Acme United Corp (ACU) 2016 Q3 法說會逐字稿

Good day, everyone and welcome to the United Acme Corporation's third-quarter 2016 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. Walter Johnsen. Please go ahead, sir.

Good morning. Welcome to the third-quarter 2016 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 involves risk 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 a strong third quarter of 2016. Our net sales increased 7% to $31.9 million. We had net income of $1.5 million, up 22% over last year and our earnings per share increased from $0.33 to $0.40, which is a 22% increase. These results were above our previous guidance.

Our Westcott family of cutting and measuring tools continued to perform very well. We gained marketshare in scissors, pencil sharpeners and had a very successful introduction of ceramic box openers. We had the best back-to-school performance in our history during the second and third quarters. Our new ergonomic kids' scissors were well-received and our high-performance carbonitride titanium office shears exceeded expectations.

The first aid business grew and continued to gain marketshare, particularly in the industrial and foodservice segments. We expanded the offering to include new ANSI 2015 kits, began production of larger and more intensive first aid cabinets for heavy industry and expanded our refill product family. Our online presence grew substantially.

The Clauss industrial cutting tools also grew due to new high-performance shears, expanded carbonitride coatings and general market strength. Our Camillus hunting knives benefited from new distribution in camping and marketshare gains, and the Cuda fishing family continued to gain new customers and additional product placement.

As you may recall, we acquired DMT in February of this year. Sales of DMT sharpening tools have increased more than we forecast due to successful placement into our global distribution network and its financial performance has exceeded our expectations.

Our Canadian business for the quarter declined 5% due to continued market weakness, but we benefited from improved profitability. We expect to build off the current base with new business initiatives. The European business declined 12% in the third quarter due to timing of promotions, but it grew 36% in the second quarter. We expect solid performance for the year.

More importantly, we are laying the groundwork for continued growth in 2017. The Westcott family has introduced new school, home and office tools. Among these are glue guns with ceramic, non-stick coatings and lightweight designs for the craft, office and shipping workplaces. We introduced new heavy-duty pencil sharpeners with proprietary titanium blades for the school market, and we are expanding the line of ceramic box cutters for heavier duty use.

The first aid business introduced an app this week at the National Safety Conference that permits customers to record first aid supplies when they are consumed by scanning their barcodes and then automatically requisitioning refills. We had a great deal of enthusiasm for the app at the show and look forward to implementing it during 2017 and beyond.

In the Clauss, Cuda, Camillus and DMT product families, we continue to see expanded distribution in the mass market and specialty stores. In 2017, we begin the rollout of new freshwater fishing tools, productline extensions such as carbon fiber gaffs and nets and new diamond-based sharpeners.

We revised our guidance for 2016 after the second quarter. We are now revising guidance again for 2016 based on strong results. The new guidance is $124 million in revenues and $1.63 earnings per share in 2016. I will now turn the call to Paul.

Acme's net sales for the third quarter were $31.9 million compared to $29.9 million in 2015, an increase of 7%. Sales for the nine months ended September 30 were $98.2 million compared to $86.7 million in the same period in 2015, an increase of 13%. Net sales in the US segment increased 9% in the quarter and 15% for the nine months ended September 30. Growth in the quarter came from Westcott school and office products, first aid kits and DMT sharpening tools. Net sales in local currency for Canada decreased 4% in the quarter, but increased 3% year-to-date.

Net sales for Europe decreased 12% in the quarter in local currency, but increased 4% for the nine months ended September 30. Sales in the second quarter of 2016 grew 34% due to a large promotional sale, which in 2015 took place in the third quarter. Gross margins were 37.2% in the third quarter of 2016 versus 34.5% in the third quarter of 2015. The third quarter of 2015 gross margin was negatively impacted by $150,000 of one-time moving and severance costs associated with the move of first aid production to Vancouver, Washington.

The third quarter of 2016 margins are helped by a better product mix and lower costs.

SG&A expenses for the third quarter of 2016 were $9.7 million, or 30% of sales compared with $8.3 million, or 28% of sales for the same period of 2015. SG&A expenses for the first nine months of 2016 were $28 million, or 28.5% of sales compared with $24.6 million, or 28.4% of sales in 2015. The SG&A increase for the three and nine months was mostly due to higher variable selling costs as a result of higher sales and the added DMT business.

Operating profit in the third quarter increased from $2 million last year to $2.1 million this year, an 8% increase. Operating profit for the nine months increased 16%. Net income for the third quarter of 2016 was $1.5 million, or $0.40 per diluted share compared to net income of $1.2 million or $0.33 per diluted share for the same period of 2015.

Net income for the first nine months ended September 30, 2016 was $5.3 million, or $1.49 per diluted share compared to $4.4 million, or $1.18 per diluted share in the comparable period last year. The Company's bank debt less cash on September 30, 2016 was $33.4 million compared to $23.9 million on September 30, 2015.

During the 12-month period, Acme United purchased DMT for $7 million and paid $1.3 million in dividends and $1.4 million in stock repurchases. We expect net debt to decline to approximately $20 million by year-end. We also expect to generate approximately $4 million in free cash flow for the 12 months ending December 31, 2016.

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

(Operator Instructions). Andrew Burns, D.A. Davidson.

Good morning and congrats on year-to-date performance. Walter, could you spend some time on Amazon and the performance you are seeing there and, as you look forward, is it just continued growth as Amazon continues to build its business, or are there any sort of internal drivers to further boost growth with that important account? Thanks.

Well, Amazon is an increasingly important account across all of our product families -- Westcott, Camillus, Clauss, DMT. Europe is becoming in our top 10 accounts, which is basically out of a much smaller base a year ago. In the US, it's particularly showing strength in the first aid area; although it's across the board. And I'm happy to say that they are now also using our first aid kits internally within Amazon.

We are working on a number of projects with them to expand our distribution, particularly in the refill area, as well as in the Smart Compliance kits. But they are not the only growth driver in our first aid area. It's really across the board in many, many of our accounts.

And as you think about growing the first aid business, where are you from a capacity standpoint as you look into 2017? Is there any capacity constraints as you ramp production in Vancouver and Rocky Mount?

Well, there certainly was. That's a very good question. A year ago when we closed, Pac-Kit and, as Paul mentioned, we had $150,000 of moving expenses in the third quarter and there was additional moving expenses in the fourth quarter. So when we moved all that to Vancouver, the goal was to increase the utilization of the plant and increase our operating margins there.

What happened was the business grew at the same time faster than we projected and we then didn't have any more Pac-Kit sites, so we scaled up in Rocky Mount where we have substantial capacity. There's about 100,000 square feet in Rocky Mount that is available for growth. So we recruited a team of people through June, July, August, May actually to start production in Rocky Mount and they are now taking on that growth.

And the good news with that is that we have plenty of capacity. They are less efficient than Rocky Mount -- than Vancouver right now, but that's just an experience curve. So, as we grow going forward, we are looking forward to putting more of that base in North Carolina.

Great. Thanks. Just one last one. If you look into 2017, can you give us any high-level thoughts in terms of -- just from a modeling perspective, it sounds like there's plenty of product initiatives and distribution opportunities, but was just hoping you could help us frame up from a growth or profitability standpoint some of the key drivers we should be thinking about.

Well, first, our internal growth this year probably has averaged -- you can model it, but I think it's probably 7% to 8%, maybe a little bit more. So if you were to take that off of $124 million, that would give you some broad number of top line, assuming we continued that kind of growth. But the first aid business with the new app, and new cabinets, and new refills and the growth we've had there, our expectation would be that that would be continuing.

The glue gun business will be a multi-million dollar launch, we hope, for next year. The Camillus business should be growing in part because we are getting more distribution and the Cuda fishing tools for freshwater are going into major chains around January. So there is growth there.

In the scissor area, there continues to be demand for opening boxes and we are estimating that to be somewhere in the 3% to 4% range in units a year, but more importantly they are buying heavier duty cutting tools because boxes are different than paper and so they're higher margin, non-stick items or titanium items more.

We are also trying to gain some business at some of the superstores in the pencil sharpener area and there's bids for that and paper trimmers. So while I don't have it all nailed at this point, if you were to look at the organic growth we've had this year, it's probably a good place to start.

And then, of course, with DMT performing and with new products being developed and introduced as we speak, we are expecting to increase that business. Of course, there's always the opportunity for another tuck-in acquisition and we are beginning to actively look in that area as well.

Great. Thanks for the color and good luck.

Michael Wasserman, Moors & Cabot.

Other than changes perhaps in general economic conditions, what do you see as the most significant challenges the Company faces in the next couple of years?

Well, one area that we are addressing is I want to make sure that we are absolutely in sync technically with the things we are doing with Amazon and that will be a -- I believe this year Amazon might be our fourth-largest customer. It could move up to our second-largest, or third-largest next year. And so getting the warehouse to be able to handle some of the smaller orders very efficiently, more pick lines. We are doing some work there right now.

On the IT side, we've strengthened that in the past quarter with somebody who was the head of IT at a $250 million company that grew to $1.5 billion and was recently sold and he's had a lot of experience working on acquisitions and bringing in various operating systems and then converting them over. I think that is an important aspect that maybe gets overlooked, but, if you look at trees, they stop growing at a certain point because nutrients can't get to the leaves and I want to make sure we've got a vascular system that's quite powerful.

One of the areas that's increasingly important is the North Carolina facility because, as we grow, we've got a place to put things and now we are scaling up production in Rocky Mount. I want top-shelf leadership throughout the organization there and so we are going to be building in more mid-level supervisors and probably some more technical staff to deal with IT requirements with Amazon.

And maybe those aren't the things that you normally think about, but, in the past year, we've had new locations in Hong Kong, in Guangzhou, China. We've added more space in Fairfield, Connecticut. We outgrew the space in Vancouver, Washington. So those logistics are very important and the execution of that is critical for us to deliver the operating leverage that I hope we can do.

Okay. Any other challenges that come to mind?

Well, when you add people, you've got to train them, but we are doing that as well. You've got the macro things that you just never know about, but the plan that I see for next year is one of execution with growth and I can see that very clearly in my mind.

Okay. Thank you. Keep up the good work.

Jeffrey Matthews, Ram Partners.

Just a clarification. What was the net debt number Paul said at year-end? I thought I heard him say $20 million, but that can't be right?

That's not right. He said $29 million.

$29 million. Okay. And then he said free cash flow of $4 million. Is that correct?

Yes.

Which is down from last quarter. You said $4.5 million to $5 million, I think. What are the big deltas there?

The biggest delta is CapEx spending, especially in our DMT facility.

So, Jeff, we are putting $0.5 million into DMT to expand its capability and that's in particular a big injection molding machine with robotic arms. But with that thing in and doubling the capacity, that sets us up very well for next year and the year after.

And then there's still a bit, so the remainder would be inventory, your receivables, or all of the above?

Jeff, a lot of factors go into estimating free cash flow and I think the difference at this point is pretty small.

Okay. Can I ask it another way, which is is there anything in your receivables or inventories that came out at the end of this quarter that is wildly different than what you might have expected at this time of year?

No.

Okay. I'm just curious, how did you get that Amazon corporate business with first aid? How did you actually do it?

We have a team of people that do corporate selling of first aid and they are a very, very experienced salespeople. They'd be the equivalent of a computer sales guy back in the days when you'd be a Sun Microsystems selling servers. So very sophisticated guys and they are the group that calls on, for example, United Airlines, or McDonald's, or Wells Fargo and they called on Amazon. Now Amazon happened to also be using our products -- I mean selling our products and having success with some knowledge base, but basically it was a corporate call.

Okay. And on Mike's question about what challenges you see ahead, I'm just curious, was there anything in the quarter or year-to-date that was disappointing to you in terms of any productlines or accounts, things that didn't work out?

Well, it's minor, but Jeff Burns from D.A. Davidson covers us and he had a top-line growth of I think $22 million. We came in at $20.9 million and there was $300,000 or $400,000 that was going to shift at month-end and then the Chinese had National Day and they didn't do it, so that rolled into the fourth quarter. It wasn't a big disappointment, but I want (technical difficulty) top line as well.

But on a more serious note, we are getting very, very good reception from our new product introductions and we are happy with them. We had a little bit more inventory in first aid than we expected because of some of it sitting in Vancouver and didn't want to ship it across country and then store it, so we are storing it there and it's eventually going to be consumed, but that's -- those are little tactical things.

And then on the box cutters, is that people buying them to open up boxes from Amazon at the house, which we do?

Yes. So this was very interesting to me. OPI Magazine, which used to be the Office Product International, it's a UK-based magazine that goes throughout the world, they had something on opening boxes for online deliveries and prominently placed across half of a page was one of our ceramic box openers, which surprised me. I know we sell them in Europe, but I guess even OPI is using them. So I was pleased with that.

And as we roll into next year, there will be more of these that are slightly heavier duty for use in places like the -- purchased by the safety managers at a Walmart, or a Krogers, people that are using our first aid and safety items right now for the health of their employees. Here, it's the same buyer for something that's like a very much more safe box opener. So these are being targeted those accounts.

Got it. Okay. And then a bit of an off-the-wall question, but Scotts Miracle-Gro has become something of a marijuana play because they are selling fertilizers and stuff, Miracle-Gro, to that crew. Is there anything in the cutting side that you find that all of a sudden is being sold in weird places to people you didn't expect that might suddenly make a difference down the road or not?

We will do a couple hundred thousand dollars this year probably to marijuana distributors. They love the nonstick herb scissors that we have.

Really?

Yes. Marijuana is sticky. So they love them. But I don't see that as a big growth vector, it's just they pay by credit card.

Thanks, Walter. Appreciate it.

(Operator Instructions). Richard Dearnly, Longport Partners.

Good morning. To pick up on Jeff's questions, how did you win the foodservice first aid placement that you spoke about? Was that also through the sales team, or did that come through Grainger or someone like that?

Dick, I can't get too specific about customers, but we've announced and I think people know that most of the -- there's about 8,000 McDonald's that are customers and there is an example. And that one came when we bought First Aid Only two years ago, 2.5 years ago. So we built off that experience and so you can imagine at a corporate level our guys going from one to the next to the next.

Right.

When we won all of the first aid business at Walmart in the spring, every store, warehouse, office, truck in America and all the retails for that, that was again corporate sales. So we've got a very, very good team and it's different than most of our competitors who make these calls on the local level, on the branch level. We offer substantial savings to the safety managers through our Smart Compliance where refills are about 30% less than what they might get through a van-based delivery.

Right. I see. And is the first aid production in North Carolina fully up and running, or is it phasing in? Where is that?

It's running. We need to put some more equipment in there so that it's got the same quality equipment that our Vancouver, Washington plant has, but it's running and what we did is we took the old equipment that was at Pac-Kit and moved it down there we thought for reserve capacity. It turns out it's not reserve. We are in production, and eventually, during this year, its volumes probably will be about equal to Vancouver, Washington, if we can hit our growth.

Paul, on SG&A, the third quarter of 2015 SG&A was abnormally low as a percentage of sales. And so this quarter is back to normal, or at the high end of normal.

Let me explain that, Dick. Last year, we didn't hit the numbers we wanted to hit and deliver to shareholders, so we reversed every bonus within the Company. We paid none. And this year, we are exceeding our numbers and we are accumulating some bonuses for our people.

Does that account for most -- you called out sales comp, increased sales. Well, that would seem to account for really a small percentage of the $1.4 million of increased SG&A where that comp or bonus comp would seem to account for a lot of it?

Yes. So, of course, we've got bigger facilities all over the place.

But the $1.4 million includes adding the DMT business.

That's what it was too.

So if you look at it purely on a dollar amount, that's $0.5 million and if you look at it on a percentage, it doesn't necessarily have the same impact, but Walter answered the question why the percentage to sales was down -- was up 2% -- points.

Right. And will there be further bonuses accrued for fourth quarter?

Sure. They've got goals. As long as they can deliver them.

Right. Got you. Okay. Thank you.

(Operator Instructions). Richard Dearnly, Longport Partners.

What productlines have been disappointing so far in 2016?

We had a pretty good year.

Okay.

I can't think of one. I'm sure there's something that we've discontinued -- oh, sure -- the Scotts and Miracle-Gro business, we dropped that and we reverted it to our original brand, Clauss, for our garden tools. And we executed that in June and we are shifting over customers now. We had hoped that Scotts branding would help us build that category to $20 million and $30 million and be big players at Lowe's and Home Depot and that didn't occur. It's a very competitive business and we weren't able to crack that. So that was a disappointment, but it wouldn't show in the numbers because we didn't have the expectation that it was going to grow this year.

I see. Okay. Thank you.

Jeffrey Matthews, Ram Partners.

Just on your debt and whether -- I know you are keyed off of LIBOR. Given where we are in the interest rate cycle and given where -- who knows where things go -- but is there any reason to change, to lock in, to go to some kind of fixed rate over the long term, or are you just happy where you are and you've got the flexibility you need and you are not even thinking about that?

Oh, I'm thinking about it and we've had some banks in to look at it. But, right now, we've got floating rate debt at LIBOR plus 2%, so we are borrowing at 2.5% interest. If LIBOR goes up 2 points, we are still at 4.5% and a lot of the fixed rate loans are sitting at around that level. Every time we've looked at this, it's turned out that staying with the floating debt was the right decision because I can tell you that banks were trying to hustle us into some hedges five years ago, four years ago, three, two. It's like the money -- it's a profit center for them. So we haven't, but it would have to go up quite a bit to be very expensive for us.

Okay. Thanks very much.

I'm showing we have no further questions at this time. I'd like to turn the call back to our presenters for any closing remarks today.

I'd like to thank you for joining us today and supporting us as we continue to grow the Company and now we will conclude the call. Thank you very much. Goodbye.

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