Acme United Corp (ACU) 2013 Q3 法說會逐字稿

Good day and welcome to the Acme United Corporation's third-quarter 2013 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 third quarter of 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 operations 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 quarter for 2013. Our net sales were $22.1 million, which was an increase of 9% over last year at this time. We set a new record for third-quarter revenues. Our net income was $959,000, up 20% over last year.

The back-to-school sales were at record levels. Our titanium kids and stainless scissors were particularly strong as we gained distribution and had excellent sellthrough of our new products. We also had record sales of our First Aid kit to both the office and industrial markets. Clauss industrial tools and Camillus knives also had an excellent quarter.

Our Canadian business was down 15% in local currency, due to weak office product sales. However, this was offset by growth in Europe of 19% in local currency, due to increased mass-market sales. We were particularly happy with the performance in Europe, especially since our team there has more than offset the loss last year of their largest customers, due to liquidation.

During the quarter we acquired a new 340,000 square-foot distribution and manufacturing facility in Rocky Mount, North Carolina, for $2.8 million. The site was formerly owned by Room Store, which went bankrupt and was liquidated. Our purchase price was $8.30 per foot, which is less than many rental rates per year for warehouse space.

We intend to consolidate our Goldsboro, North Carolina, warehouse into the new space by January 1, 2014, and our Fremont facility by March 1, 2014.

We will repay the mortgage from the sale of our former Bridgeport, Connecticut site in July. And this resulted in a cash inflow of $1.74 million. Our Fremont, North Carolina facility is now on the market for $900,000.

While we have duplicate operating costs and moving expenses for the fourth quarter, we will begin to realize savings after the first of the year. More importantly, we have put our US distribution facilities in one location and have room for growth.

Also during the quarter, we hired John Ward to run our Canadian operations. John has extensive sales and management experience at Newell Rubbermaid and Esselte Corporation. We look forward to building our Canadian business with him.

The fourth quarter of 2013 looks strong. We are seeing a hump in fourth-quarter sales for Camillus knives for hunting and Christmas time gifts, new hazard protection kits and mass-market promotions in Europe. We are providing guidance of about $90 million in sales for the year and earnings per share of $1.20 to $1.22 per share, less than a duplicate running cost of the new Rocky Mountain facility.

Although we are not giving guidance yet for 2014, we are rolling up our budgets and we see solid growth based on existing and new business. I will now turn the call to Paul.

Acme's net sales for the third quarter were $22.1 million compared to $20.4 million in 2012, an increase of 9%. Sales for the nine months ended September 30, 2013, were $68.2 million compared to $64.8 million in the same period in 2012, an increase of 5%. Net sales in the US segment increased 11% in the quarter and 8% for the nine months ended September 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, back to school products and first aid kits.

Net sales and local currency for Canada decreased 15% on the quarter and 8% year to date. Sales were lower in Canada due to soft conditions in the office products industry. Net sales for Europe increased 19% in the quarter in local currency, but declined 7% for the nine months ended September 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 third quarter of 2013 were $6.5 million or 30% of sales compared with $6.1 million or 30% of sales for the same period of 2012. SG&A expenses for the first nine months of 2013 were $19.3 million or 28% of sales compared with $18.3 million or 28% of sales in 2012. The SG&A increase was mainly due to higher variable selling costs as a result of higher sales and the addition of sales and marketing personnel.

Operating profit in the third quarter increased from $1.360 million last year to $1.410 million this year, a 4% increase. Operating profit for the nine months increased by 5%.

Net income for the third quarter of 2013 was $959,000 or $0.29 per diluted share compared to a net income of $798,000 or $0.26 per diluted share for the same period of 2012. Net income for the first nine months was $3.5 million or $1.07 per diluted share compared to $3.1 million or $1.00 per diluted share in the comparable period last year.

The Company's bank debt less cash on September 30, 2013, was $13.2 million compared to $14.2 million on September 30, 2012. During a 12-month period ended September 30, Acme purchased the new distribution facility in North Carolina for $2.8 million and paid $900,000 of dividends. During this period, the Company also received $1.7 million from repayment of a mortgage receivable and generated $3 million of cash flow from operations. Net debt should end the year at approximately $12 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). Richard Dearnly, Longport Partners.

Good morning. Could you talk about the investments that you plan to spend in the new distribution center, what is necessary there and then take a stab at what the living cost will be and where -- how they are going to hit in the fourth quarter, first quarter, second quarter, whenever?

Sure. I will start with the physical description. Paul, perhaps you could fill in a little bit better some of the timing of the investment.

So we bought the building that, in my view, we got an incredible price on. But, there were some things that needed to be done. It had been vacant for a year. So there was damage in the offices. We are stripping out the offices and refurbishing them. That is about 6,000 square feet and so that is going on.

There is a lot of cleaning. Cleaning of dust -- and this is a big facility with ceilings 40 and 50 feet high. So there is a lot of cleaning of dust and, then, debris and, then, power washing floors and then preparing the floors for our level of operation. So that is going on.

There was not a certificate of occupancy because it had been vacant a year. So all the air-conditioning, water, septic, electrical, sprinklers, all had to be retested. That is going on. We are pulling out a couple of oil tanks that did not leak, but we don't want them on the site. That is in process. We are painting the outside, we are working on the loading docks so that they are properly -- have the proper height for our operating (multiple speakers).

Then finally, we are bringing in a, we believe, a new conveyor system that we are buying at a very good price from another company so that we begin to automate some of that operation. We are also working on the facilities, rewiring so that we have got scanners that are up to our standards. And right now the wiring is several generations old. So, that is coming in. We are putting in a new phone system.

So most of that is happening between now and year end.

Why don't you go over, just ballpark, what that means in capital?

We spent $2.8 million for the property through the end of September. We will spend approximately a total of $1.2 million for the refurbishments and the additional equipment that we need, and probably $600,000 in the fourth quarter and another $600,000 in mostly the first quarter, a little bit into the second quarter. So, the total will be $4 million.

All in.

Yes, all in. And as far as the moving, the duplicate operating costs and the moving expenses, we expect that the approximately $160,000 in the fourth quarter of this year and then maybe $80,000 in the first quarter.

When I had originally given guidance on that, I estimated the cost of duplicate occupancy and moving to be about $300,000. So we are coming in below that and business is doing well. So the impact in the fourth quarter may be less than that number.

Right. I see. Then the $90 million for the year implies a flat sequential fourth quarter versus the third quarter where usually the fourth quarter sales are significantly less than the third quarter. What is causing the change this year?

We are seeing a shift in our business in the seasonality. And I mentioned the bump that we are seeing in the fourth quarter. Part of that is Camillus knives where now we have got some Christmas time and hunting promotions. We have got industrial business which is moving in all our quarters going up. But it is having an impact of raising the fourth-quarter revenues.

In the first aid business, we started to make hazard protection kits for things like hurricanes and snowstorms. And we had a pretty big order, some of which we really thought that was going to be a third-quarter shipment, but it is rolling into the fourth quarter. But that is something else.

And then finally, in Europe, the mass market promotions are lined up to be quite strong and last year, some of that didn't occur.

So, all told, fourth quarter will be at least equal we think or stronger than third. And that will be the first time it has been like that.

Would you guess that that is going to be a new --? That will stay the same way in years to come? I realize this is a guess.

That will be changing and that is the garden area with our Scotts Miracle-Gro, things that a year from now some of that may be Christmas time promotions that will certainly be impacting our first quarter in a favorable way in 2014. Because you shipped those in the --

Yes, right.

So I think it is fair to say we are hitting new levels in the fourth quarter in sales. But the seasonality, we may find the first quarter now also being stronger because of the garden shipments.

Right. I see. Then, Paul, you are looking to be short of 30% tax rates this year. Is that -- or is there a big makeup coming in the fourth quarter? Where do you -- do you have a new look at tax rates?

I expect our tax rate to be 28% for the year. At this point, that is where we are, at 28%, and that is our expectation for the 12 months.

And is that a new level going forward? Or is that a one-time special?

It is 28% to 30% is the range where we will be going forward.

Right. Okay. And is -- going forward, do the new businesses -- in the past, if you normalized inventory and receivables, they are about half of sales. Is that -- with the different mix is that likely to stay the same as well?

Let me address that. And it depends on the business. For example, if they are products that we are bringing in from Asia and that would be the Camillus line, the -- or Westcott line. Those have lead times both at the factories, time on the water, and customs.

And there -- our penalty for not shipping is air freighting and we will lose all the profit that we could possibly have made. So that portion of the business, there may be some optimization we do a little bit better, but that is basically what it is.

Yes, you need the inventory to get the margin.

The other side of the business is the Pac-Kit and PhysiciansCare first aid side, which is growing nicely. And there, particularly Pac-Kit we make to order. And so, we have got inventory -- picture a big Lego set in our warehouse -- and when we get the orders we are picking different components off of the shelf, churning it and shipping it out and we are doing custom printing on the boxes.

Those are very quick turnarounds. And to the extent that Pac-Kit and PhysiciansCare continues to grow, and it is, that reduces the inventory turns.

So the net net is my -- it increases the inventory turns. Net net is we should see some improvement, but on the imported items, that is how we believe it is best to be running the business right now.

Thank you very much.

(Operator Instructions). Frank DiLorenzo, Singular Research.

I had a question about Canada. Can you talk about anything that you are planning or maybe able to do in the future, say beginning in 2014, to try and turn around that situation? Thanks.

Well, our Canadian business has consistently been a very profitable cash generating business. It has been an excellent business for us. It has had some slowness particularly in the last two quarters and it related to the office business. And it related to a couple of the customers, which maybe it has got something to do with their inventory plan. I am not sure. We are seeing a pickup this quarter, so that's helpful.

We made a change as I mentioned, with John Ward, who is now our head of Canada. Highly energetic, very, very strong sales and marketing background. Well-known in our industries. He alone won't make a difference in sales, but he certainly will be, I think, fresh energy.

There are other areas, though, that we have growth that we didn't last year. For example, the Scotts Miracle-Gro we know has now been placed in some fairly large accounts in Canada and that will be impacting our growth next year. Camillus knives business is making inroads. And the Clauss tools have a chance to break into some of the big distributions for next year.

All these things are additives, but what hurt the business this year was the softness in a couple of big accounts. That may be temporary. In any case, I am not expecting this to be indicative of the fourth quarter for Canada and we have certainly got programs to drive for next year.

Going to Europe, can you talk about 2014? Is there potential in Europe for additional, an additional presence in the retailer space, new clients, distribution things of that nature?

This was in Europe?

Yes, Europe, thanks.

Well, let me tell you some things we have done. We are showing growth in Europe especially when you factor -- well, the nine months we are not showing growth. Third quarter, we clearly didn't have growth. The fourth quarter we do. We are adding some distribution, for example, in Camillus knives. We are now selling Camillus and Les Stroud throughout Scandinavia and those are happening.

We have just signed a large German distributor for Camillus knives. Shipments start this quarter for that. The garden area would be new for us in Europe. We are making presentations. We have gained some good office business and this is market share gains in Continental Europe as well as the UK.

And finally in the mass market, we will sell about 1 million knives this year and these are for the consumer in their kitchen. And this business is something that has been growing very nicely for us there. Knives that are used in the industrial market here in the US and upgraded for packaging and ergonomics, but they are very high quality, fairly inexpensive knives. And they are hitting very well in Europe.

So all those things are working in its favor. But the new distribution, really, is the Camillus knives.

Thanks. And going back to Scotts, it you mentioned that should be strong in the US in 2014, also helpful in Canada. You are working on that for Europe, but nothing concrete at this time.

Right.

Okay, thanks.

Ralph Marash, First Manhattan Company.

Good afternoon. Wanted to go back to the inventories again to see if I understand it.

So, they are essentially flat, they are down a little bit year over year. And as the Pac-Kits and the first aid kits become a higher percent of your sales, is that really the reason why sales are increasing and the inventory is not?

Well, no, we did some things that made that happen. One of the things was the reset points on inventory in general. We scaled it back by a week. As that -- you don't see that the first date you do it, but you do see it over the course of the use of inventory in a year and then the replenishment levels in the future.

We have also worked on the minimum order quantities with our factories. So that if you can reduce the minimum order quantity for them it means they have got more turnovers in production. For us it means we have less to -- we have a faster cycle time. So, we have done that.

We have also worked on some inventory that is duplicate -- duplicate might be in one type of packaging versus another type -- and standardized it and then sold off the -- so you had one packaging instead of two.

These things sounds simple, but they have thrown off a fair amount of cash this year. I think the inventory is down about $700,000 and we have grown during that period. We are continuing to work at that. And frankly, if we are able to do it, I want to keep pushing, but the trade-off is being shorthanded and then having to airfreight. So it is a very careful mix.

First aid, though, clearly has a much quicker turnaround because you are making to order or you have your own factory and you are able to turn it around. One of the exciting things is that eventually as we continue to grow that first aid business, our Rocky Mountain facility now has space to be able to store semifinished components and probably increase our overall volume.

Okay, good, thanks for that helpful information. Also on the balance sheet, accounts payable are down substantially. Could you talk about that?

Paul, that is yours.

At this time last year our inventory was higher and the accounts receivable relative to inventory was higher. So this year --

Accounts payable.

Accounts payable. At this point our inventory is down so our accounts payable is down.

Thank you.

It seems that we have no further questions at this time. I will now turn the program back to our presenters for any closing remarks.

Well, if there are no further questions, this call is complete. I would like to thank you for joining us. Goodbye.

Thank you for your participation. You may now disconnect at any time.