Acme United Corp (ACU) 2015 Q3 法說會逐字稿

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

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

Thank you. Welcome to the third-quarter 2015 earnings 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 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 third quarter of 2015. Our net sales for the quarter were $29.9 million compared to $30 million last year. Net income was $1.21 million versus $1.19 million in the comparable period last year. Earnings per share were $0.33 compared to $0.34 in 2014. And as described in this morning's release, we would have had $0.35 earnings per share without the first aid consolidation expenses.

Let me give you more details by segment. In the US, revenues increased 2%. This was led by the Westcott family of school and office products, which grew 7%. We had record back-to-school sales, with particularly strong growth in our titanium scissors and iPoint pencil sharpeners. More significantly, it appears that the closing of office superstores may have peaked, as evidenced by our record third-quarter back-to-school sales.

The first aid business in the US grew 9% after adjusting for discontinuation of low margin sales and branded medications to several large customers. We landed new accounts in the industrial market, continued to support our office product customers in their business-to-business sales, and started shipping refills to a large industrial wholesaler for use in a vending machine rollout throughout the United States.

We also introduced ANSI 2015 compliant first aid kits, which exceed newly issued OSHA safety regulations. These items are beginning to be shipped now, and we are actively quoting new programs for 2016.

Revenues in the Clauss, Camillus, and Cuda product families were $900,000 lower than last year due to a retail promotion that did not repeat. We are gaining market share with new Camillus knives in camping and hunting, and have booked new business for 2016.

The Cuda fishing family has broadened distribution for next year and we have expanded into freshwater tools. There were a number of market tests with large retail chains of our Clauss tools that are getting strong results. And this would represent upside if the products were taken chainwide.

Turning to international, overall sales declined 11% when revenues were translated into US dollars. In Europe, revenues were $2.1 million or 21% above last year in euros, and 5% in US dollars. Our European business earned $112,000 in operating profit compared to $17,000 in 2014.

Canadian sales were $1.7 million, which was a decline of 11% in local currency, and minus 24% when translated into US dollars. The Canadian economy is in a recession and demand continues to be soft. Operating profit in our Canadian business was $30,000 compared to $95,000 in the third quarter last year.

During the past several months, we have focused on generating cost savings. We have lowered our cost of sales with many international suppliers, which has made us more competitive and generated savings. We have integrated a number of sales and support functions within the first aid-only operation that have streamlined our business and generated savings.

During the third quarter, we shifted most first aid production from our Pac-Kit manufacturing facility in Connecticut to the first aid-only site in Washington. We incurred severance and moving expenses of about $150,000 in the third quarter. We expect to complete the consolidation by year end as planned. We anticipate operating leverage from these actions in 2016.

As we look into the remainder of 2015, we are seeing a solid fourth quarter and full year. We are maintaining the estimate we provided in the last quarter, with about $115 million in net sales, and net income of approximately $5 million or $1.38 per share. This would make it a record year for our Company.

In 2016, we see growth from new products and customer initiatives, which may generate total net sales of $120 million to $123 million. We will give more specific guidance on the coming year after we release our year-end 2015 financials.

I will now turn the call to Paul Driscoll. Paul?

Acme's net sales for the third quarter were $29.9 million compared to $30 million in 2014, approximately even in US dollars and an increase of 3% in constant currency. Sales for the 9 months ended September 30, 2015, were $86.7 million compared to $82.6 million in the same period in 2014, an increase of 5%, and 8% in constant currency.

Net sales in the US segment increased 2% in the quarter and 9% for the 9 months ended September 30. Growth in the quarter came from iPoint pencil sharpeners, titanium scissors, and first aid kits. Partially offsetting this growth was the discontinuation of some low margin over-the-counter medications. And as Walter indicated, a Camillus knife promotion from last year that did not repeat this year. The year-to-date growth came from first aid and Westcott products.

Net sales in local currency for Canada decreased 9% in the quarter and 11% year to date. As you know, a major retailer exited the Canadian market at the first of the year. Excluding this impact, sales decreased 6% in both the quarter and year to date. Net sales for Europe increased 24% in the quarter in local currency, and 13% for the 9 months ended September 30. We had a special promotion in the third quarter 2015.

Gross margins were 34.5% in the third quarter of 2015 versus 35.4% in the third quarter of 2014. In the third quarter of 2015, the Company spent approximately $150,000 on one-time moving and severance costs associated with the move of first aid production to Vancouver, Washington. Excluding the one-time cost, the gross margin would have been 35% in the quarter. We expect to spend an additional $125,000 in the fourth quarter. Starting the first quarter of 2016, we anticipate saving approximately $450,000 annually in fixed costs associated with the consolidation.

SG&A expenses for the third quarter of 2015 were $8.3 million or 28% of sales compared with $8.7 million or 29% of sales for the same period of 2014. SG&A expenses for the 9 months of 2015 were $24.6 million or 28% of sales compared with $22.9 million or 28% of sales in 2014. The SG&A increase for the 9 months was mainly due to the added first aid-only business and higher variable selling costs as a result of higher sales.

Operating profit in the third quarter increased from $1.9 million last year to $2 million this year on 3% increase. Operating profit for the 9 months increased 6%.

Net income for the third quarter of 2015 was $1.208 million or $0.33 per diluted share compared to net income of $1.189 million or $0.34 per diluted share for the same period of 2014. Excluding the one-time consolidation costs, earnings per share would have been $0.35.

Net income for the first 9 months ended September 30, 2015, was $4.4 million or $1.18 per diluted share compared to $4.1 million or $1.18 per diluted share in the comparable period last year. Excluding consolidation costs, earnings per share would have been $1.20 per diluted share.

The Company's bank debt less cash on September 30, 2015, was $23.9 million compared to $24.5 million on September 30, 2014. During the 12 months, we generated $2.6 million in cash flow from operations.

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

(Operator Instructions) Steve Percoco, Lark Research.

Beth Lilly, GAMCO Investors.

Good afternoon. I was wondering, Walter, if you would spend a minute and just -- you made some comments about just the overall environment. As you look at the consolidation in the office superstores and overall demand trends, can you just give us a sense of where you think the economy is at and demand for your products is?

First on the office superstores. Between Staples and Office Depot, they've closed about 400 stores this year, which is a huge number. And what we saw I believe in the second quarter was the shifting of particularly back-to-school inventory into those stores because they couldn't sell the back-to-school in any volume during the months until it came to the back-to-school period.

While that softened our demand in the second quarter, I believe they've washed through that. And so in the third quarter, we were seeing normal demand for back to school. And it turned out to be a record.

I have heard that Staples has closed most of their nonperforming stores, which would be terrific news. Now if Staples and Office Depot complete the merger, there's been talk of about 1,000 stores being closed. And if the estimate turns out to be somewhere between 2.5 and 3 years, that would be at a lower rate of store closures than we currently have experienced. And I am perfectly comfortable then comping against those numbers because the demand overall within our markets continues to be pretty strong.

In Canada, the economy is just dreadful. And I say that -- when I just talk to colleagues and people that I know that are doing business there, between oil and commodities, particularly Western Canada, it's just very slow.

What we are seeing, though, is we are getting placement for next year -- and some this year -- in the hunting and fishing area that we didn't have placement before. And we just had a very strong September in Canada, which was sort of a rebound in office sales. Overall, the macro in Canada is not good. But we are seeing a way to carve a way through to recover.

In Europe, we are finding it to be fairly robust in Germany and in France, and the UK had a decent quarter for us. So overall, I think we are in an okay environment. I don't see some big issues in our markets. Is that a little helpful?

Yes, very helpful. So even though there is consolidation going on in the office superstore market, it seems to me that even as those stores are closing and that's the demand for scissors and pencil sharpeners, I mean. Even though the stores are closing, demand is growing in the market. So can't you -- you can just increase your distribution to other outlets. Is that --?

Sure. If there are less retail stores, there will be probably a pickup with online. There will be a pickup with many of the independent dealers. We sell -- we're the primary supplier of our products to -- both Office to SP Richards and United Stationers, which then distribute to the independents. Demand gets redistributed.

Okay. And so for the most part, would you say that the inventory that was -- and you talked about this, but I want to be clear. So as they've shut down these stores, the excess inventory that was in the system, is that for the most part cleared out now?

If Staples doesn't close anymore stores, then that would be accurate. Office Depot, I'm frankly not sure where they are. I haven't heard -- my guess is there's still stores in Office Depot that will be closed. But if they close at a slower rate, then we have less of a problem going forward and so we should benefit from that.

Okay. But that's been a headwind for the last several months and potentially that could be a headwind for the next year or so.

It could be. But again, the base continues to shrink, so it's less important relative to the superstore. And their impact, they got run out of stores. They can't keep doing 400 stores a year. So that inventory issue will become smaller.

Okay, good. Great. All right, those are all my questions. Thank you very much.

(Operator Instructions) Jeff Briggs, Singular Research.

Quick question for you. In some of the past calls, you guys had mentioned due to the exchange rate situation with both Canada and Europe that you may be looking around or just seeing if anything pops up in terms of acquisitions that may be more attractive due to the exchange rate, and I guess the current economic situation in Canada right now.

I guess do you have any comments on has anything looked intriguing? Or have -- you've kind of taken a look at some things and nothing really pops out?

We've seen a number of things in Europe and a couple in Canada. I couldn't tell you whether we are actively working on anything. Even if I could, I just can't. But we've seen [things] and the buying power in the dollar is favorable to us. So that would be terrific if we found something that was appropriate.

So I guess knowing that you can just comment on any particular deal, I guess in terms of the types of deals that might make sense, would it be -- I guess a couple options would be would it be sort of like a wholesale new product line or sort of extension of current things you're doing into other markets. I guess can you speak a little bit as to the types of things that might make sense for you guys?

So one of the things we are doing is we are expanding our first aid business, which is primarily in the US today. [Into Canada and into] Europe. And in Canada, we've now got the health safety -- Health Canada licensing so that we can sell the products that we intend to sell. If we were to find a Canadian first aid company that could complement those efforts, that would be terrific.

In Europe, we will have the license to be selling first aid kits in January. And similarly, there have been a few things we've looked at in Europe that are in that arena, but we decided not to do them. They weren't what we wanted. But we may find one.

Other products could be that companies that we acquire would be a half step away from our current line. It might be in the cutting area; it might be in Camillus knife area. But I think it would be unlikely for us to be doing a major acquisition that puts the Company at risk. I just don't see a reason to do that.

Okay, thanks. That's helpful.

(Operator Instructions) Tim Call, Capital Management.

Good afternoon. Stock option dilution continues to cost a good amount of the earnings-per-share growth. Do you look at that at all? And how do you look to contain that? Would you ever consider share buybacks, or cutting the stock option issuance? And then on a separate issue, with the Chinese currency devaluation, how much does that affect your business?

First on the stock options. We have a pool of options that we have not awarded at any size this year. And at this stage, we are being very cautious with that, except where we need to be retaining somebody.

Clearly what you don't want to do is continue to issue options and dilute earnings when the earnings aren't growing as robustly as we would like them to. So you can pretty much assume that we have held where we are. The one thing about the options is they're exercisable at prices, mostly $10, $12, $15 a share. So they bring in capital when they were exercised. And that's been over $1 million in the past year.

The Chinese currency is one of the things that has provided a headwind for -- a tailwind for us, and it's an important one. Because we buy in dollars, and it increases our buying power for most of about 60% of our cost of sales. And that decline in currency was somewhere between 3.5% and 4%.

If we are successful in getting some price reductions based on currency, that would improve our gross margins and our operating income. Obviously, we are working on that. You can be sure that our customers are also aware of that and we are working with them to pass on savings where it's appropriate. So it's a plus to our --.

Is that more of a 2016 issue?

It's a thing that you address as soon as you can. And we've certainly addressed it. But when you take product in, it has to work its way through our inventory turns. And then eventually it works its way out. Our inventory turns, 2.2 times; then 6 months from now, you've got the full impact of any savings. And (multiple speakers).

And then if you could talk about --.

Getting direct import sales, because there it would be priced at the time of shipment.

If you could talk about share buybacks and dividend increases?

We have a share buyback program in place. And it's currently a 10(b)5 at $17 a share. So when the stock dropped a little bit in September, we bought about $100,000 of stock. And opportunistically if that were happening again, we think that would be a very good thing for the Company.

Relative to dividend increases, we tend to increase our dividends about every 5 or 6 quarters, and that's been the history since we started. And some of you may not really know this, but we started dividends at $0.01 a share around 2003, I believe. And today, we are at $0.09 a share. So there's been some sizable increases over that time period. And I would guess we would keep that up. But again, I don't want to exceed the earnings growth.

Thank you.

We have no further questions in the queue. I'd like to turn it back to you for any closing remarks.

If there are no further questions, I'd like to conclude this call. Thank you for joining us, and we look forward to giving you another update after year end. Goodbye.

That concludes your conference for today. Thank you for your participation.