Acme United Corp (ACU) 2015 Q2 法說會逐字稿

Good day and welcome to the Acme United Corporation's second-quarter 2015 earnings call. Today's conference is being recorded.

At this time, I would like to turn the conference after to Chairman and Chief Executive Officer, Mr. Walter Johnsen. Please go ahead, sir.

Good morning. Welcome to the second-quarter 2015 earnings conference call for Acme United Corporation. I am Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Offer, 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 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 solid sales and earnings in the second quarter of 2015. In fact, both set records for the period. Nevertheless, they did not meet our expectations. Net sales were $34 million compared to $33.4 million last year, an increase of 2%. Net income was $2.7 million compared to $2.5 million last year, an increase of 6%.

While we did well in many areas, we also faced a number of challenges. Our back-to-school sales of Wescott scissors, rulers, pencil sharpeners, and other supplies were less than forecast. We saw declines in purchases from the office retail chains, which are closing hundreds of stores. While we believe demand for our products continues to be strong, inventory in the closed stores was sent to other sites, resulting in reduced purchases by our customers.

In Canada, one large retail chain exited the entire country and closed over 100 stores. We had won some wonderful back-to-school business for 2015 that unfortunately never had a chance to materialize. Both Canada and Europe had reduced sales and gross margins due to the weakness of the Canadian dollar and euro compared to the US dollar. The impact of the currency in those locations was about 16% reduction in their sales.

The diversification strategy that we began implementing over 10 years ago showed its value in the quarter. When we purchased Clauss Cutlery in 2004, we entered the industrial and hardware market. Our acquisition of Camillus Cutlery in 2007 brought us into the sporting goods market with the oldest knife company in North America. In 2013, we developed and launched the Cuda line of fishing tools, which is proving to be very special. And of course our recent purchases of Pac-Kit in 2011 and First Aid Only in 2014 strengthened our presence in first aid throughout the industrial and safety markets.

The second quarter of 2015 benefited from the new customers and product lines this diversification brought. In particular, sales of our first aid items, the Cuda fishing line, and our Camillus knives overcame the weakness in the office channel. We are working hard to manage product mix, reduce costs, and leverage operations. We are raising prices where appropriate.

There has been an improvement in gross margins of about 1.5 percentage points during the past six months. We are consolidating our two first aid locations, which has resulted in additional cost of approximately $125,000 in the second quarter, but is expected to provide operating leverage in 2016 and beyond.

There are a number of opportunities that we expect to enhance sales and earnings in the coming quarters. We recently won all the scissors at a large office superstore chain, and shipments are now underway. We have a substantial pencil sharpener promotion at a large retail chain that ships in this quarter now, the third quarter. We look forward to strong Camillus knife sales during the fall and holidays. The Cuda fishing line is gaining market share and new customers at a very strong rate. We are building new first aid promotions with a hardware market, and expanding its presence in the industrial channel.

Recently we engaged LHA, a New York-based Investor Relations firm, to help put our story in front of the investment community.

Looking at the remainder of 2015, we are now forecasting about $115 million in revenues, and earnings per share of $1.40 to $1.42. By comparison, we had revenues of $107.2 million and earned $1.36 in 2014.

I will now turn the call to Paul.

Acme's net sales for the second quarter were $34 million compared to $33.4 million in 2014, an increase of 2%, or 4% in constant currency. Sales for the six months ended June 30, 2015, were $56.8 million compared to $52.5 million in the same period in 2014, an increase of 8% or 10% in constant currency.

Net sales in the US segment increased 6% in the quarter and 13% for the six months ended June 30. The growth in the quarter and year to date mainly came from first aid products, Camillus knives, and Cuda fishing tools.

Net sales in local currency for Canada decreased 13% in the quarter and 11% year to date. Sales were lower in Canada for both periods mainly due to a major retailer exiting the Canadian market and soft economic conditions. Net sales for Europe were constant in the quarter in local currency, and increased 6% for the six months ended June 30. The year-to-date sales increase was primarily due to higher sales and the office channel.

Gross margins were 36.9% in the second quarter of 2015 versus 35.1% in the second quarter of 2014. The gross margin percentage was higher mainly due to favorable product mix.

SG&A expenses for the second quarter of 2015 were $8.7 million or 25.5% of sales compared with $8 million or 23.9% of sales in the same period of 2014. SG&A expenses for the six months of 2015 were $16.3 million or 28.6% of sales compared with $14.2 million or 27.2% of sales in 2014. The SG&A increase for the six months was due to higher variable selling costs as a result of higher sales, the addition of sales and marketing personnel, and the added First Aid Only business.

Operating profit in the second quarter increased from $3.5 million last year to $3.9 million this year, a 10% increase. Operating profit for the six months increased 13%. Net income for the second quarter of 2015 was $2.7 million or $0.74 per diluted share, compared to a net income of $2.5 million or $0.72 per diluted share for the same period of 2014. Net income for the first six months ended June 30, 2015, was $3.1 million or $0.85 per diluted share, compared to $2.9 million or $0.83 per diluted share in the comparable period last year.

That Company's bank debt, less cash, on June 30, 2015, was $28.2 million compared to $28.9 million on June 30, 2014. We expect net debt to decline to approximately $20 million by year end.

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

(Operator Instructions). Mike Mork, Mork Capital Management.

Two questions; one kind of short-term. This year you ran into some problems that were unforeseen. Looking at 2016, is this a new base that we should maybe go 12% to 14% up for, or will you have a bigger year in 2016? Let's say, initially, you are going to do $1.50 this year. Just wondering, is that going to -- should the $1.40, $1.42, be the base we work off of? Or were these just extraordinary things this year, and you'll leapfrog up where you should have been in 2016 anyway?

Well, that's a really good question. One of the things with the store closings -- and it's kind of hard to read into what some of these superstores are thinking -- but the Office Depot/OfficeMax merger, of course we knew there were store closings. And we had them the year before, but when they accelerate, it's that extra piece of that was unforeseen. Staples had been closing stores, but this year they are closing 250 stores. These are big numbers.

Off that base, if they do the same thing next year, then we would have a consistency, and I would run off the --.

Off the $1.40, $1.42 then.

Yes, probably. In the longer term, demand for our products I believe is very strong. And I say that because, well, we just won one major superstore chain of -- in the scissor category; the entire category. And that's all new business. And the new products that are coming in for the fall are strong, we hope.

So, if Office Depot and Staples were complete their merger, and instead of between them closing 350 stores -- if they closed 500, well, that would again result in some excess inventory that you work off.

The impact is really biggest in the second quarter, because that's where your back-to-school shipments primarily are; some in the third, but mostly second. And so, these stores close, it gets pushed over into the remaining ones. And they sit there until that second quarter when they can then liquidate them. And that temporarily reduces demand from our perspective.

But there's a lot of good things going on that -- as we roll up into -- through September, October, into the buying area, and we roll into the budget, I will have a much better sense of visibility. But I'm pretty optimistic that we'll get back on track.

Okay, that sounds good. Then the next one, just a longer-term thing. Looking at this [value land], they go back to 2006. In 2006, 2007, and 2008, your operating margins were 12%, 13%. Your return on investment, return on stockholders' equity, was about 20%. Now they're -- operating margins are 8%. Return on stockholders' investment is 11%, 12%. Did something change in the business, just got more competitive? Or can you get back to these higher numbers?

From 2006 until about 2013, the US dollar lost 40% of its buying power, relative to the RMB in China. And that 40% impacted both our gross margins as well as the operating income margin, because we're buying with substantially weaker currency. And we overcame the bulk of that 40% by new products, by productivity improvement, by pricing strength. But that's where the margin was hit.

Okay.

We have started to pick up gross margin in the past year or so, and we're seeing that. Because if the dollar holds, the ability to then reprice with new products, come out with new products, it's off a base that we then can regain some of that margin. I think it would be unrealistic to say that you're going to go back up to 12% operating margins from -- we're somewhere around 8% right now.

You're at 8% right now, right.

I think we can certainly gain if the dollar holds. And at what we're seeing is that the dollar is strengthening, and it may in fact continue to do that even against the RMB. And that's the key currency for us.

Okay. Very good. Thank you very much.

(Operator Instructions). Richard Dearnly, Longport Partners.

Could you talk about the effect of the store closings and the inventory going to other stores, versus the increase in inventory, which looked high? Was that left over because you didn't ship the Canadian business that you expected, and then the store closing? And then part two of that is, is the new office chain that you won able to absorb that inventory?

Well, I'll let Paul answer the first part of that.

Yes, I'll answer the inventory part. The inventory, some of that is just timing. We expect the inventory to decline by $2 million between now and the end of the year. It will correct itself between now and the end of the year.

Relative to the new chain, we just started shipping that really in late June, but mostly starting now. And those items typically are different than what we had in inventory before. It just always works that way.

Yes.

But it's a major initiative for us, and we're very excited about it.

You mentioned you could raise price where appropriate. My guess is with the saggy economy that you're not talking huge increases. But was raising price significant in your gross margin increase?

I don't think that would be the most significant. There was clearly productivity in our first aid area, where we've resourced many, many of the components when we had Pac-Kit, First Aid Only, and PhysiciansCare. We've been working to combine that into a single brand, and bidding that out to the suppliers very aggressively. We're picking up some gross margin there.

We're also picking up operating margins in Vancouver, Washington, in the First Aid Only facility, because we're shifting more production into that from Pac-Kit, which eventually will be phased out.

And during the quarter, we had about $125,000 of expenses related to the unfavorable variances at Pac-Kit, but that's going to be eventually gone.

Relative to price increases, in Europe we've had price increases; in Canada we've had price increases. And that's consistent with the weaker currencies there. We've also had selective price increases in our first aid area, where PhysiciansCare might have had a higher price than First Aid Only, for example. So we harmonize them at the higher level. So there's been some impact of that.

The margin recovery from productivity is quite impressive.

Well, there's a lot more to go with that. And when we finally get the Pac-Kit facility closed, and all running through First Aid Only and some of the production goes to our Rocky Mount, North Carolina, facility. We basically eliminated a plant and all -- it has [ended] in fixed cost, which runs somewhere between $750,000 and $1 million annually. By year end, we should be starting to see some of that impact.

Great. Thank you.

Jeffrey Matthews, Ram Partners.

A couple questions. One is how much of that inventory build in the quarter was unplanned, roughly? I'm thinking of the (multiple speakers).

Our inventory build?

Yes.

[None] of it was planned.

Okay. And I assume it was Target you're talking about in Canada closing stores.

Well, we just try not to (multiple speakers).

I understand. It's just hard not to say the name because it's so -- so when a big retailer like Target closes a lot of stores. When you see that headline cross the tape, that they're going to do it, what do you do? And I'm not asking retrospectively, why didn't you do certain things that would have avoided the impact. But how do you -- what are your actions to (multiple speakers)?

The typical one is if we've got production going -- and you can imagine, we start production for back-to-school shipment in, say, May -- we're doing that in the fall -- November, December. And if there's an announcement like that, we may have to repackage the product into a different language. For example, Canada is French-English; and it would be going to the US, it would be just English. And it might be a different model number. But by and large, we just shift the production into one of the other locations.

Yes, and to put it into perspective though, Target in Canada for the Company wasn't significant. It was important in Canada, but we only made our first real sale in 2014. So for comparable purposes, the back-to-school in the second quarter, it had a big impact (multiple speakers) -- yes, right. We never did -- in 2013 we did zero, for the most part. In 2014 we had our first sale, and now it's gone. So it's not that big of a deal, but it definitely impacts the change in sales for the second quarter of Canada.

Because they didn't get it.

Right.

Sure. No, I understand. And then the -- did I hear correctly that you're going to get your bank debt down to $20 million by year end?

Yes, that's about right.

We get the net debt down to $20 million, so the bank debt should be at around $21 million.

Okay. And that's a pretty big drop. Is there anything special in there, or just normal inventory reduction and --?

Working the inventory down.

Yes, we're working the inventory, and we peak this time of year. Our debt is always the highest on June 30 because of our inventory and our receivables.

Okay. And mentioning China, the Chinese -- the yuan is the only currency in the world that's up against the US dollar this year. Is there any change in your commitment to manufacturing there? Are you just continuing what you've been doing, modernizing, and then looking at some other places?

Well, honestly, we're very good with our operations in China; very good. And the infrastructure, the development team, the engineering, our coating lab, all that -- just working very well for us. And if the dollar basically stays pretty close to the RMB's current levels, we're in good shape. It's when the dollar weakens that we get killed.

Right. Okay, thanks very much.

And it appears that we have no further questions at this time.

Well, if there are no further questions, then I'd like to thank you very much for joining us.

Pardon me, gentlemen. We did have somebody re-queue, if you'd like to take his question.

Of course.

Jeffrey Matthews, Ram Partners.

Sorry about that. I just figured somebody else might want to ask something. Walter, are you thinking at all about -- well first, before I ask that, I hear very good things about the Cuda line. And I wonder what your -- what surprised you about it so far? What distinguishes it from other products out there? Because there have been guys out there selling stuff like that for 100 years.

Okay, well let me refresh a little bit. The Cuda line is our line of fishing tools. And we started developing that in 2013, and launched it about a year ago at ICAST in 2014. It's line of all kinds of fillet knives, chunking knives, pliers, needle-nose pliers, crimpers, hook removers. And we're using a very high quality German steel, where we're putting it through some proprietary processing. The net result of that is that the steel can withstand 5% salt spray test for 500 hours.

And there's really nothing we're aware of on the market that does that. And so, when it was introduced, the ability for it to withstand rusting -- now stainless, even though you would think it doesn't rust, stainless rusts in a saltwater environment. And these tools perform remarkably well.

The designs of them are special, in that the handle -- the blade goes right through the handle. There's a special grip that is patterned after fish scales. And moisture naturally runs off the handles, so that you have a strong grip. And the price point is right in the sweet spot.

So we introduce them at the ICAST show last July. We won the best of show award in the category; totally unexpected. We then quickly broadened the distribution to many accounts that we'd never had before. And it's in the sporting goods area and fishing area. It's in Australia; it's in Europe.

So we created a stir with this product family in an area that I guess hadn't had serious innovation in a long time. But the most important thing is that the products really don't rust, so they perform.

And we have a number of sponsors that have been using these products regularly on their shows, including Wicked Tuna, Deadliest Catch, and the Izumi brothers in Canada. And there's about 21 pros now that have joined and are working with us. We just had our -- the second ICAST show for us, which was in July. And there was a buzz, and it was tangible, and we really do believe we have something special in this category. So we're accelerating the product development and the product introductions, all of which we'll be showing to customers from now through November.

The potential for this market is a lot more than knives. And I think you will begin to start seeing that in gaffs and in nets and in perhaps gloves, where maybe it's hard for a fish to bite through. There's a lot of stuff going on. So, it's a line that we are very excited about. And I think next year where we're really into production, it will begin to have an impact.

That's great. I appreciate that. That's really terrific and comprehensive. Then just one final question. I wonder if you are thinking it all -- or if the Acme Board is considering at all -- joining the folks at GE and Aetna at reconsidering their headquarters in Connecticut, given the potential tax situation there.

Well, at this stage, I think we're letting GE and Aetna fight it out with the state, and see what that impact is. When Pac-Kit closes, we'll have about 35 people in the state, so it will be a substantially reduced presence from where we currently are.

Thanks very much, Walter. Best of luck.

And it appears we have no further questions at this time.

Well again, thank you for joining us. And I look forward to giving you an update on our initiatives this fall. Goodbye.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.