Acme United Corp (ACU) 2013 Q4 法說會逐字稿

Good day and welcome to the Acme United Corporation's fourth-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 fourth quarter and year-end 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 relate to the Company's plans, strategies, objectives, expectations, intentions, inadequacy 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 an excellent year in 2013. Our sales were $89.6 million, which was a record for the Company. Operating income increased 10% to $5.9 million. Net income was $4 million, an increase of 13%. Our earnings per share was $1.22, which exceeded our guidance of $1.20 per share.

Growth drivers for the year included Camillus knives, which gained distribution in a number of large outdoor sporting goods stores, as well as in the mass market. Our PhysiciansCare and Pac-Kit first-aid business had strong growth in the office channel, the industrial safety market and in sporting goods.

The Clauss industrial cutting tools gained share in the hardware and mass markets, and with industrial distributors. The Wescott titanium and nonstick scissors continued to gain marketshare globally, and our iPoint pencil sharpeners performed well.

In Europe, we had solid performance in the office channel with our traditional cutting tools. We offset the loss of sales from the bankruptcy of our largest European customer, Schlecker, with increased mass-market sales of innovative kitchen knives, manicure sets and other cutting products. We were profitable in Europe for the first time in many years.

Our Canadian revenues decreased 8% during the year, due to softness in the office channel. We are addressing this with new cutting and measuring tools for the office, greater sales emphasis on hunting knives and survival tools, and we are taking early steps to introduce first-aid kits in Canada. We are very actively quoting new business in Canada, and we expect to resume its historical growth.

The consolidation of our two North Carolina warehouses into the new Rocky Mount facility has progressed on plan. We moved out of the Goldsboro warehouse at year-end, and just finished the move from our Fremont plant this past weekend. We have now listed the Fremont, North Carolina facility for sale for $900,000.

The savings from the moves about offset the extra costs of the new facility. We begin to gain operating leverage when we consolidate other operations from higher cost locations. The state of North Carolina is working with us on incentives as we speak, and we expect to be making decisions in the coming quarters.

We reduced our inventory by $2 million during the year, despite our growth. In total, we generated $5.5 million in free cash flow during the year. Our net debt declined from $14.6 million at the end of 2012 to $11.3 million at year-end 2013.

Our guidance for 2014 at this point is $97 million to $102 million in revenues, with between $4.3 million and $4.6 million in net income. This would be fully taxed. This correlates to approximately $1.26 to $1.33 earnings per share in 2014.

I will now turn the call to Paul.

Acme's net sales for the fourth quarter were $21.4 million compared to $19.5 million in 2012, an increase of 9%. Sales for the year ended December 31, 2013 were $89.6 million compared to $84.4 million in 2012, an increase of 6%.

Net sales in the US segment increased 11% in the quarter and 9% for the year ended December 31. The biggest contributors to the sales increase came from Camillus knives and first-aid kits. Net sales in local currency for Canada were constant in the quarter and decreased 8% for the year. The fourth quarter showed improvement over the previous two quarters.

Net sales in local currency for Europe increased 2% in the quarter and decreased 5% for the year. Early in 2012, we lost Schlecker, a large customer, due to their liquidation. However, the increased mass-market business is mostly offsetting the lost Schlecker business.

The fourth-quarter gross margin was 35% compared to 34% in the fourth quarter of 2012. Gross margin for the year was 36% compared to 35% last year. The gross margin increase was mainly due to better product mix.

SG&A expenses for the fourth quarter of 2013 were $6 million or 31% of sales, compared with $6.1 million or 31% of sales for the same period of 2012. SG&A expenses for the year ended December 31, 2013 were $25.9 million or 29% of sales, compared with $24.4 million or 29% of sales in 2012.

The increase for the quarter and the year was primarily due to higher sales commissions and delivery costs associated with the higher sales, the addition of sales and marketing personnel, and higher spending on new product development.

Operating profit in the fourth quarter increased from $465,000 last year to $763,000 this year, a 68% increase. Operating profit for the year ended December 31, 2013 increased by 10%. Net income for the fourth quarter and year end increased by 22% and 13% respectively.

The Company's bank debt less cash on December 31, 2013 was $11.3 million compared to $14.6 million on December 31, 2012. During 2013, Acme purchased a new distribution facility in North Carolina for $2.8 million. added $900,000 in refurbishments to the facility, and paid $700,000 in dividends.

In 2013, the Company also received $1.7 million from early repayment of a mortgage receivable and generated $5.5 million in free cash flow, which included a reduction in inventory of $2.1 million.

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

Thank you. (Operator Instructions) Jeffrey Matthews, Ram Partners.

Hi, Walter. Congratulations.

Thank you, Jeff.

And I say that because I know you have been dealing with a lot of cross currents, and you came out of it very well for the year. And I wanted to -- first of all, congratulations on the balance sheet. I love that balance sheet. It looks really clean, and I notice that it looked to me like payables were even down, so it wasn't like you were stretching to look for cash.

Could you just talk about the state of the balance sheet? And this is not a question of when are you going to buy stock or anything like that, but what is your view of it at this point?

We did a couple of things a year ago to address first inventory. One of them was, obviously, you go through your product line and you begin to narrow some of its focus and then liquidate that inventory. That is a continuing process, but we were aggressive with that.

The second thing we did was we reduced the safety stock by a week. And what that means is when we place orders in China, there are certain restocking levels that we work with, and by taking one week out of the system, that generates cash. The risk, of course, is that you are not close enough with your forecasting, so it is a careful balancing act.

I can tell you that air freight was minimal last year, so we did that effectively. Then the final thing is there were a couple of items that were heavy in the inventory, not obsolete but heavy, and we reduced those. So the inventory reduction was particularly satisfying because we grew. And in other areas, of course, we then needed inventory.

We also introduced the ScottsMiracle-Gro garden line, and we had to stock for that. So at year end, we were building for garden products for its major launch in 2014.

Regarding the mortgage that we received, that related to the Bridgeport facility which was an environmental challenge a number of years ago, did the remediation. We sold the building, put some of the cash back into completing the remediation, and the property is now completed as far as remediation and monitoring.

We are working with the finals steps to get the transfer completed with the state, which I would expect to be done in the next 2 to 6 months depending on how busy the state is. But that truly says that we have collected the money from the Bridgeport facility and that piece of land is behind us.

The payables really just related to normal payables.

The function -- the payables being down is mainly a function of inventory being down.

Sure, and I know it's just a snapshot in time, but still it looked very clean.

No, I am very happy with that. And it positions us because we continue to be building cash in our Asian operations, and we have the ability to act many places in the world for acquisitions. So I am very happy with that.

Okay, good. And along those lines, you have done a great job picking off things. Sometimes it's just customer lists, sometimes it's companies out of bankruptcy, sometimes it's buildings down in the Carolinas.

Do you see anything more substantive out there, or do you still continue to see kind of smaller things available?

Well, we are seeing pretty active deal flow, and we have always done that. But we tend to generate these transactions. They are not -- some of them come in from bankers, but usually -- for example, Brown Brothers brought us, wow, I mean it's an amazing thing, but they did.

It was a small transaction for them, and we bought it from Brown Brothers through -- and there was a broker. But generally, we are generating them ourselves. And generally, they tend to be something that has -- either they are half a step away from the product family or they are in the product family the way Pac-Kit was for the first-aid kits. We are continuing to look at that.

We are now positioned with a balance sheet that we are very comfortable taking another step forward, should something come along. And all I can tell you is that they are like buses; there is always another one. And you just have to hop on them.

Good. And finally, Camillus you highlighted, and I know that that was -- you were building that into the fourth quarter. It is a more seasonable product. But could you talk about success there and especially sell-through, what you are seeing as far as sell-through and reorders go? Does that continue to expand?

Well, Camillus has been a very, very fun product line. The hunting and fishing guides that they sell, the survival tools we pool together with Les Stroud, all make an interesting package. In the fourth quarter we shipped quite a number of Camillus knives, both for Christmas and holiday gifts, as well as hunting and it was active. And not only that, but yes, it sold through.

We also put together a Camillus survival kit that went into one of the mass-market chains in the fourth quarter. And that has now got reorders for spring, so it carried over and it sold well. As we look into this year, we are continuing to place more Camillus items in other major chains, hunting and fishing chains, that we didn't have before, or we are gaining additional space. So Camillus' growth has been exciting for us, and it has got legs.

Also in Europe -- one thing about Europe, Camillus knife business has been introduced there. And next week we will be at a tradeshow in Nuremberg with a number of European distributors as we launch that very seriously in Europe.

Wow, great, terrific. Well, thanks for the update and congratulations.

Frank DiLorenzo, Singular Research.

Hi, thanks for taking my call. I had a question about the ScottsMiracle-Gro line. Can you give us a little more detail on the wider launch for this year, and the potential for that lineup in Europe and possibly Canada? Thanks.

Well, Scotts is an exciting product family. It is our designs, of course, and we pay a royalty to Scotts. But as we speak, you will be finding ScottsMiracle-Gro both at Walmart and Sam's in the US. So that is an exciting bit of new customers for us.

We have been able to get very good distribution in Canada, as well as other retailers in the US. We are getting interest in places like New Zealand and Australia; some in Europe, not much. But the real impact with the Scotts line is we are making forward progress in the garden area, and we are doing it with excellent products.

My guess is that it will be a good year with them this year with those products, but it will continue to grow we hope for next year as well, as we broaden the product family and gain additional distribution.

Thanks. And a quick question on margins regarding the Carolina facility and the consolidation. When do you think you're really going to see a positive impact from that when everything is finalized? Is that more of a second-half event for this fiscal year 2014?

We have a number of things that we are working on. As I mentioned in the call, we working with the state of North Carolina for incentives, and that is specifically to move some other operations into that facility.

When we do that, we basically have a free facility and we are leaving behind substantial rents somewhere in the US, which you can probably figure the footprint. But the answer is then it really starts to move forward.

I might note that we, in the fourth quarter of 2013, we had about $130,000 of duplicate rent expenses. Because we had the North Carolina facility plus the other two --.

And just moving expenses.

And moving expenses. And somehow we had enough probability that we didn't even miss a beat with the numbers, but that won't be there next year or in 2014. We will be having some moving expenses as we relocate some locations, but the net is probably back half of the year, you start to see some things.

Okay, so it is reasonable to assume that the full effect won't be felt until fiscal 2015?

Oh, in 2015 when we finish these moves, it is going to be very exciting.

Okay, thank you.

At this time, we have one question remaining in the queue. (Operator Instructions)

Richard Dearnly, Longport Partners.

Good morning. I would like to second what Jeff had to say about the balance sheet. You did a great job. Is there more to go on SKU reduction and other ways to save on the supply chain?

Dick, there is, and one of those areas relates to bringing some of the manufacturing eventually back from Asia. And this would not be in the scissor line, but there might be some things we do in first aid. And when we have space to be able to do that, you probably will be able to reduce inventory just because we have now got the turn into the manufacturer. So that is on the horizon.

We are actively working on reducing SKUs, but unfortunately we're adding SKUs, so I think that has kind of run its course. We do have the Fremont facility for sale for $900,000, and there is a serious buyer for that at a slightly reduced price. So I hope I can make an announcement soon about that facility. And then we are just continuing to generate cash.

That is good. As I remember, you were doing well with nonstick kitchen knives in Europe. Did that continue?

It was a very big success, yes. And when you look at replacement of the Schlecker business, which was over $1.5 million in lost business because they went bankrupt and disappeared, those kitchen knives, the nonstick, have done extremely well. And we're working on a similar program that we hope to get in 2014.

Just to repeat what you did --.

Well, there is repeat, same difference (technical difficulty) there is additional products. There is more customers. So when I say repeat, I mean build on.

Right. Any thoughts about bringing those kind of products to the US?

We really don't have the kitchen distribution in the US, and that means not just customers but sales reps, and the marketing brochures and the support. And it is a pretty competitive area, but it is also a big market. But I don't -- I can tell you that that we don't have active plans for doing that this year.

I got you. Other than the relocation expense in the first quarter for the distribution center, are there any other expenses? You were sort of expecting some expenses both in the fourth quarter and the first quarter. Is there more than just relocation, or is that done?

Most of that took place in the fourth quarter. There is still some because we were continuing to move in the first quarter, where we just finished moving one of the facilities. The bigger facility we moved in the fourth quarter, so there will be maybe another $60,000, $70,000 of moving expenses and double running costs.

And then we have some savings should we sell the building. If that happens, then maybe we pick up a little bit there.

Great. Well, thank you. Well done.

Jeffrey Matthews, Ram Partners.

Hi, thanks. Walter, two questions. One is what is your relationship with Walmart like these days? How have you been doing with them, 2013 versus 2012; and does anything look different, better or worse, in 2014? And then I had a follow-up on Amazon.

Well, I've got to be careful what we talk about because with customers, they listen and certainly our competitors do. But Walmart is a very important customer for us. It continues to be growing. You continue to see if you walk the stores more Camillus knives in the hunting area. Some of our safety items at Walmart, you see them online.

You see lots of scissors and rulers in the office area, some in the kid area; you see our pencil sharpeners. Walmart, they've got our paper trimmers. They are doing very well for us and they are growing, and they treat us very well.

Got it. And then on Amazon, I'm just curious if you have any -- you see any conflict there the way other consumer product companies do where stuff shows up on Amazon and undercuts their own sales channels, or if they are a partner of yours.

Well, Amazon as a customer and it's a very growing customer. They don't get any special pricing relative to any of our other big customers. They have a very, very deep product mix of our offering, with images and pricing, and that becomes available online. But you find the same thing at Staples and Walmart and others that are online.

I would suggest, though, that Amazon is a very active marketplace. And for whatever reason, it attracts our products from sources that we have no idea where they come from. And we are quite happy with that because it is another way to sell more.

Sure, great. Okay, I appreciate it.

And it appears there are no further questions at this time. Mr. Johnsen, I would like to turn the conference back to you for any additional or closing remarks.

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

Once again, that does concludes today's call. We appreciate your participation.