Acme United Corp (ACU) 2014 Q1 法說會逐字稿

Good day and welcome to the Acme United Corporation's first quarter 2014 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.

Good morning. Welcome to the first quarter 2014 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 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 net sales in the first quarter of 2014 of $19.2 million, an increase of 9%. Our net income was $368,000, an increase of 19%.

Our US sales, representing our largest segment, increased 13%. This was driven by solid revenues in the Westcott family of cutting and measuring products, an incremental growth of our newly introduced garden pruners and loppers, which are sold under the Scotts and Miracle-Gro brands.

Our first-aid products had strong sales growth in the office channel as well as in the mass-market as safety and industrial distributors. The first aid family is benefiting significantly from the increased emphasis of our traditional office supply customers for broader product selections outside their core office supplies. We expect this trend to continue.

Our international businesses were down due to timing. In Canada, we are anticipating a strong back-to-school, and increased sales of garden implements and Camillus knives during the coming quarters. Europe is working on second-half promotions, which should be comparable to last year.

We are building our Camillus knife distribution business in Europe, which has the potential to be sizable. It is still in its infancy, however, so it will take some time. We have had strong interest in Camillus at recent shows, which is very encouraging.

The consolidation of our US warehousing in Rocky Mount, North Carolina, was completed during the quarter. As we look back, this has been more successful and quicker than we planned. We purchased the 340,000 square foot facility in Rocky Mount with $2.8 million at the end of August 2013.

We renovated it, installed new conveyor systems, and updated the software. By year-end, we had moved the first warehouse and achieved our earnings forecast, despite duplicate running costs and moving expenses.

We moved our Fremont, North Carolina plant, which was our principal shipping location, at the end of February 2014. Duplicate running expenses and moving costs were approximately $100,000 in the first quarter. We then sold the Fremont plant about 10 days ago for $850,000. Acme will report a gain from the sale, of approximately $200,000 in the second quarter.

The Company now has an outstanding facility to handle increased sales and to consolidate acquisitions.

Our balance sheet has continued to strengthen despite the purchase of the new facility, and growth due to earnings and asset management. Net debt at the end of the first quarter was $13.9 million compared to $15.5 million at the same time last year.

As we look for the balance of the year, we are continuing to provide sales guidance of $97 million to $102 million, with net income of $4.3 million to $4.6 million, or $1.26 to $1.33 $1.33 per share. I will now turn the call to Paul.

Acme's net sales for the first quarter were $19.2 million compared to $17.7 million in 2013, a 9% increase. Net sales for the first quarter in the US segment increased 13%, mainly due to the introduction of a new lawn and garden product line and higher sales of first aid kits.

Net sales in Canada decreased by 7% in US dollars, but increased 2% on local currency. Net sales in Europe decreased 15% on US dollars and 21% on local currency, primarily due to the timing of shipments to mass-market customers.

Gross margins were 36% in the first quarter of 2014 versus 36% in the first quarter of 2013. SG&A expenses for the first quarter 2014 were $6.3 million or 33% of net sales, compared with $5.9 million or 32% of net sales for the same period of 2013. 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 $625,000 in the first quarter of 2014, compared with $513,000 in the first quarter of 2013, a 22% increase. Net income for the first quarter of 2014 was $368,000 or $0.11 per diluted share compared to net income of $309,000 or $0.10 per diluted share for the same period in 2013.

The Company's bank debt, less cash, on March 31, 2014, was $13.9 million compared to $15.5 million on March 31, 2013.

During the 12-month period, we purchased the new distribution facility in North Carolina for $2.8 million, added $1.3 million in refurbishments and new equipment for the facility, and paid $1 million dividends. In August 2013, the Company received $1.7 million from early repayment of a mortgage receivable. During the 12 months we also generated $5.7 million in cash flow from operations, including a reduction in inventory of $1.5 million.

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

(Operator Instructions) And it appears we have no questions at this time. Oh, yes we do. Richard Dearnly.

How did the Nuremberg trade show go?

Wow. That is a specific question. For those who are listening, the Nuremberg trade show was a knife show in Germany, in Nuremberg, and it was held at the beginning of March. It was the first time we exhibited in Europe at a show like that. And it was excellent.

We worked on a number of new business presentations. We had a host of potential distributors, some of whom became distributors into various parts of Europe, and we wrote orders. So it far exceeded our expectations.

That's great. Will those orders show up -- are those for 2015 or are those the second half of 2014?

Well, I had an update on that, literally, about an hour ago. And I can tell you that, in this quarter, we will be shipping somewhere around $60,000 of Camillus knives. So it is starting.

Well, good. And it looks like -- your comments about the office channel moving to nontraditional products, which include first aid, is intriguing.

If Staples closes 12% of their stores, and your sales are loosely a third to the office channel, that would imply a sales hit of 3% or 4%, everything being equal, which it never is, because they will probably close the worst stores, not the best stores. Is that right?

And, an offset, I was in someone's office a week or three ago and they order -- all their office supplies come from Staples and they are all online. And I think Staples has said half their sales are online now, so the stores are sort of inventory.

So let me address that a little bit broader as opposed to specifically. The Westcott family performed solidly in the quarter. And that is the traditional cutting implements, the scissors, the pencil sharpener, the Westcott ruler line. It did well.

Now, there was some softness at the retail level in the Northeast and you could see it in the sales that went through those stores. But in the broader picture, the online efforts that all of our customers are doing far exceeds just to the Northeast, their retail footprint.

It also provides the opportunity to broaden the product line rather seamlessly. And Staples has made a big push on that, but so have many of our other customers. And, as a result, in the safety area, we are able to bring in not just traditional first aid kits, but the more industrial ones, the more specialized ones that were going into the broad base of commercial users. And they are now all available.

So we are seeing sizable growth in that area from all of the superstores as they are broadening that mix. Some of them are rebranding, calling themselves office to business supply centers. And I think that is probably an accurate description of the product mix that they are now carrying.

Great. Good description. And then the -- as I remember, there were some big incentives from North Carolina. What are the triggering factors that trigger those incentives?

The question relates to North Carolina providing incentives for our Rocky Mount facility and those are still in discussions. It relates to employment. And as we begin to build that basic employment in Rocky Mount, we probably will become eligible for them.

So we don't have any reflected in our P&L or our balance sheet because we haven't gotten them, but they have been approved and we are working towards that. When they are actually being awarded, I would be delighted to make a presentation to the world because they have been very supportive.

Great. Okay. Thank you.

Ralph Marash, First Manhattan.

I have a question on acquisitions. What would be the upper limit on what you would invest when you make an acquisition?

That is a very good question, Ralph. We are not going to bet the Company on any acquisitions. We are not going to be doing something that is transformative that, in my view, puts our shareholders at risk if it doesn't work. And so there are upper limits at that level.

But, if we were looking at a $15 million to $20 million revenue add-on, that to me is right in an area that I am quite comfortable doing. And, as you can tell, we have been strengthening our balance sheet through inventory reduction and collection of the mortgage with Bridgeport and so forth. And we are in a position to be able to, I think, easily acquire a $15 million to $20 million company. And I know that our team is prepared to be able to execute that.

(Operator Instructions) Michael Wasserman, Moors & Cabot.

What are the strategic ramifications, if any, to the changing currency situation in China and the labor situation there?

Well, first on the currency, that is a key aspect of our cost of sales, because we are buying in US dollars. And, over the past five years, our costs have gone up as the dollar lost about 35% of its buying power against the Chinese currency. And so we have been working to get more efficient, to pass on some price increases over the years, we have had some impact on our margin over the past five years as well.

But, in the past several months, the Chinese currency has weakened against the dollar and, while that is not impacting our margins yet, if that were sustained, it would improve our gross margins. And the percent so far is like 2% or 3%. But that is a lot in the course of a year.

Regarding labor, that continues to be increasing in the Chinese factories. Our typical product is somewhere between 12% and 18% of labor content. And so, depending on what it is, it has a little bit more than in other cases. However, we are working to become more efficient in areas like that, or in our stamping of metal where today we get large rolls of stainless steel and automatically feed them into the presses. Others are in packaging.

We recently installed a new almost automated packaging system in one of the plants that we paid for and that is helping to reduce the impact, if any, of labor. So the overall impact is probably flat on margins with, at this stage, currency -- Chinese currency weakening and us automating some of the operations.

(Operator Instructions) It appears we have no further questions at this moment.

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

And this concludes your teleconference. Thank you for your participation. You may now disconnect. Have a wonderful day.