Acme United Corp (ACU) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Acme United Corporation second quarter 2013 earnings conference call. Today's call 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 2013 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 record quarterly revenues and profits for the second quarter of 2013. Our net sales were $28.4 million, an increase of 3%. Net income for the second quarter of 2013 was $2.2 million, an increase of 7% over last year. Both net sales and net income set new corporate highs. The comparisons were steep since we set records last year as well. Gross margins were 35.5% in the second quarter of 2013, which were approximately the same as last year.

Back-to-school sales were at record levels. Sales of children's scissors, titanium shears, iPoint pencil sharpeners, Westcott rulers and map gain, all gained shares and moved our US revenues forward. New Camillus knives, Clauss industrial cutting tools and Pac-Kit first aid kits and supplies all had good growth.

However, we continue to see declines of between 3% and 6% in revenues of publicly held superstores and distributors. It is within this environment that we are pushing ahead. Other channels, however, are proving far more favorable than the office market. Our Pac-Kit industrial first aid products and Clauss professional cutting tools, are benefiting from a recovery of manufacturing and construction. We're selling increasing amounts of safety products to the oil and gas markets, the drilling as well as refining. The Camillus knife business continues to gain distribution in the hunting, fishing and outdoor sports markets. We are introducing new items to the market shortly for sale in the fall and as Christmas time gifts.

Garden tools are being well received and we expect to be shipping these items in the spring of 2014 with perhaps some sales in late 2013.

As we look into the second half, we believe these new business activities will strengthen the third and fourth quarters and lead to growth over last year. Our guidance for 2013 continues to be approximately $90 million to $95 million in revenues and $1.20 to $1.25 per share. The higher end of the forecast would require securing some additional business in the coming quarters.

I will now turn the call to Paul.

Acme's net sales for the second quarter were $28.4 million compared to $27.6 million in 2012, an increase of 3% or 4% in local currency. Sales for the six months ended June 30, 2013 were $46.1 million compared to $44.5 million in the same period of 2012, an increase of 4%, or 5% in local currencies.

Net sales in the US segment increased 5% in the quarter and 8% for the six months ended June 30. The biggest contributors to the sales increase came from higher sales of Camillus knives, the added sales of the C-thru business acquired on June 7, 2012, and back-to-school products. Net sales in local currency for Canada decreased 3% in the quarter and year to date. Sales were lower in Canada due to a slightly soft economy. Net sales for Europe increased by 2% in the quarter and local currency but declined 18% for the six months ended June 30.

The year-to-date sales decline was primarily due to the loss of Schlecker, a large customer, as a result of their bankruptcy and liquidation in the second quarter of 2012. We expect the increased mass-market business for the remainder of 2013 to offset the loss of Schlecker.

SG&A expenses for the second quarter of 2013 were $6.9 million or 24% of sales compared with $6.7 million or 24% of sales for the same period of 2012. SG&A expenses for the first six months of 2013 were $12.8 million or 27.8% of sales compared with $12.2 million or 27.5% of sales in 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 in the second quarter increased from $3.1 million last year to $3.2 million this year, a 4% increase.

Operating profit for the six months increased by 5%. Net income for the second quarter of 2013 was $2.2 million or $0.68 per diluted share compared to a net income of $2.1 million or $0.66 per diluted share for the same period of 2012. Net income for the first six months ended June 30, 2013 was $2.5 million or $0.78 per diluted share compared to $2.3 million or $0.74 per diluted share in the comparable period last year.

The Company's bank debt less cash on June 30, 2013 was $17.6 million compared to $15.9 million on June 30, 2012. The primary reason for the increase was a $2.8 million increase in inventory for new business. We expect inventory to end the year at approximately $30 million, the same level as December 31, 2012. Net debt should end the year at approximately $10 million to $11 million. This compares to $14.6 million at the end of last year.

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

(Operator instructions) Frank DiLorenzo, Singular Research.

Good morning, good quarter and thanks for taking my call. My first question -- would you have an organic sales number for the quarter?

The acquisition of Pac-Kit took place about the middle of June of last year, so it was only two weeks of the contribution. It was quite negligible, so most of this was organic.

Okay, great. Also, it seems as though you were stabilized fairly nicely this past quarter. Can you tell us where you may have seen some strength in the outlook for the second half by product segment in Europe?

Yes. The first thing is that most of our back-to-school products performed very well, and that was pretty much across the board. As I outlined in the conference call, whether it was iPoint pencil sharpeners or it was titanium scissors or kids' scissors, they performed very well, at record levels. Where we were softer was in some of the office products, and that is the systemic with the environment we're in.

We had, last year, a large load-in of Camillus knives at one of the large retailers, which did not anniversary because it's in the stores currently. So that was a negative. But we have -- every quarter, there is something we are loading in and we are not, but that happens to be that case there.

We also, last year, had Schlecker as a contributor pretty much up through its bankruptcy and liquidation, which would have been through June, and we didn't have that this year. However, the mass-market business that Paul indicated would be strong in the second half in Europe appears to be accurate. So that should cover the loss of Schlecker going forward.

Looking at other areas that we would build in the back half and are building, the Camillus knives, perhaps the Scotts garden items, we are seeing a lot more rounding of the business and less cyclicality because back-to-school continues to be our biggest quarter. But the other quarters are growing as we have moved outside of the office channel. The industrial business, the Pac-Kit first aid business -- that's all showing growth and will be adding strength to remaining two quarters.

Okay, thanks for the answer.

And no one else's in the queue at this time. So if there are any additional questions (Operator instructions). Richard Dearnly, Longport Partners.

Last call, you mentioned that there has been an upgrade in your general quality of the scissors and whatnot that you're selling. Has that continued?

Yes, it has. And when I was talking about the titanium scissors, that's a perfect example where we are shipping them in record numbers. And part of the reason for that is we've gained distribution, but I believe people are moving higher up into the value chain, and that might be in relation to a recovery. It may just be a trend. It might be inventory adjustment, but we are seeing it.

And is that titanium, but nonstick?

It's on more nonstick products across the board. One area that continues to be going well are the nonstick titanium putty knives that are in one of the large do-it-yourself retailers. And they just simply outperform what is currently in the market, they clean up quickly and they don't rust. These are attributes that no other product in the market that we know of is able to deliver. And as a result, it's another growth vector.

It's also an upgrade in the product that's currently out there. The nonstick products family continues to find applications, even in some kitchen knives for sale in Europe that, frankly, we just didn't have a year ago.

All right, great. It sounds like Europe, you really did quite well against what was a really tough comparison. Is that --

Our European team has dug in and they are working very, very aggressively and they are focused on new business. And while it takes time to get that, we certainly are seeing the progress. And I'm very proud of them.

Ah, good. And the comment about new introductions in the fall and for Christmas -- was that for Camillus, or is that across the board?

Yes, yes. There are quite a number of Camillus items that are being introduced. Also, there may be some Scotts items that we might be able to get some tail end of the Christmas season with some of those. So that's all in our favor.

Good, okay, thank you.

[Todd St. Mary], private investor.

I would like to hear more about the Scotts garden items. I specifically would like to know what are your expectations going forward. Is this going to be potentially just an additional $1 million or $2 million a year, or does this thing have the potential to be sizable with $5 million, $10 million or bigger?

That's a very good question, Todd; and in our guidance, we have assumed that it didn't exist. So we certainly have been spending a lot of effort in trying to build the garden business. And with the clout from the Scotts branding and the quality of the products and the award-winning features that we've got, we think we've got a decent shot at building a good business there.

However, for this year it's not in the forecast at all. As we begin to see purchase orders from some of the larger retailers, if we are fortunate enough to do that, I will be able to roll that into a forecast. Right now, you should assume that it's a small product family. By the time I give guidance for next year, which will probably be at the end of next quarter, I will have a better idea as to what we might expect for 2014. We didn't enter this to stay as a $1 million category, and we are certainly trying to build it into a fairly substantial line for the Company.

Did you incur costs that were of any significance with the rollout in this quarter?

I'm sorry; I missed that.

My understanding is that the products were introduced in the current quarter, the quarter that just ended. I'm just wondering if there were any significant costs incurred with introducing the products.

Usually not. Usually, when we are introducing new products, it tends to be incremental. Sometimes they have marked down money. But I can't recall that in this current quarter we had any of that.

Okay, that's all I've got, thank you very much.

Chris Doucet, Doucet Asset Management

A couple of questions for you -- first of all, is Europe profitable?

Paul, why don't you go over that.

At this point in the year, they are not profitable, but we expect them to be at least breakeven or a little bit more than that, a little profitable at the end of the year.

But, for the year (multiple speakers) --

What will happen is, in the second half of the year with the mass-market business that we are booking right now and producing, that should be sufficient to turn it into a pretty strong second half for them.

Okay. Is the reason that you had a change of heart about building the inventory because you are going to build inventory in anticipation of Scotts sales?

We're obviously building inventory for that, sure.

In the last quarter, you mentioned that you wanted to reduce inventory by the end of the year. Now, you say you are going to be $30 million by the end of the year, and I'm wondering why the change of heart.

We are building inventory for some products that we will be rolling out. Some of that should be the Scotts business, assuming that we get it. But you've got to have it built because it's a spring delivery. And there may be some putty knives that we are building. There probably will be Camillus items. We continue to be gaining business with Pac-Kit.

And so as you are building that revenue base, and we didn't know where we were looking into 2014, we see a lot more clarity in that right now. So we are starting to build for it.

And you have no Scotts business in your forecast in 2013?

Right.

Is there a chance that you might see some Christmas sales in the Scots business in the fourth quarter?

Yes, there's a possibility, but we don't have it right now.

Have you finished the test that you talked about -- talking about putty knives, have you finished the test that you are doing in the major hardware store?

That test is continuing and is performing well. I couldn't give you a date when it would be the rollout chain-wide or it would be dropped. But it's performing well and that tends to mean that it may get more distribution.

What kind of estimates do you have for your putty knife sales in 2013?

Chris, we don't go into that kind of detail on the product families. You got to understand, as I think we all do, that every competitor that we compete with listens to us.

Okay. Do you have any -- have you put any putty knife sales in your estimates in 2013? Maybe that's a better way to ask it.

Oh, sure they were.

Okay. All right, I'll step back in the queue. Congratulations on the quarter, by the way.

Jeffrey Matthews, Ram Partners.

I wanted to get a sense of how important the office products channel is for you today versus the peak, because it seems like you are able to grow without it now.

Well, the office products business today represents about 35% of our sales. Five years ago, that would have been closer to 80%. So it has changed quite a bit as we have grown in the first aid area, as we have grown in the Camillus knives, as we have moved into the hardware and in Clauss industrial tools. They have all gained in importance, what didn't exist years ago.

Right, okay, that really gets to my next question. Over time -- at the same time that your dependence on that channel has dramatically declined, your margin profile has shifted a bit. And I think your gross margins peaked in the mid-40s, and they now seem to have settled in at around 35%. Is that pretty much the way the business will look over time, roughly, mid-30s gross margin, operating margin somewhere in the low-double digits?

Well, a large reason that the margins sell was because the US dollar declined over 40% during that period. And since we buy in dollars, our costs went up. Part of that we offset by price increases, part of it through productivity, part of it through products -- material substitutions and so forth, packaging changes. But the net of it is the US dollar fell apart, and we buy in the global markets and produce in global markets. That hurt us. If the dollar stabilizes, then I think it's fair to say that we might be able to regain some more margin that we lost. It's not the profile of the business; it's our ability to buy and source.

So to forecast what goes forward, we have an unusual fiscal policy. I can tell you, though, that as we develop new products, we price them based on our costs and so they tend to have margins that are higher than those that are older.

Got it, okay. And then my final question, speaking of China, as opposed to sourcing over there, I'm interested in your sales efforts over there. That economy seems to be -- there's kind of a tastes great/less filling argument about whether the economy over there is getting better or hitting a wall. And I'm curious what you are seeing and what it means to Acme on the revenue side.

I'm in Hong Kong right now, and I just came back from Beijing, visiting some customers. And I can tell you that my view is that when an economy grows a 7.5% and you don't see any used cars and the highways are packed and the buildings are modern -- and Beijing is just a city, but there's 24 million people in it -- it kind of gives you an idea that things aren't so bad in China. And my impression is that it's quite robust. Maybe they are throttling back and maybe they have got some banking issues, as many countries do. But the lifestyles of the people that I've seen is continuing to get better, and it's a rich country.

I think -- in fact, my conclusion was surprising. The opportunities in China are very big.

For Acme?

Well, in general. For Acme, that's not the thrust right now in our Asian sales. We do sell into China, but we're selling a lot more into Australia, the Philippines, Indonesia, Thailand, Japan, Thailand, all of those are contributing far more than China. But there's potential.

Okay, great, that's a terrific answer. I appreciate it. Best of luck.

Michael Wasserman, Moors & Cabot.

Walter, can you comment on the labor cost trends in China, please, insofar as Acme is concerned, and also raw material pricing?

Sure. First, on labor, it's continuing to increase. Last year, our numbers were about 14% increase in wages over the previous year. And I see every indication that we will be having numbers of 12% to 14% increases in labor again in the coming year.

Relative to raw materials, it pretty much stabilized. The plastic that goes in the packaging and goes in the handle of the scissors has increased because petroleum has gone up a little bit. The steel, which is a larger part of the product cost, is about stable. We are working on productivity, on packaging, on automating some more steps, particularly in the processing of some of the steel and packaging. All those things tend to offset some of the labor increases. But the net is, the labor costs continue to be increasing.

Okay, and do you see that continuing indefinitely? And what -- other than looking for additional efficiencies, what might that cause you to do in the long term, if anything?

Well, I think that our -- I know that our products are as competitive, if not more so, particularly in the scissor line, than any other supplier globally. And we know that because we are selling not only private label, but the mainstay scissors to -- well, we're the largest in the industry, so it's probably everybody.

And I also know that there doesn't seem to be any letdown on the cost of labor going up in China. So that's a problem in a five- or seven-year period for the Chinese economy, perhaps. But there's a lot of productivity that you can do and we are still in the early stages of that.

So it's something we can manage, and we have been managing.

All right, thank you.

(Operator instructions) Frank DiLorenzo, Singular Research.

Could you talk about the possibility for the rest of this year and into 2014 of potential acquisitions, whether it's a company or product acquisitions?

Frank, we are always working on that. And what I would tell you is it would be unlikely that we would do an acquisition that stretched from where we are right now in our core businesses, a half-step away, perhaps. We've got quite a number of leads that we are continuing to follow up. And, you know, if we are successful in making another acquisition, that would be in addition to any of the forecasts I've given, of course. But I can't identify anything right now publicly.

Would that potentially be in the first year neutral accretive? Do you have a goal there, or it depends on the strategic fit?

Well, every acquisition we've done has been accretive, almost immediately. I can think of a couple that took three or four months, but these are accretive acquisitions. And it's an important part of the strategy, but the ability to talk about those before you do them is a little bit difficult.

Thanks.

Jeffrey Matthews, Ram Partners.

I just wanted to follow up on that last question on acquisitions. You have tended to do very shrewd, deep discount, sometimes out of bankruptcy type things. Do you still see opportunities along those lines, or are you thinking in the back of your mind, there's an ability down the road to buy more of an established, ongoing business?

Well, I think that you've got to keep an open mind on the types of acquisitions that you do. But the ones that I think we are very, very good at are those that we can add value to quickly. And they tend to be in trouble, but they tend to be in markets where we add value, where we can add either customers or we can do sourcing or product innovation very quickly and turn them around. Whether that was Clauss or that was Rotex years ago in Canada or Pac-Kit, to name a few, we have been successful doing that. It was see-through last year. I wouldn't rule out buying something that is a more established business, and in fact we have looked at numbers of them. But again, it's a case-by-case basis. Our track record suggests we have bought a lot of companies with value.

All right, great, thanks, Walter.

And there are no other questions, so I will turn the call back to Walter Johnsen for any additional or closing remarks

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

Thank you very much, and that does conclude our conference call for today. Thank you for your participation and you may now disconnect.