Acme United Corp (ACU) 2014 Q4 法說會逐字稿

Good day and welcome to the Acme United Corporation's fourth-quarter 2014 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chairman and Chief Executive Officer, Mr. Bicester Walter Johnsen. Please go ahead, sir.

Good morning. Welcome to the fourth-quarter and year-end 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, and 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 has just completed a record year of sales and earnings. Our revenues for 2014 were $107.2 million compared to $89.6 million in 2013, an increase of 19.6%. Net income was $4.8 million compared to $4 million last year, an increase of 20%. Our earnings per share were $1.36 compared to $1.22.

Every quarter during the year set records. Our fourth quarter had revenues of $24.7 million compared to $21.4 million, and earnings per share increased to $0.19 from 15%(sic - see press release, "$0.15") last year. I am very happy with this performance, and I would like to congratulate our team.

In June 2014, we acquired First Aid Only for $13.8 million. The Company was an innovative supplier of first aid kits for the industrial and office markets, and had thousands of its smart compliance kits in place in key accounts. We saw an opportunity to increase its distribution across our broader customer base and to bring greater value to our customers. We are delighted with our progress.

Our new product efforts have also been successful. The Westcott family of school, home, and office products introduced a new, high performance Carbonitride scissors, Orbit pencil sharpeners, and new lettering products -- all of them well received and are contributing to our growth.

The Clauss team introduced new gardening tools, nonstick scrapers and cutting products, and a proprietary line of knives which truly resist rusting. The Camillus family expanded its array of high-performance knives and expanded to the European and Asian markets.

Our first aid business now constitutes about 35% of revenues and positions us well with our office products customers for expanding beyond traditional office supplies. We are broadening the range of industrial first aid kits and expanding the retail business. There is increasing activity with sales to our mass-market customers and also to sporting goods dealers.

The customer mix of our business during the past five years has changed. In 2009 sales to the office channel represented about 65% of revenues. In the intervening years, this channel continued to grow for us, but was outpaced by other customers in the mass, industrial, and sporting goods markets. Our customer mix in 2014 was approximately 34% office, 38% mass-market, and 28% hardware, industrial, and sporting goods. We believe this broadening of our customer base has created new sales opportunities and reduced our reliance on any single market sector.

On a operational front during 2014, we closed two warehouses in North Carolina and moved into our new 33-acre warehouse and office complex in Rocky Mount. The move was ambitious, but it was successful. We believe we are positioned for growth during the next three years, with much of the distribution infrastructure now in place. There should be operational efficiencies as we grow.

As we look to 2015, we see revenues of $120 million to $125 million and net income of $5.5 million to $5.8 million. If we achieve these levels, our earnings per share would be well in excess of $1.50.

I will now turn the call to Paul.

Acme's net sales for the fourth quarter were $24.7 million compared to $21.4 million in 2013, an increase of 15%. Sales for the year ended December 31, 2014, were $107.2 million compared to $89.6 million in 2013, an increase of 20%. Excluding First Aid Only, sales increased 8% or 9% in local currency. Net sales in the US segment increased 22% in the quarter and 24% for the year ended December 31. The biggest contributors to the sales increase came from Acme first aid products, First Aid Only products, the introduction of a new lawn and garden product line, as well as growth in iPoint pencil sharpeners and Camillus knives.

Net sales in local currency for Canada were constant in the quarter and increased 17% for the year. The sales increase for the year was mainly due to increased back-to-school business and higher sales of Camillus knives. Net sales in local currency for Europe decreased 15% in the quarter and 10% for the year. In the fourth quarter of 2013, we had a large Christmas promotion that we were unable to repeat in 2014.

The fourth-quarter gross margin was 36% compared to 35% in the fourth quarter of 2013. The gross margin for the year ended December 31 was 36% for both 2014 and 2013. SG&A expenses for the fourth quarter of 2014 were $7.9 million or 32% of sales compared with $6.6 million or 31% of sales for the same period of 2013. SG&A expenses for the year ended December 31, 2014, were $30.8 million or 29% of sales compared with $25.9 million or 29% of sales in 2013. The increase for the quarter and the year was primarily due to the added First Aid Only business, higher variable selling costs as a result of higher sales, the addition of sales and marketing personnel, higher spending on new product development, and office moves.

Operating profit in the fourth quarter increased from $763,000 last year to $1.104 million this year, a 45% increase. Operating profit for the year ended December 31, 2014, increased 26%.

Net income for the fourth quarter and year end increased by 31% and 20%, respectively. The Company's bank debt less cash on December 31, 2014, was $21.9 million compared to $11.3 million on December 31, 2013.

During 2014, Acme purchased First Aid Only for $13.8 million, spent $900,000 on refurbishing the new distribution facility in North Carolina, and paid $1.2 million in dividends. In 2014 we also generated $4.6 million in cash flow from operations.

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

(Operator Instructions). Richard Dearnly, Longport Partners.

Paul, a quick data question here. You said European sales, your numbers didn't match the numbers in the release. The quarter decreased 23% in dollars and 15% in local currency. You said something else.

I only referred to local currency.

Okay. And so, they were down 15%?

They were down 15%.

In the quarter, and -- okay, 10% for the year.

For the year.

What was the bump-up in SG&A in the quarter -- year to year and the quarter -- how much of that was related to essentially sales shortfall?

Sales shortfall in the quarter?

Yes.

Well, the sales increased.

Yes. Sales were -- did you all feel that sales in the quarter were a little less than expected?

No, they were right on budget.

Right on -- okay. And the European sales, I take it promotions over there are totally unpredictable?

Well, they are the icing on the cake. If you get them, it's terrific, but it's not what the business is based on. And kind of similar in the US as well. It's just that when you get them in Europe as a percent of revenues, they are substantially impactful.

Okay. How much of the gross margin increase -- and gross margins were really great. How much of that was First Aid Only synergy?

Well, we were clearly getting First Aid Only synergy, and in 2015 this should be about $1 million of improvement in our cost of sales. However, that wouldn't be the case in 2014 because we were working through inventory.

Right.

And that's mostly depleted now. In the fourth quarter, we did have a pickup there, but one of the things that occurred was because we did not get a $1 million promotion in Europe, which was very thin margins, we had higher margins for the rest. And we were selling quite a number of Orbit pencil sharpeners to some major retailers, which have good margins, and they were very successful.

Great.

So it's basically mix: customer mix, product mix.

And how much of the Cuda line got shipped and into stores for the fourth quarter, and did they really have any effect in the fourth quarter?

No. For those that don't know, the Cuda fishing line is a line of rust-resistant knives and tools for saltwater fishing. And we introduced them mid-last year, and we were overwhelmed with orders for the first quarter of 2015. So, while we shipped some, really it's going out right now.

Well, it's good to have overwhelming orders.

Well, these are great products, too.

Yes, I'm looking forward to using them. Inventories seemed to be higher maybe than expected. Was that relative to new products or what happened there a?

Well, a big part of the increase was just that we -- in buying First Aid Only, of course, we added inventory, and that's about $2 million. Other than that, it's just prepping up for new business in 2015.

Okay. That's super. Thank you.

(Operator Instructions). Richard Dearnly.

Well, if no one else is going to ask anything, how is the integration of First Aid Only's EDP and what not?

The integration of First Aid Only is progressing very, very well. The most important thing after we purchased the company was not do in any way impact the customer experience, and I think we've been able to accomplish that.

So we ran the First Aid Only brand in parallel with PhysiciansCare and Pac-Kit, our other two first aid lines, and that was complicated on the back end. But to the customer, they didn't see it. And now we've got our systems integrated throughout First Aid Only. We're narrowing down the components so that they are more consistent across the brands. We're beginning to do more training with the combined sales forces and our customer sales forces. So at this stage, we're really building on the revenue base. It's going well.

And do you think it will be complete by June?

It depends what complete means.

I'm sure it's ongoing.

Yes, as far as rationalizing some of the components that go in first aid kits, that's been accomplished, and we're working very hard now to improve some of the productivity in the First Aid Only plant. We will be accessing some of our Asian sourcing to take components from Asia directly to our first aid business, bypassing intermediaries. So there's a lot of work yet to do, but in the initial stages that we set out, that's bearing fruit today, and it's well underway.

Good. Okay. Thank you.

Steve Percoco, Lark Research.

Could you talk about your capital spending budget for next year? How big will it be, and where do you anticipate spending the money?

Our current plan is about $1.2 million in capital spending. Some of that will be going into computer systems. Some of it will be going into equipment at the First Aid Only facility. For example, screen printing with a pretty modern line for the cases.

It's going to be substantially down from the previous two years. As you know, we bought the plant in North Carolina in 2013 and then we refurbished it in 2014. But that's behind us now, so it's really money being put into our computer systems and into First Aid Only's production. And it will be about $1.2 million.

Okay. And then finally, could you talk a little bit more about Europe? As I looked at it, except for, I think, 2012 and 2013, the business there has been consistently unprofitable. I don't know from a cash flow point of view whether it's positive or not, but it just seems to me -- I understand you are rolling out some new products to Europe. Obviously you're staying with it, but was it profitable in 2014? And if it wasn't, what are your longer-term plans? I mean do you see that it makes sense to stay there over the long-term?

Well, the answer on Europe is we service our global customers, and so it is growing with Staples and Office Depot and our office channel. We are leveraging our customer relationships with Costco and Asda, Walmart subsidiary.

So it's very important from a customer service perspective. We have skinnied back a couple of positions, which should put it in a pretty good place for being lucky in the future. And what that means is should we land some promotions, that's just extra gravy, which is where you want it anyway.

The markets for first aid and our hunting and Camillus and Cuda fishing lines are -- those markets are just as big in Europe as in the US, and the customers are asking for those products. So there's a lot of opportunity that we think we can build on.

Having said that, if we had landed just one mass market account, you wouldn't be asking that question because it would have been throwing off a ton of cash, but we didn't do that. But, again, in the scheme of building the business, that is sort of insignificant.

Okay. Thank you.

Michael Wasserman, Moors Cabot.

Can you comment on any recent developments in China, for better or for worse, in terms of labor costs and the like, currency, and how it's affecting the Company at the moment, please?

Sure. The labor costs continue to be rising, and that's been a trend for about the last five years. And in the past year, they've increased about 10% for our workers in China and about 5% to 8% in Hong Kong. So there's been clearly upward pressure.

The offset to that has been a fair amount of automation, and that's continuing. It's done at the factory level, so we're not paying for that automation. But we are benefiting from pretty stable costs.

With the dollar so strong, it has pretty much stopped the decline that we've had over the past five years, where every year we were facing the headwinds of a dollar losing its buying power.

And that's no longer the case, at least it hasn't been for the past 12 months. And as we are looking into 2015, we're not seeing any pressure from a rise in the RMB or a decline in the dollar. In fact it's just the opposite.

So, with a stable currency, that allows us to be able to generate cost savings and work to possibly raise the margin in this year and going forward. Again, if the dollar were to weaken substantially, then that wouldn't be so easy, but I'm looking to try to recover some of the margin that we used to have five years ago. So those are good changes.

Any changes in shipping costs that are material?

Well, the shipping costs are not so material as changes are. What has been a very big hassle is the US workers in the Long Beach and LA ports. And the reason there is just a continual work down and bickering about wanting more money. We haven't used the LA ports very much for the past several years, and we ship through the Panama Canal and then over to Norfolk, Virginia. But we did get hung up with some Cuda items outside of Long Beach at Christmas that we might have been able to ship this year or in 2014. It's not the cost so much; it's just workers that don't want to work.

And given that cost isn't that big a deal on the East Coast side of things, is it fair to assume that you will not benefit very much from the expansion of the Panama Canal and the ability of larger ships to make it through, which in theory should lower shipping costs a touch?

That would be terrific for us, because Norfolk, Virginia, is very close to our major distribution center in Rocky Mount, North Carolina. And we're currently using Norfolk for the bulk of our freight, so a larger vessel going through the Panama canal would be wonderful.

That's not far away.

Yes.

Okay. Thank you.

(Operator Instructions). And currently there are no questions in queue.

Well, if there are no further questions, let's call this complete. I'd like to thank you for joining us. Goodbye.

This does conclude your teleconference for today. Thank you for your participation. You may disconnect at any time.