Acme United Corp (ACU) 2014 Q3 法說會逐字稿

Good day and welcome to the Acme United Corporation's third-quarter 2014 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 third-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 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 an excellent third quarter in 2014. Our sales for the quarter were $30 million compared to $22.1 million last year, an increase of 36%. Excluding the impact of our First Aid Only acquisition, revenues grew 16%. Net income for the third quarter of 2014 was $1.2 million, an increase of 24%. EPS for the third quarter was $0.34 compared to $0.29 last year, an increase of 17%.

Our internal growth resulted from strong back-to-school sales, robust first aid revenues, and increased demand for Camillus knives. Particularly noteworthy were the growth in iPoint pencil sharpeners throughout the year and the increasing customer base with our Camillus knife family. Our Westcott kids scissors one the Teacher's Choice Award which is particularly rewarding since it reflects the overwhelming opinion of educators in the classroom.

The financial and operational performance of First Aid Only was excellent. We delivered strong sales and made headway in the integration process. Our initial focus operationally was to combine the salesforces and products with attention to improving customer service and expanding the items that we could provide. We believe this has been done well. Our next steps are rationalization of duplicate products, integration of our computer systems, and shifting some production to the First Aid Only site to leverage fixed costs.

First Aid Only has been accretive since the first month of ownership, and we anticipate generating savings as we move forward. Sales in Canada were strong due to an excellent back-to-school, as well as new lawn and garden sales and new customers for Camillus knives.

In Europe we had excellent back-to-school and office product sales and our medical instruments were very strong. However, Europe did not have the same promotional revenues this year compared to last. We are working to regain the mass market momentum for next year.

We donated over 150,000 respirator masks to MAP International which promptly sent them to Liberia to fight the Ebola crisis. There were many reasons to do this. West Africa is overwhelmed with the disease and the doctors do not have the medical supplies to treat the population. We are positioned to supply blood-borne containment kits, fluid isolation kits, and custom kits.

We've had many inquiries for various items from large cities, police departments, as well as medical and industrial distributors. In the coming months we expect to work with these groups to meet their needs.

Our guidance for 2014 is about $107 million to $109 million in sales with EPS of approximately $1.34. For 2015 our preliminary revenue guidance is $125 million, but we are still developing the bottoms-up forecast. I'll now turn to call to Paul.

Acme's net sales for the third quarter were $30 million compared to $22.1 million in 2013, an increase of 36%. Sales for the nine months ended September 30 were $82.6 million compared to $68.2 million in the same period in 2013, an increase of 21%. Excluding First Aid Only, sales increased 12%.

Net sales in the US segment increased 41% in the quarter and 25% for the nine months ended September 30. Excluding First Aid Only, sales increased 16% and 13% respectively. The growth in the quarter came from Acme first aid products, First Aid Only products, and Camillus knives. The year-to-date growth came from first aid, pencil sharpeners, Camillus knives, and the introduction of a new lawn and garden product line.

Net sales in local currency for Canada increased 28% in the quarter and 19% year-to-date. Sales were higher in Canada for both periods mainly due to our strong back-to-school, introduction of lawn and garden products, and higher sales of Camillus knives.

Net sales for Europe decreased 5% in the quarter in local currency and declined 8% for the nine months ended September 30.

Gross margins were 35.8% in the third quarter of 2014 after adjusting for the donation versus 35.9% in the third quarter of 2014.

SG&A expenses for the third quarter of 2014 were $8.7 million or 29% of sales compared to $6.5 million or 30% of sales for the same period 2013. SG&A expenses for the first nine months of 2014 were $22.9 million or 28% of sales compared with $19.3 million or 28% of sales in 2013.

The SG&A increase was mainly due to the added First Aid Only business, 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 $1.4 million last year to $1.9 million this year, a 37% increase. Operating profit for the nine months increased by 23%.

Net income for the third quarter 2014 was $1,190,000 or $0.34 per diluted share compared to a net income of $959,000 or $0.29 per diluted share for 2013. Net income for the nine months ended September 30 was $4.1 million or $1.18 per diluted share compared to $3.5 million or $1.07 per diluted share in the comparable period last year.

The Company's bank debt less cash on September 30, 2014, was $24.5 million compared to $13.2 million on September 30, 2013.

During the 12 months we purchased First Aid Only for $13.8 million, spent $1.5 million on refurbishing the new distribution facility in North Carolina, and paid $1 million in dividends. Also during the 12 months we received $800,000 from the sale of our Fremont, North Carolina property, and generated $5 million in cash flow from operations.

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

(Operator Instructions)

Jim Collins, Portfolio Guru.

Good afternoon, guys. Great quarter. Just one question on the working capital. Accounts receivable went up 37%, payables up 31%, and sales were up 21%. How much of that is attributable to First Aid Only and should we be modeling out a higher sort of days sales outstanding going forward given the different business mix that you have today?

I will attempt to address that. Paul is closer to the numbers. The primary reasons were dated receivables are the back to school, and we had a pretty strong back-to-school season this year. So those typically get collected about four weeks later than the normal receivable. However, First Aid Only has had an impact in part the inventories for the manufacturing operation turn faster than our typical import business, so we'll see an improvement in the turns. I would guess because of the customers that we overlap -- and these big office customers and many of the industrial distributors -- that they would stay about the same. So I would suggest to you that the inventory would be the primary change and it could be favorable to the Company.

Paul, do you have more specifics?

As he said the receivables are up 37% and sales in the quarter were up 36%. The average days sales outstanding is about 60 days and that's pretty close to a quarter. So the accounts receivable increase is consistent with the sales increase, and the inventory increase is mostly attributed to the First Aid Only addition.

Okay. That answers my question. Thank you.

(Operator Instructions)

Richard Dearnly, Longport Partners.

Good morning. What percentage -- or could you give a feel for how big back to school is as part of Westcott? Or as part of the Company -- either one.

Well, that's changing because now with First Aid Only obviously the first aid is having a more consistent base, so that growth that occurs as a percent has declined with the impact of First Aid Only. I would really be misleading to tell you that I know that number offhand because FAO has changed the ratios. However, I can tell you that if you look historically, sales in the second and third quarter were the strongest for the Company. That impact is gradually shifting to more in the fourth quarter as we get more Camillus knives and hunting and back to school.

The first aid business tends to make the base broader across all quarters. The garden business is much stronger in the first quarter and that's going to be a changeover change over previous years as we continue to grow that. So, we are seeing a little bit more balance then we had only a couple of years ago. But I don't have a specific numbers, and I don't think we had ever broken that out.

Okay. And then when you say back to school was strong, is that just more kids scissors? Is that iPoint and other product and gaining SKU share?

Well, when I say back-to-school strong, we are specifically talking about the Westcott product shipment.

Right.

And it's not just kids because the teachers are also purchasing heavy-duty pencil sharpeners for the classrooms; schools are as well. They are also buying some of the rulers -- the Westcott rulers. Some of the C-Thru products that we have -- the lettering and stencils. The kids scissors did have a good back to school. The iPoint pencil sharpener continued throughout the year to be stronger than it had ever been and was a strong contributor. We are also making product with our nonstick scissors which are being used in classrooms. So just in general it was very encouraging. And then to get the Teacher's Choice Award was sort of a confirmation that -- guys, you are doing something right here.

Right. When you get an award like that do you notice it in sales? Will that product line do better -- noticeably better than last year?

Well, it helps you when you are in the selling season -- for example we are right now. So for next year those items will have some attention. I think buyers pay attention to that. But there are so many variables that relate, too. And cost is a pretty big one. You know it's nice to win awards but at the end of the day you have to deliver value.

Right. Could you take a guess at any margin drag in the quarter from First Aid Only?

I'll turn that to Paul. I know that First Aid Only's margins, as we speak, are about comparable with our corporate margins and there's an opportunity as we leverage our combined purchasing with Pac-Kit and PhysiciansCare to improve them. But Paul why don't you be a little bit more specific?

Well there isn't a drag and, as Walter said, they are comparable to the corporate margins. So they are not affecting the margins one way or the other at the moment.

And is that both gross margin and operating margin?

No, the operating margin on First Aid Only is higher.

Higher now?

Yes. And it will continue to be higher than corporate as we begin to put more and more into the facility.

Right. Okay. Thank you very much. Sounds good.

(Operator Instructions)

Richard Dearnly, Longport Partners.

I forgot to ask about Westcott's mix. How has that been trending the last quarter or two? The higher price versus lower price sellthrough?

I think the mix has been fairly neutral. The effect -- there really isn't much of an effect on mix.

Okie doke. Good. Thanks.

Jim Collins, Portfolio Guru.

Just one quick one. I was checking my notes from the last conference call, and it looks like you are talking about earnings of about $1.34 for 2014 and revenues of $125 million for 2015. On the last conference call you said $135 million to $138 million for this year and revenues of $125 million to $130 million. I realize these are very, very small differences, but is that a reflection in your outlook at all or is that just more granularity as the year has passed?

Well, first looking out to 2015 -- I could've said $125 million to $130 million. We really don't have that nailed down yet. When we do our modeling we tend to be looking at 10%-ish internal growth plus the impact of First Aid Only and other acquisitions. Well, that gets you to a pretty quick $125 million plus. This quarter we grew 16% so it was greater than our internal modeling for next year.

2014 there were a couple of things that -- there is some more granularity. One of the things is we are in the midst of moving our operation here in Fairfield because we need more space. We had to move Hong Kong because we needed more space. So there's a little bit of expense here that we are incurring.

And then when we donated the masks to MAP International, that reduced the earnings per share by about $0.01 this quarter. But I can tell you that we were in the mainstream of many, many quotes and it raised our visibility quite significantly. So there was a benefit to that, in addition to -- there's a lot of talk about getting supplies over to Liberia in particular and nothing happens. We've had plane loads of things going over now. So I know it's perhaps a little bit off the call, but people don't act on it we are going to have a pandemic. And it's exponential so you can't think it's isolated. So we were happy to play a very small part in that.

Right. It sounds like the respirators were about $0.01 and moving offices was about $0.01. So maybe that -- we are now at $1.34 where we might've been at $1.36?

That's ballpark right. That's ballpark right.

These are such tiny differences -- I get that. And then just a follow-up, obviously we have heard a lot about Ebola plays and things like that, but I think the bigger issue is that it was just so blatantly obvious that protocols were not followed on the ground, especially in Dallas. Is that really where you are seeing interest in greater supplies is from sort of what would be normal first responders? I think you mentioned police, municipal government. Just wondering a little more color on that.

As an example, in New York two days ago Governor Cuomo announced that he was working to properly equip first responders. What that means is when you have an event you don't then try to buy you something because it's too late. And so a number of locations are being proactive right now, evaluating their needs in the event that there is some reason to use the masks, the isolation kits, the full bodysuits -- which we don't sell.

So that's what they are working on right now. I think the lack of protocol was really a wake-up call. These things come across borders. I can tell you that when I'm on an airplane, which I tend to be on sometimes, I just worry about where that plane has been -- especially some of the international flights.

Yes. That's a good point. Thanks again for taking my questions, Walter.

(Operator Instructions)

Michael Wasserman, Moors & Cabot Investments.

Hi, Walter. I was wondering if you would perhaps comment a bit on your broad brush view of the world as we sit here in late October versus say a year ago in terms of varying impacts on Acme's businesses including currency, raw material cost, overall economic environments, et cetera.

Sure. One of the things that we found is that the dollar is strengthening, and although I'm not an expert on forecasting where the dollar goes -- because a lot of that this policy -- it appears to me that the dollar is in a good place to continue strengthening. So for the US buying Chinese goods, which is our primary activity -- that helps us.

For many years we were facing something quite different, which was the headwinds of the dollar depreciating over five years about 40%. So there were price increases; there were cost savings, intense cost savings; product redesign -- a lot of things to be able to offset 40% decline in our buying power.

Well, in the past year we've had pretty much stability with the US dollar against the RMB. In fact it's been -- the dollar has strengthened slightly. So that's a plus and what I am hearing is we can expect more of that in the coming year.

Regarding interest rates, we have cash in Asia and we have $27 million of debt here in the US. So, obviously, we are sensitive to interest rates. We borrow at LIBOR plus 1 3/4 -- so that's a little bit over 2% interest. What I'm hearing is that we are expecting stability in that -- perhaps on the 10-year bond and maybe it is going to be up to -- instead of 210 it might be up to 230 next year. But that's insignificant to us in our borrowing.

I worry about some of the political things that are going on; in particular I worry about gas for Europe and the Ukraine. I worry about the US being aggressive with borders against China. These things can be disruptive to our business. Frankly, I worry about Ebola. Because that can be a pandemic. But I think there's enough attention now that that's not going to occur.

As we're laying out our plans we are seeing good interest in our products in both the Camillus knives, the new fishing line -- the Cuda line -- we are continuing to see growth in our first aid business. Westcott is holding and growing. So I'm feeling good, but I think probably if you ask me where the biggest concern is it's the political environment which can be kind of dicey.

And you didn't comment I don't think about raw material costs, generally.

Well, raw material in a scissor -- the biggest raw material is stainless steel and the second-largest is the plastic handle. The plastic has not dropped in the past two months from our purchasing, anyway. So it's about the same, although I would guess that in time as the feedstock prices drop, then we should pick up a little bit. With stainless steel we are about the same as we were a year ago, so there's not been inflation and that's good for us because if we have a stable or slightly more favorable cost of materials it gives us the ability to offset perhaps a labor increase in China which will occur.

Right. So that's going to continue as it has for years and likely to for years more?

What, the wages in China?

Yes.

Well, I think that's going to be continuing for quite a while. I'll point out that we pay the employees in China -- costs less than our healthcare in the US and they are both appreciating in double digits. So it's not as if there is an alternative of bringing it here, although there are places elsewhere in the world that we are looking at right now. That's really a change from the past.

Okay. Thank you.

(Operator Instructions).

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

Thank you. Ladies and gentlemen, that does conclude our conference for today. We would like to thank you for your participation, and you may now disconnect.