Acme United Corp (ACU) 2013 Q1 法說會逐字稿

Good day, and welcome to the Acme United Corporation's first-quarter 2013 earnings conference call. Today's conference is being recorded.

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

Good morning. Welcome to the first-quarter 2013 earnings conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO.

With me is Paul Driscoll, or 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 had a good first quarter of 2013. Our sales increased 5%. Gross margins improved 1.2 percentage points. Operating income grew 12%, and net income increased 19%. Sales in our largest market, the US, increased 12%. This was driven by growth in our proprietary titanium scissors; sales from the C-Thru lettering and measuring products; new Clauss cutting tools; and additional Camillus knife sales. Revenues in Europe were off 31% due to the loss of Schlecker after their liquidation June 2012. This was our largest customer in Europe, accounting for about $1.5 million in annual sales. We have new mass-market business in Europe that we expect to offset the Schlecker sales, but the timing is in later quarters this year. Gross margins increased from 35.2% to 36.4%, due to sales of more proprietary Westcott and Clauss products, and additional Camillus knives.

We managed our SG&A expenses carefully in the quarter, but continue to invest in new products. The tight cost control provided operating leverage and led to a 12% increase in operating income. During the quarter, we began a test to proprietary nonstick putty knives at a major hardware chain. These products resist corrosion, clean up quickly, and provide excellent application properties. Early results in this category, and the test, is very promising.

We also begin shipping a new series of first aid kits to large industrial distributor. These are for heavy-duty use in factories and industrial sites, and have had early and excellent sell-through. In April, we announced a partnership with Scotts Miracle-Gro for the sale of cutting tools for the garden. Scotts is one of the largest suppliers of branded lawn and garden tools in North America, and we are encouraged by the early market reception. We believe we are on track for $90 million to $95 million in revenues in 2013. If this occurs, we have given guidance of $1.20 to $1.25 per share for the year.

I will now turn the call to Paul.

Acme's net sales for the first quarter was $17.7 million compared to $16.9 million in 2012, a 5% increase. Net sales for the first quarter in the US segment increased 12%, mainly due to higher sales of Camillus knives, and the added sales of the C-Thru business acquired on June 7, 2012. Net sales in Canada decreased by 2% in both US dollars and local currency. Sales were lower in Canada in the first quarter due to a soft economy, but we expect growth for the rest of the year from the business. Net sales in Europe decreased by 31% in both US dollars and local currency, primarily due to the loss of Schlecker, a large customer, as a result of their bankruptcy and liquidation. We expect the increased mass-market business for the remainder of 2013 to more than offset the loss of Schlecker.

Gross margins were 36% in the first quarter of 2013, compared to 35% in the first quarter of 2012. The higher margin in 2013 was primarily due to favorable product and customer mix. SG&A expenses for the first quarter of 2013 were $5.9 million, or 32% of net sales, compared with $5.5 million, or 32% of net sales, for the same period of 2012. The SG&A increase was due to higher variable selling costs as a result of higher sales, and the addition of sales and marketing personnel.

Operating profit was $513,000 in the first quarter of 2013, compared with $458,000 in the first quarter of 2012, a 12% increase. Net income for the first quarter of 2013 was $309,000, or $0.10 per diluted share, compared to net income of $260,000, or $0.08 per diluted share, for the same period of 2012. The Company's bank debt, less cash, on March 31, 2013, was $15.5 million, compared to $12.8 million on March 31, 2012. During the 12-month period, we spent $1.5 million on C-Thru, and paid $900,000 in dividends. Inventory increased $6.8 million, primarily due to the new Camillus products, C-Thru products, and other new business for 2013.

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

(Operator instructions). Jeffrey Matthews, Ram Partners.

The inventory growth -- is it controlled? And what will free cash flow look like over the course of the year, do you think?

Well, first on the inventory growth, we have added some inventory from the C-Thru acquisition because we went from a domestic manufacturer to moving it offshore. So obviously you are going to be adding some substantial inventory there. However, we also increased margins very much as well.

The inventory on some of the other items are getting ready for back to school, and that's pretty normal. We've had growth over the past year. We are working on reducing inventory in a number of places where, frankly, we have too much. And we've worked to cut the replenishment parameters back a little bit to squeeze some inventory. So we are working in addressing that. Relative to the inventory by year-end, I don't have that in front of me. But I know that we are working to drive down the overall number.

And what would you be expecting free cash flow for the year to look like? Do you have any sense of that?

Jeff, I think free cash flow for the year will be about $5 million. We are expecting that we are going to level out the inventory and not grow very much over December of last year, at the end of this year.

Despite the growth in revenues.

Right.

And is there, Walter, any related issue in terms of supply chain, as cost in China has increased? How does the supply chain look for the coming year, versus a year or two ago? Any big changes, anything there?

There continues to be wage (technical difficulty) inflation in China. There continues to be overall inflation. We do get some productivity improvement from the factories as we mature products. We have put through some price increases. But in general, it's not a major issue. The one area that I can't really address well is the US dollar, because if we get hit with continued weakening of the dollar, as we have had in the past, that changes the margin impact -- not initially, but sometime in -- a year's time. Frankly, even that has been fairly stable lately.

Chris Doucet, Doucet Asset Management.

Paul, I think this question is for you. Without me having to go look it up, what was your revenue for Europe, or in Europe in 2012? And what was it for the first quarter of 2013?

In the first quarter of 2013, it was $1.6 million. And you are asking what it was for 2012? Is that what --

Correct.

That's the question?

Yes. Compare the two.

For the full year, or for the quarter?

The quarter.

Oh, the quarter was -- this year it's $1.8 million; last year was $2.6 million.

Okay. So Schlecker -- the $1.5 million number is an annual number that you've historically have gotten from Schlecker?

Correct.

Okay. And you said that you had customers to replace it with. Is it that you expect similar margins?

Yes, let me address that, Chris. Those customers are large mass-market customers in Europe, primarily Lidl and Aldi; [Revay] and Norma. They place orders, and when they do, they are large orders. So in the fourth quarter of last year, we benefited from some pretty big orders from both Lidl and Aldi. And margins tend to be at least comparable to what we were doing at Schlecker or better. In the second half of this year, we are seeing already quite a bit of booked business for that mass market. So that's why we are saying it appears that we are going to be at least comparable in overcoming Schlecker -- perhaps because have a lot of selling time to close things -- will exceed it.

Okay. My other question has been asked. I'll step back in the queue.

Richard Dearnly, Longport Partners.

I'm intrigued that you called out sales strength in titanium scissors. Why scissors, all of a sudden? Is that a new channel, or --

It's not a new channel, but we just had a lot of sales. And that's kind of an interesting thing, because we have been seeing more of our common scissors gaining share and impacting some of the margins for the business. And in this quarter, that really reversed. And I don't know whether customers are buying up, or whether we have just had a couple of promotions that have driven it. But the titanium sales did very well in the quarter.

And is that nonstick, or just titanium?

Just titanium.

Okay. And could you characterize the sell-through at Walmart, and some of the other new mass chains you've gotten?

Sell-through?

Well, sell-through/reorder rates.

We are doing well with them. To my knowledge, there's nothing where we've loaded in and we are not getting success at this stage. So the sell-through is excellent. For example, the Camillus knives -- which a year ago, we were entering into new channels -- continues to be successful, not only with more placement of products almost across the board, but then the new introductions that we are coming with are also being well received and selling through.

I mentioned on the call. a test we are doing with putty knives. These are a proprietary nonstick that we developed so that the putty would easily come off the knives. And when they -- you probably are not aware of this, but when you use a putty knife and you are putting it in normal plaster, that's a very acidic material. And so rust happens most -- on all the putty knives that are out there, and fairly quickly. That rust, then, streaks onto the wall when you are applying the putty. So use it for a week; you've got a problem; then it's on the wall. Because of our nonstick coatings, they don't rust.

The second thing is they clean up remarkably well. So the test that we are doing is with professionals. And it's one that we are excited about, because we think we might be able to change the way these tools are used. And that's a fairly big market, not only in the professional house building and building trades, but the home user as well. We'll see, as that plays out over the course of this year. But the test is going well so far. And we are pretty excited about the benefits that we are conveying.

Actually, I do understand. I'm an expert taper and spackler. It feels like your sales are changing seasonally. Is that because of the Camillus influence?

Well, we have been seasonal. Traditionally, first quarter is the weakest; and then we've had strong second and third quarters for back to school. The Camillus knives sell in, in the spring, particularly around Father's Day. And then there's a big -- another push in the fall for hunting and Christmastime. So that's a change.

The industrial business is growing pretty much across the board, and it's not too seasonal. And that Pac-Kit safety and first aid products tend to be more in the first half, but they sell pretty much all year as well. So I think we will probably find some more sales in the fourth quarter than we had in the past because of the Camillus knives. Also, with Europe moving more into the mass market, a lot of the items that they are selling -- some of these specialty knives and manicure sets -- in the last year, at least, it has been a fourth-quarter sale. So that may change some of the dynamics.

(Operator instructions) Tom Spiro, Spiro Capital.

The Scotts arrangement -- did we initiate that early enough to capture the spring selling season?

Well, we initiated it plenty early enough. There were a lot of negotiations that took a lot longer than we expected, and a lot of details. But the fact is, this is really more of 2014 product family. We may very well sell some of our new Scotts, powered by Clauss, garden tools in the fourth quarter. But really the change we are talking to, and the changes they do in their planograms, a lot of that will be in the first quarter and second quarter of next year. There's a big show coming up in Las Vegas called the National Hardware Show. And we are working hand-in-hand with Scotts to promote the products, meetings. It's a powerful endorsement, and we are optimistic. But we probably won't see any sales until probably the fourth quarter at best; and then clearly in the first and second (multiple speakers).

And who is responsible for getting the placement? Do we get the placement, or do they?

We do.

We get the placement? I see.

Absolutely. (Multiple speakers) sell our products. They will carry us. I think the number is $180 million in advertising for their whole company. We will be getting some of that benefit. But the selling and the warehousing in our products, and the development and customer service -- that's all ours.

Does Scotts already have similar kinds of tools? Are there similar kinds of tools out under the Scotts name?

The Scotts has Miracle-Gro fertilizer. They've got --

Right, that's what I know.

-- spreaders for garden seed and fertilizers; insecticides; and very, very high quality brand recognition. And they are known for being a quality organization. These tools will be their first entry, and it's exclusively ours.

I understand. As I recall, initially, when we initially rolled out the gardening line, we had difficulty getting good placement. I guess we still don't know, at this early stage, what kind of placement we would get.

I can tell you that we've got a powerful brand working with us, and we are getting a lot of attention. But, again, until we get orders and see sell-through on those orders --

Sure, sure. And just to switch subjects for a moment -- do the office people, OfficeMax situation -- are we feeling that much? How do we expect it to affect us?

Well, I don't think it's good news for us, because you go from two customers to one. I don't think it's bad news, because we sell to both of them. But I also don't know that I really believe it's going to happen. And my reasoning for that, is OfficeMax shareholders will be getting Office Depot shares; and I don't believe that they are performing anywhere near where they justify their price. But I don't think it's -- there's no great positive I see out of that, although maybe we would sell more products to the combined entity.

I would think it would be at least negative for a while, because there would be a lot of extra inventory floating around out there.

Perhaps. I don't know. Office Depot is a struggling company. And maybe it's better to keep the stores going, but they've got so many stores in places they shouldn't be.

Richard Dearnly, Longport Partners.

Actually, my question was about Scotts, also. So, we've covered it. Thank you.

Jeffrey Matthews, Ram Partners.

Tom Spiro, as usual, asked most of my questions. But Walter, I'm wondering if, given what is going on in China, if you foresee a day down the road -- maybe in the next five years -- that you are sourcing more from, say, Mexico in a significant way.

Well, that's something we work with and struggle with a lot. We are awfully good with China right now. Despite the inflation and the wages, which are going up, we are getting productivity improvements. Mexico -- everything we read is that it's going to be a real contender in the next five years. But that's if things stay static. And I don't know that they will. But we don't do much -- we don't do hardly any production in Mexico anymore. In fact, the scissors we used to make in Mexico stopped being made last November, and went to China. So that was a little bit frustrating.

We're doing some production now in Colombia, and some in Spain. But China is still very important for us. And to see that changing in five years -- we are going to be have to be moving at a very aggressive rate somewhere to actually shift that kind of volume, unless we do an acquisition that brings us there. So I think about it, and I worry about it, but that's what we are doing. And we are doing it well.

Okay, two others -- one is, what's the status of Fiskars these days in the scissor business?

Well, Fiskars has -- as some of you may know -- is a really quality company based in Finland. It's publicly traded. And they have got lots of different divisions. They have been, lately, for example -- in the last two years -- moving into housewares. They just bought Royal Copenhagen, which they are marketing as a premium product into department stores. They have the Gerber knives, which are excellent. And they do well, especially the multi-tools.

In the scissor area, we have pretty much ripped them out of most of the office channel. They still sell kid's scissors; they sell some craft scissors, particularly a Jo-Ann Fabrics. But they are not the competitor they once were in that area. On the other hand, knives -- Bear Grylls endorses their survival tools and knives; and de-similar Les Stroud, has a large following. They are very, very good company. And they compete head-to-head with us. As I said, we've ripped them out of most of the office channel in a lot of the mass.

Okay. In terms of Eastern Europe -- not the usual Germany/UK stuff, but more Eastern Europe -- what is the status of your efforts there?

We have one distributor in Austria that sells into Eastern Europe in a somewhat sizable way, and it's a really quality company. We used to sell to Office Depot in Hungary. But they closed that operation. We used to sell into the Russian market, but we didn't get paid, so we stopped doing that. It's really our distributor in Vienna that handles Eastern Europe. And I think they do pretty well.

(Operator instructions). There are no further questions in the phone queue at this time, sir.

Well, then, I would like to thank you for joining us. We have our annual meeting on Monday at 11 o'clock at the Cornell Club. Should anybody want to attend, you are more than welcome. And I would like to thank you for joining us. Goodbye.

That does conclude today's conference. We do thank you for your participation.