting tools. PhysiciansCare and Pac-Kit first aid products each set new highs with market share gains in new products.

The biggest single issue during the past six months has been the bankruptcy of Schlecker, one of our large customers in Europe, which purchases our manicure products and distributes them in 17,000 outlets. In June, Schlecker announced that it would liquidate most of the company, although some divisions may continue under new owners.

We continue to be taking orders under bankruptcy protection but they are understandably lower. Our maximum exposure during the next six months is about $200,000 in lost gross margins. The European team is actively working to replace the lost business.

Our C-Thru Ruler acquisition is now fully operational within the Acme United system. Revenues last year were about $2.5 million with 40% gross margins. We added one person in customer service to the staff and there is an opportunity to expand the product line to our global customer base and to bring our cutting instruments into its craft and school markets.

We will be actively developing new products within this segment and of course leveraging our combined purchasing power. The C-Thru ruler acquisition is already accretive.

The Camillus knife business is expected to continue to grow during the next six months. The product family is now shipping in volume to the mass market and many major sporting goods chains. This will be largely incremental business to last year with sales for the fall hunting season and Christmas.

We gave guidance earlier in the year of $80 million to $85 million in revenues. Our revenues to date and our backorder suggests that we may be at the higher end of that range for the year.

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

Acme's net sales for the second quarter were $27.6 million compared to $24 million in 2011, an increase of 15% or 16% in local currency. Sales for the six months ended June 30, 2012 were $44.5 million compared to $38.4 million in the same period in 2011, an increase of 16% or 17% in local currency.

Net sales in the US segment increased 22% in the quarter and 21% for the six months ended June 30. The biggest contributors to the sales increase came from Camillus knives, paper trimmers, the iPoint pencil sharpeners, and first aid kits.

Net sales for Canada increased 4% in the quarter in local currency but declined 1% in local currency for the six months.

Net sales for Europe decreased by 11% in the quarter in local currency due to the recent loss of Schlecker, a large customer. Sales for the six months increased 13% in local currency compared to the same period last year due to higher sales and the growing mass market channel. The loss of Schlecker sales amount to approximately $1.5 million annually. We are aggressively seeking new business.

SG&A expenses for the second quarter of 2012 were $6.7 million or 24% of sales compared with $6.2 million or 26% of sales in the same period of 2011. SG&A expenses for the first six months of 2012 were $12.2 million or 27% of sales compared with $11.3 million or 30% of sales in 2011. The increase for this quarter and six months was primarily due to higher sales commissions and delivery costs associated with increased sales and higher personnel-related costs.

Operating profit in the second quarter increased from $2.5 million last year to $3.1 million this year, a 25% increase. Operating profit for the six months increased by 34%.

Net income for the second quarter 2012 was $2.1 million or $0.66 per diluted share compared to net income of $1.7 million or $0.56 per diluted share for the same period in 2011. Net income for the six months ended June 30, 2012 was $2.3 million or $0.74 per diluted share compared to $1.9 million or $0.60 per diluted share last year.

The Company's bank debt less cash on June 30, 2012 was $15.9 million compared to $14.4 million on June 30, 2011. During the 12-month period, we spent $1.5 million on C-Thru Ruler; $400,000 on treasury shares; $800,000 in dividends; and generated $1.3 million of cash from operations less capital expenditures.

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

(Operator Instructions). Jeffrey Matthews, RAM Partners.

Good afternoon. The fact that -- first of all, congratulations. Secondly, the fact that you highlighted Camillus in the commentary first among reasons for the US increase implies that that's the biggest reason or at least a large chunk of the reason for the increase. And I just wondered if you could talk about Camillus and where it stands in the Acme portfolio now versus when you bought it and what your plans look like over the next few years for it?

First, the big increase in the year so far has not been Camillus although it's got a lot of orders. The big growth driver has been the iPoint pencil sharpener and some of the paper trimmers, just a lot of growth in other items in the Wescott family. Camillus has grown well but it has not been the driver for the second quarter. If I were to break it out, I would tell you maybe about one million --

$1.5 million for the quarter.

So what's happening is this product family, which only did about $1 million last year, has a lot of legs now and part of it was spurred I think by our agreement with Les Stroud which we announced in January but had been talking to many outdoor sporting goods [games] well before that. Les is a survival expert. He has got a major television show called Survivor Men on Discovery Channel and he endorsed the Camillus line and we developed survival tools with him.

That plus a lot of really good product and coating technologies on the knives themselves that are still open, major chains, and some of them include Walmart and you will see our items now on the shelves there. Others are Academy Sports, Cabela's, Smoky Mountain Knife Works, a host of them. Bass Pro.

And as that happens and as we start to ship more, particularly the back half when we've got the hunting season and the Christmas type presence, we are gearing up for some more substantial volume. I can't give you a real feel yet for what that means but if I were to guess, it's the back end half of $4 million to $6 billion of additional growth. So in the back half of this year is an incremental piece that we haven't had before.

Relative to the entire portfolio, Camillus gives us a platform of high quality, more expensive items to sell. It gives us the ability to differentiate with coatings. I can see doing things with Les Stroud on more survival tools. I can see bringing this into some of the military markets outside of the US and we will be seeing how that plays out over the next six months.

But it's an exciting rebirth of this product family and we are just seeing the beginning of it, I think.

Great. Just to follow up on that is an obvious point, obviously it sounds like the Les Stroud relationship has worked out at least as well as you thought it might have.

Well, it has worked out better than I thought it would work out and working with Les has been a real pleasure. I am sure there's going to be more things we do together and the nice thing is he's got very real experience surviving in harsh environments and he trains Special Forces and we can put things together that with our cutting technology, with our safety items which all add real value to the product category. I think we can get placement with it so there's other things we can be doing in the future with him.

Good, thank you.

[Louis Mosier], [MAXAX Investors].

I'm on a cell phone so I am not sure -- can you hear me? The loss of the European customer, I'm not sure I have the figures right but it appears to amount to about $0.16 a share for the year. Is that the ballpark?

I don't know because I haven't done that arithmetic. How did you get that?

I believe you said $200,000 would be the number compared to the 3 million live outstanding shares.

That was a little off -- $0.06.

$0.06.

I though he said 16.

It is $0.06. We wanted to confirm that. It's $200,000 in gross margin and there's a lot of new business that we are working on right now. One of the things, Louis, and the audience, losing the manicure business at Schlecker, which was low-margin private label, opened up the opportunity to fill that channel in other ways including selling to the mass market such as through Aldi or Lidl, and so there is a demand for the product. We need to find other avenues to distribute it. It's unfortunate for the Schlecker shareholders who have lost billions but we will be doing fine.

The outstanding accounts receivable from that company probably to bankruptcy, how do you look at the (multiple speakers)

What we did was we had insurance for the receivables, so we were covered entirely.

Covered. Going forward, what is the biggest growth area? I caught the call late and I'm not sure if you covered that, which of these new products do you think has the most potential?

Well, really we have got a portfolio of products and as I mentioned in my conference call, every single one of our five major brands hit records this quarter, which meant they were all pulling their weight.

In the Wescott family with the school, home, and office, we have got a lot of growth with the iPoint pencil sharpeners. We have had very meaningful growth with the paper trimmers. We introduced a new product called a Scissor Mouse, which is now distribution-ed in the office and mass channel and that will be carrying more weight in the fourth quarter. So the Wescott family, which is the main family, is doing well.

The Clauss line, which is the industrial tools, in part we are benefiting from arrangements we have got with customers such as Grainger, who we have taken on some exclusives for the category. There have been others where it's been pulled through our Pac-Kit first aid industrial line because our industrial cutting tools are also being sold out in the channels where (inaudible) are sold.

So we are getting good growth at Clauss and that we are also seeing in the hardware and do-it-yourself market with things like our Clauss shears now at Home Depot and other items at Lowe's, all of which we didn't have 18 months ago.

Finally with the Camillus line, I outlined that we have got substantial growth sitting with the back end of this year with the sporting goods and mass account. We just acquired C-Thru Ruler. Annually that is a $2.5 million. If we are unable to grow it, we certainly have plans for that. We kept them gross margin and our incremental cost was one person in customer service. So that's a very accretive acquisition.

So that's the net of the vectors that get us to grow.

Thanks for that recap. One last question. There is one analyst of yours that does cover earnings for your Company, or estimates and he has or she has $1.05 for the current year and $1.20 for next year. Is there an opinion from management in terms of those numbers?

Well, I haven't given guidance on the earnings. I just gave a little bit of guidance on the top -- I had previously suggested $80 million to $85 million. We are probably looking closer at the $85 million level now and depending on what happens it could be a little bit more. So with the $1.05, we didn't help the analyst get to that number but I'm sure they will be recovering it and taking another look at it.

Yes, because he had or she had $83.5 million as the total sales in your (inaudible).

Yes, yes, so we are pushing ahead of that.

And then next year, your estimate was $95 million in sales. Is that doable?

I haven't rolled up next year's numbers yet and usually we do that when we give guidance, but the momentum that we have got across all the segments and then with new products backing up for next year, it doesn't seem unreasonable.

Is there any effort on management's part to increase the number of analysts? I know you're coming up with -- going through a presentation shortly at least if I read it correctly.

Yes, well I would encourage analysts to cover us. Of course you know it's a small-cap stock and it's hard for analysts to make money doing that in the traditional manner but we are certainly open to that.

Okay, great. Thanks for the answers and I appreciate seeing that the Company is progressing as well as it has.

Thank you very much, Louis.

Bill Jones, Singular Research.

Congratulations on the quarter. Obviously it was ahead of my estimates as the last caller mentioned both on the top line and the bottom line. So we will be revisiting that. But I wanted to ask on the C-Thru Ruler acquisition, has that closed or when did it close?

Yes, we closed that the first week in June, around June 7.

Okay, so that's when it was announced. You said it's about $2.5 million, about $40 million gross margin.

Yes.

Obviously -- $2.5 million in sales, I'm sorry. But obviously a lot of that is going to fall it into the bottom line so could you give us any sense of how accretive? Could it be $0.08 to $0.10 accretive on an annual basis?

Let's just take some real simple example. 40% of $2.5 million is $1 million. You've got some shipping so maybe that's 3% and maybe you have one person and that person is $50,000 to $70,000. Everything else is accretive.

Okay, that's helpful.

Basically it's very accretive.

Okay, so that should more than offset the lost customer, I would think.

Oh yes.

Okay and as far as back-to-school just generally speaking, it seems like it's been very strong despite the weakness we are hearing about and the economy. Maybe you could just talk kind of broadly big picture why do you think back-to-school has been going so well.

I know the reason it is for us. We have gotten market share gains in things like the iPoint pencil sharpeners, in the mass market, also in the office superstore market, that's in millions of dollars. We've gained share in the paper trimmer area both in the mass market and in the office superstores and distributors.

We have gained in erasers and in some of the smaller items that we don't talk about much but when you put that whole basket together, it led to a record back to school.

We sell to the retailers. We don't sell to the school districts much. We do a little bit and I would guess that business would be under a lot of budget constraints, but the parents who are buying our products seem to be spending the way they have in the past.

Excellent, so you are seeing that momentum into today?

Yes.

Great, just one last question on Europe. You were just getting to the point where you are getting some scale there and is that now back to losing money in the European business?

Well, I just got back from Europe because obviously we had to address the loss of the customer, and get our arms around the implications. There's some really good new business that we have a chance to be pulling in in the back half of this year, which if we are successful, we won't even miss a blink.

But there may be -- we have to make up 200,000 in margins in the back half and we are all working on that. So after the third quarter, I think we will have a really good idea what the fourth looks like and certainly for next year, the mass market continues to be growing with us. And that is Lidl and Aldi and REWE. These are major European retail chains.

So in the long term, I don't think this is more than a blip but in the short term, we have a couple hundred thousand to try to address.

Right. Well, thank you for taking my questions and congratulations. Again, keep up the good work, guys.

(Operator Instructions). Tom Spiro, Spiro Capital.

Hello, guys. My line just dropped for a couple of minutes. I'm sorry if this has already been addressed, but our sourcing in China, how is that going? Any changes we should be aware of? Any changes on the horizon?

Well, there are some changes. One of the things that we are seeing is the factories are running a little bit less heavily than they had been in the past and I see it almost across the board. What that means for us is we should be able to get faster turnaround on our orders. And last week I met with one of our major suppliers, who said look, our leadtimes are dropping from say 120 days, which we had been at, to the 90, maybe even 70 day turnaround. That's much, much faster.

There continues to be pressure on wages and I don't see that stopping. That's for us, it is about 15% annually. But the factories are clearly working on automation and in my trip to China back in May, we were going factory by factory on steps to drive our productivity up. We have to.

Relative to raw materials, they have stabilized and with currency, the RMB has actually weakened. So that's different than the environment we had a year ago, where the RMB just kept strengthening. I think they are protecting in part the Chinese export market right now.

So it's actually improving for us. If you net all that up, shorter lead times, stable raw materials, automation and stable currency.

That's helpful, thank you. Lastly the AirShoc line of gardening tools, how has that done this year and what are your thoughts for improving performance next year?

We had great hopes for AirShoc and we've gotten several million dollars of business. So it's not as if the line hasn't done well. But we have not been able to get one of the major retailers to commit to big volumes. By those retailers, I mean a Home Depot or Lowe's, where you move millions and millions and millions.

We have been in places like Orchard Supply and Sears online and I think Walmart online. Been in Canadian Tire and Home Hardware in Canada. We have been in specialty shops but the big volumes have alluded us so far. We are working on that and there's a couple of things in the pipeline that might make me be really optimistic going forward but right now the facts are it's the product line that is excellent but it's not making the sales contribution that I would like.

What was the principal impediment? Was it price point or design or something else?

No, it's not that at all. It's really our competitors jealously maintaining their market share and [likely] because they've got big market shares. They pass money around legally to their customers through rebates and slotting fees and it's just been very tough to crack it. But I think we might have a shot at this.

Okay, thanks so much.

(Operator Instructions) Jeffrey Matthews, RAM Partners.

Walter, I have two unrelated questions. One, to follow up on Tom's question on China, I recall a year or two or three ago that you were on the verge of making a push of selling into China end markets with your scissors. Am I wrong? Did nothing come of that?

No, you weren't wrong. We are selling into China. Our two big customers there are Walmart and Staples. What we haven't done in China is gone to many of the local distributors for lots of reasons. First, they change a lot and second, it's hard to have the same kind of confidence with credit.

Where we really have been successful though has been selling into Thailand, the Philippines, Taiwan, South Africa, New Zealand, Australia. There the market is more stable and again, the major customers that we are selling into and we get paid for them and the business is growing. It's about $1 million in total at this stage.

Okay, secondly on the health of the US retailing customer base, without naming names, but I'm just curious what you see out there as far as the health of your retail partners and whether you are nervous down the road with the distribution that you've got.

If we looked at our office channel and that's one of our big channels, our biggest customer is Staples. Financially I think they are quite stable. They are excellently run. They are not adding stores the way they had been and we -- the number of office workers seems to be flat. Not much is happening there. I don't worry about Staples as an entity going forward.

OfficeMax at Office Depot are smaller customers in the office channel and both of them have varying degrees of a balance sheet. I would say OfficeMax is better than Depot in that regard.

Again, I don't really worry about collecting because I think what would happen with either -- probably Depot would be acquired.

In the mass market, our major customers are Target and Walmart. I think they are excellent credit and the business is growing with them.

In the industrial channel, big ones are Fastenal and MSC and Northern Tool, Grainger. They are all solid and growing.

The real area is in the office channel and it is because there's not a whole lot of employment growth going on. And so as we have been gaining it's been because of new products and market share gains but a lot of it is new products. We are very active with that. That iPoint pencil sharpener family is a great example of starting with a concept and building it into a sizable force within the office industry.

To your credit, I think that list is a lot longer than it would have been a few years ago. Much more (multiple speakers)

We have been very active, Jeff, in developing new products and when we talked about the AirShoc line, it generated a couple million dollars so far. Some of them don't hit the way we would like although some of them like the iPoints have done way more than we ever anticipated.

Great, thanks so much.

Laura Vaughn, Doucet Asset Management.

Hi, Walter. Congratulations on the quarter. Just a quick question. In relation to the balance sheet, I see that the long-term debt has grown from around $18.6 million to $23 million. Can you just speak to that a little and what your plans are for the debt going forward through the end of the year?

Paul, would you take that one?

Yes, the debt went from $18.6 million last year to $22.9 million principally due to the purchase of C-Thru. We were at $1.5 million and then we had $400,000 in purchase of treasury shares and $800,000 in dividends. I expect that debt will be at about $22 million at the end of the year.

Laura, one thing that you should note is the amount of cash that built over the year as well. It's about a $3 million build. So in our global operations, we've got about $7.1 million compared to $4.2 million this time last year. That money would be taxed a second time if we brought it into the US so instead, when we employ it, it is for our other global businesses.

Okay, so on the years going forward, are you comfortable with that around $22 million, that level of debt or are you going to try and reduce it over time?

Well, we are trying to grow the business and when we signed a new bank arrangement with HSBC in April, which was a $30 million facility and as some of you may recall, our interest rate dropped from LIBOR plus 2 to LIBOR 1 3/4, which means we are borrowing at about 2%.

The facility is a five-year facility and they would love to be able to deploy more capital with us if there were appropriate acquisitions or things that might be a good use of money.

Our cash flow right now will improve when we are able to get some of the debt, some of the inventory down. But it's complicated because we are -- for example, the Camillus line we are gearing up for maybe some more volume later in the year. So you are adding inventory for that.

Okay, that makes sense. Thanks for taking my questions.

Sure, thank you.

It appears there are no further questions.

Well, I would like to thank you for joining us. This call is complete. Goodbye.

This does conclude our presentation for today. Thank you for your participation.