Acme United Corp (ACU) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Acme United Corporation's Fourth Quarter and Year-end 2017 Earnings Call.

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

Good morning. Welcome to the Fourth Quarter and Year-end 2017 Earnings Conference Call for Acme United Corporation. I'm 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 reported net sales in 2017 of $130.5 million, an increase of 5% over 2016. This was the seventh year in a row of record sales for the company. Our net income in 2017 prior to adjustments due to tax reform was $5.3 million compared to $5.8 million in 2016. Earnings per share were $1.42 compared to $1.64 in 2016. During the fourth quarter of 2017, our sales increased 14%, and net income prior to adjustments due to tax reform increased 8%.

All of our major product lines gained market share due to online growth. However, we had a large pencil sharpener promotion at a major retailer that did not repeat in 2017 and reduced Westcott sales for the year. We've regained this business for 2018. Our online sales have increased in excess of 100% annually for the past 3 years. We believe we are driving this growth due to outstanding products with excellent reviews, strong content and search and promotional strategies that help us to continue to gain market share. Despite weakness at many retailers, wholesalers and superstores, our overall business continues to grow. We are optimistic about the prospects for continued momentum during 2018.

Our acquisition and successful integration of Spill Magic, which we acquired in February 2017, was one of the highlights of our year. We added marketing and support staff to build the business and placed its products at major new mass market accounts, industrial and safety distributors, online customers and into the office products market. We look forward to growth in 2018 due to the additional product placement.

Our international businesses also grew. In Europe, sales increased 18% due to growth at DMT, our office products business and online sales. In Canada, revenues grew 2%. Both subsidiaries contributed solid earnings.

We have continued and worked on improving our warehouse operations to respond to the challenges of our online growth. During the year, we added experienced executives and managers to improve the accuracy, speed and cost of deliveries; installed new software modules to improve the efficiency of the pic lines; and began building a mezzanine level for storage of online products close to the point of shipment. We are seeing progress in reducing costs and look forward to benefiting from those improvements during 2018.

The Tax Cuts and Jobs Act helps us directly in generating cash and increasing profits. We've already repatriated $5.8 million from our overseas subsidiaries and reduced debt. We expect our investments in new equipment for the expansion of the DMT, Spill Magic and first aid facilities to receive accelerated depreciation for tax purposes.

We're trying to better assess the impact of our online business in 2018 before providing guidance for the year. As I've mentioned in past calls, online sales are difficult to forecast. And I can also add that, as of now, we're continuing to grow with strong momentum. I will turn the call to Paul.

Acme's net sales for the fourth quarter were $30.2 million compared to $26.4 million in 2016, an increase of 14%. Sales for the year ended December 31, 2017 were $130.5 million compared to $124.6 million in 2016, an increase of 5%. Net sales in the U.S. segment increased 15% in the quarter. Sales for the year ended December 31 increased 4%. Sales, excluding the Spill Magic acquisition, declined 2%. Sales of first aid products were strong. But due to a large back-to-school promotion that did not repeat this year, Westcott school and office products sales were slightly lower than 2016. Spill Magic contributed $6.5 million to sales. Net sales of local currency from Canada increased 9% in the quarter and were constant for the year. Net sales in local currency for Europe increased 8% in the quarter and 16% for the year. Growth in Europe came primarily from market share gains in the office product channel and sales of DMT sharpeners.

The gross margin was 35% in the fourth quarter of 2017 versus 37% in the fourth quarter of 2016. The fourth quarter of 2017 margin was lower than fourth quarter 2016, mainly due to high promotional spending in e-commerce business. The gross margin for the year was 37% compared to 37% in 2016.

SG&A expenses for the fourth quarter of 2017 were $9.9 million or 33% of sales compared with $9.1 million or 35% of sales for the same period of 2016. SG&A expenses for the year ended December 31, 2017, were $40.1 million or 31% of sales compared with $37.1 million or 30% of sales in 2016. The increase in the quarter and year was primarily due to higher variable selling costs as a result of higher sales, the added Spill Magic business and the additional sales marketing and IT personnel.

Adjusted net income for the fourth quarter of 2017 was $590,000 or $0.16 per diluted share compared to net income of $546,000 or $0.15 per diluted share for the same period in 2016, an increase of 8% in net income and 7% in EPS. Adjusted net income for the 12 months ended December 31 was $5.3 million or $1.42 per diluted share compared to $5.8 million or $1.64 per diluted share in the prior period, a decrease of 9% in net income and 13% in EPS.

The company's bank debt, less cash, at the end of 2017 was $37.8 million compared to $27 million in December 31, 2016.

During the year, we spent $7.2 million on the Spill Magic acquisition, $1.4 million on dividends and generated $1.7 million in free cash flow. Additionally, we've purchased our first aid manufacturing and distribution facility in Vancouver, Washington for $4 million. This property was recently appraised for $6.25 million.

Some comments on GAAP net income and taxes. GAAP net income that included a onetime charge for $1.25 million was a loss of $655,000 in the fourth quarter and a gain of $4.1 million for the year. The tax charge was related to the U.S. tax reform enacted in December 2017. $1.17 million of the charge was associated with the onetime transition tax [for deemed] repatriation of accumulated foreign earnings, which are payable over 8 years. As the new tax law allows for a onetime repatriation of cash held abroad at a lower tax rate that would have been paid under the previous tax plan, we have so far repatriated approximately $5.8 million that will be used primarily to fund capital expenditures and acquisitions. With the corporate tax rate being reduced, we expect the company's effective global tax rate, excluding special items, to be reduced by approximately 600 basis points.

I will now open the call to questions.

(Operator Instructions) First, from D.A. Davidson, we have Andrew Burns.

Just a couple of follow-ups for you here. Just in terms of the loss of the Westcott pencil sharpener, was that the variance in 4Q? And was that product already built and we sort of reship in '18? Or what's the process there?

We lost the business in the second and third quarter. As you can imagine, that's mostly back-to-school, and it was a sizable loss. We will be shipping that in the second and third quarter of 2018 as we'll now recover it.

Okay. And then so the variance versus guidance in the fourth quarter?

Well, there was about $0.5 million of product that we did not ship in the fourth quarter due to basically timing that shifted into Q1, but there's always some of that.

Okay. And then as you think about holding off on providing annual guidance between now and I guess late April when you report, are you sort of waiting to firm up one particular retailer? Or does that time allow for much greater visibility on the back-to-school sell-in? Just trying to better understand the reason for the waiting.

Well, the primary one is the online business is difficult to forecast, and it continues to be growing at a very fast rate. And it's cannibalizing weaker sales at the wholesalers for office products, at the retailers, many of them, some of the office superstores. And so while we're gaining market share, we're also having some attrition with these other accounts. And you can see that with many of your retailers globally who are struggling and it's going online. We're doing the same thing. And what we're trying to figure out is the margin mix of the new business, the margin mix of the lost business and it's complicated. And the good news is that our online business is now very sizable. One of the online retailers was our third largest customer in 2017 and could very well become our largest customer this year. So we're adapting to that change in customer mix, but it also -- what we've got on the shelves at the stores is different than what we have online. In some cases, higher margin; in some cases, lower margin. And we're trying to calibrate that as it now shifts into a bigger chunk of our overall sales. So I hope that helps a little bit.

And then just one last one as you look forward in terms of a great year from Europe, just for sustainability and sort of the key drivers for that market as we look forward.

I'm sorry, Andrew, you're talking about Europe?

Yes, Europe. Sorry.

Well, Europe did have a very, very -- it's a record year. And so far this year, it's continuing at a good pace. One of the stars has been the DMT product line, which has high margins and which is growing strongly in the European market. Amazon in Europe is also having an impact and is now the largest customer we have in Europe. We've also gained office products business, so it's hitting on all cylinders right now.

Moving on, we have Jeff Briggs from Singular Research.

It's Robert Maltbie sitting in for Jeff Briggs this morning. So 3 questions. Regarding Spill Magic, looks like you're getting some good growth there. Is there -- do you have a ramp of forecast on that for 2018 or a feeling of that? Also regarding the online business, is there -- in terms of the difficulty to forecast, are you seeing any type of, I guess, per unit or SKU, are you seeing any type of price erosion there? And then final question regarding M&A, are you on the lookout for possibilities for 2018?

All right. First, on Spill Magic, we've just installed the new equipment in the Nashville, Tennessee facility, which allows us to produce smaller containers of Spill Magic for both retail and online sales. And that's very exciting for us because it reduces not only the labor, but it increases the throughput. I have just personally placed an order at Amazon for Spill Magic, and I'm waiting for a delivery, although it's been confirmed. So it's just beginning to flow into the online area. The major distributors, Grainger, Fastenal and so forth, are carrying the product. We've just introduced it into Europe at Paperworld in February, and so we'll see what we can do there. We have a lot of customer interest and I was part of that, so I'm not going to give you a forecast for it. It's a reasonably high-margin product, and it will grow. And we're spending money to reduce the cost and make capability to produce it. With the online business, it's not really a question of price erosion. We are selling in the Westcott product family a lot of very high margin and exciting coated scissors, in particular, in volumes that don't represent what happens in our retail with any single retailer. So strong volumes there, and those are high margin. On the other hand, we're selling less of the lower-margin items which need to be placed to have a representative mix online. Similarly, but differently, on our first aid area, we're selling a lot of low-margin consumer first aid kits, which we really don't sell in the U.S., except through Amazon. And the higher margin, the industrial products in the retail are lower. So it's not consistent, and that's what we're grappling with. On the other hand, we're [calling it] the top line, and we will build in these other areas as we continue to do promotions and fill in the gaps. Regarding M&A, we're constantly looking. I can tell you that by being able to bring back $5.8 million so far from Asia, and that number, by year-end as we've continued to generate cash there, will be a bigger number. It almost resets us for being able to do another acquisition with our current bank line. In addition, we're generating cash through our regular operations. And on a normal year, that's $5 million or $6 million of free cash flow. So we're positioning ourselves to grow through another acquisition.

(Operator Instructions) Next, we'll move to Tim Call with Capital Management Corporation.

Can you review your Toys“R”Us exposure, whether it was material? And if you had any sales there, do they just move to other retailers over time?

Toys“R”Us was an account a number of years ago, but it was always small. And Paul, do you know if we even sell to them?

No. We don't sell to them.

We don't sell to them, Tim, so there's no exposure.

With hunting and fishing, the hurricanes hurt your sales there. Do you have any easy comparisons coming up because of that? And do you see strength returning to those areas? Or was that just a onetime blip down in the second half of last year?

Well, the Cuda fishing line continues to be gaining share, and that's not only at -- for saltwater but now for fresh water and into Canada. And we've put in -- hired a person for social media to cover fishing tournaments with the sponsors. There's a few of them. We've got one coming up in a couple of weeks in Florida. The fishing pros are actively working for us, and we've got about 10 of them. And it's bearing fruit. And in the first quarter, which is traditionally where you begin to sell a lot of the fishing tools, were stronger than last year now. In the hunting area, we've gained a fair amount of new business for 2018, both under the branded -- from those lines as well as a private label program for one of the large retailers. So it will -- there'll be some good comparisons for hunting and fishing regardless of whether we had some storms. It's just -- the business is stronger.

(Operator Instructions) Next, from RAM Partners, we'll move to Jeffrey Matthews.

Walter, the comment that Amazon is your largest European business, I think that's what you said.

Is that -- that's very striking. And I wonder if that's a function of just that you're on Amazon, and they're growing so fast? Or is it also -- is there something there that your product lines are more adaptable to being sold on Amazon? In other words, is it easier for you to gain share -- is it easier for you -- has it been easier for you to gain share in Europe being part of Amazon rather than trying to beat your head against the wall, getting share within existing retailers?

The first part of that is Amazon here is an important -- is one of our largest customers corporately, and it's growing [the fast]. And our team of people are working this account effectively, and that same team has been working with our European counterparts who are also staffed for online sales. And the strategies we're using in the U.S., we're using in Europe, and it's having a good benefit. Similar to the U.S., the -- some of the retailers, not all, but some of the retailers in Europe are in a state of flux. The sales are down. They've been sold from large superstores. They're understaffed and it's difficult to gain traction with them for new business. Having said that, we are gaining traction with the traditional retailers. And particularly in Germany, where the market is more traditional, we're picking up some very good accounts, medium-size companies that cover regional markets very effectively. So what's going on in Europe is Amazon is growing, and it's an important part. But that core base of (technical difficulty) distributors is also contributing to its growth.

Got you. Also, the comment about inability to forecast the online side of the business is not entirely surprising because you talked about that aspect last quarter. Was there something within the way the fourth quarter developed that made it more of an issue? Or is this just continued question marks about how you do it?

We're continuing in about the same pace as in the fourth quarter right now, which is in excess of 100% growth, but the numbers are getting bigger. And it's hard to say that's something you can continue for the year. It seems impossible, but it's happening. So -- and then you got the weakness with the retailers that are closing stores or taking themselves private and have squeezed inventory or there's less people, and there's a lot of problems. So the shift, in aggregate, we're growing. But again, I'm just hesitant right now to say here's where we're going and then find that the reason -- not grasp the margin mix properly. And we're either up or we're down from what I'm forecasting. But I think for the first quarter, that will be another benchmark, both the third, fourth -- actually, second, third, fourth of this year of 2017. And now the first should help us with some guidance for that.

Got it. And then finally, just wanted to follow up on the supply chain. You talked last time about having a shortened supply chain. And where -- what do you see supply-chain-wise going forward?

It wasn't so simple to shorten that supply chain. The time to take a product from Asia and put it on a boat hasn't changed, and customs are still too weak. We did get the factories to move a little bit quicker on some of their production and their changeovers, but then they went on Chinese New Year for a month so supply chain is hard.

(Operator Instructions) Next, from D.A. Davidson, we'll move back to Andrew Burns.

Just a couple of follow-ups. In terms of your go-forward tax rate comments about a 600 basis point potential reduction there, can you give us what the base level run rate was, excluding sort of onetime items? I know in '16, excluding onetime items, it was about 25%. Presumably, on the reported numbers, it was lower for '17. So what's sort of the starting point from that reduction?

I'll turn that over to Paul. Paul?

The global mix changes from year to year. In 2017, that effective rate was 23%, so it was 25% in 2016. And without the tax cuts, it would have been 28% -- possibly 28% in 2018 based on my projected mix. And with the tax cuts, that would be 22%.

Great. And then just a follow-up on the success you're seeing at DMT. It looked like a great product launch schedule at the SHOT Show there. You mentioned strength in Europe. Just how you're thinking about the growth opportunities for DMT given the plethora of new products that are coming to the market.

Let me explain some of these new products which we did introduce at the SHOT Show. There's a new line of highly accurate sharpeners that are electronic that sharpen by vibration as the blades go through the sharpener. And as a result, you have minimal burring at a microscopic level on the cutting edges. And of course, they're diamond-based and we can -- so you're going to get a very, very sharp and consistent cut. These were very well received in the hunting area, but it's a lot broader than just hunting, and later, fishing. These items can be consumerized and be sold into mass market retailers. DMT has strong margins. It had growth last year. We've gained additional business in 2018 at a couple of very large retailers in the U.S. Europe is growing online as well as through industrial. Mostly it's industrial distribution. We're adding about 1/3 of capacity to parts of that facility now. And if we do what I hope we can do, that won't be enough. So it's thriving.

Moving on, we'll move back to the line of Jeff Briggs (sic) [Robert Maltbie] with Singular Research.

A couple of follow-ups, Walter. Regarding -- and maybe you said this and I missed it. What is the magnitude or the percent of total revenue now online? And on this metric, does that include Walmart? Are they still an important customer? And what is the magnitude of sales to Walmart?

Well, let me start with Walmart. Walmart's an outstanding company, in my view. And the work they're doing online has the potential, I think, to have a real competition. Relative to its size, Walmart, as of last year, was our largest customer and a growing customer. That's in contrast to some other retailers, which haven't maybe been as aggressive in their online efforts. We're supporting the online business at Walmart in many, many different ways and including -- well, in many, many different ways. And I think that we'll continue to see solid and really exciting growth there. Relative to the percent, I don't know that number right now. And it's a definitional issue because, for example, Grainger has online sales, so does Staples and Office Depot. So when you start adding those in, if you can break them out, it would be a fairly sizable piece. The pure online retailers like Amazon are in excess of 10% of our sales right now.

Moving on from Longport Partners, we have Richard Dearnley.

You said you're going to add loosely 1/3 of capacity at DMT. Do you have round numbers on the capacity increase in Spill Magic and first aid?

That's getting pretty granular, Dick. But particularly Spill Magic, if we wind up growing by 1/3 or 1/2, it's less capital-intensive than DMT where you're dealing with diamond coatings and heavy high-precision injection molding. Spill Magic is really more packaging and mixing, so it's easier to scale. But the new equipment that we put in, in Nashville was for growth in the retail and into the online sales, all of which we don't know how much that is, but they're running pretty hard right now. With first aid, we have gotten some new business at a very large industrial distributor, which will ship either at the end of the first quarter or into the second and then continuing. And we've also gained a very large food service distributor in a pilot program that is pretty substantial. So first aid capacity is expanding, and we're at full capacity pretty much in Vancouver, Washington. But we're expanding in our facility in Rocky Mount, North Carolina.

Okay. And then, Paul, what was CapEx in '17? And then do you have a guess for '18?

It's projecting about $3.9 million for '18. It was $3.2 million in '17.

Okeydoke. Then you've mentioned that the promotions in fourth quarter and e-commerce, and I realize promotions take many different forms, hurt the gross margins by 200 basis points or most of the 200 basis points. But if you look at -- as you see online -- the online business now or better, I guess, in the future, online business, most people that are saying the gross margin is less. The SG&A is also less. And how does the up-margin then shake out?

I don't have those exact numbers to share with you.

But the answer on the promotions in the fourth quarter. Black Friday is one of the major, major promotional points for online and retailers. And for the online retailers, they want the best prices all year, and it's not one day. It's like 5 weeks. It is more volume, but it's -- that period is lower margins, the lowest you're ever going to have on your products.

Yes. It's -- Walmart made a point on their fourth quarter of saying, "We got too much online inventory. We didn't have enough in the stores." Getting this right is very difficult, and everyone's feeling their way along. And sad to say, probably like the investment business, you learn these lessons by costing your money. I understand it's tough.

No, it's a change in the paradigm, and it's exciting. I mean, we're playing and gaining market share in a huge arena, and it's with some customers who were just shining compared to many of our retailers who are struggling. And that shift from retailer to online and then getting it right, it's a huge opportunity. That's what we're putting to play. That's why we're putting the promotions, and that's why we're hiring the staff. And that's why we're upgrading in North Carolina, to handle it. And I can't think of a more exciting time to be running Acme than right now.

We'll move back to Jeffrey Matthews with RAM partners.

Walter, I didn't hear any mention of sales in China or business in Asia. Maybe I missed it. What's going on there, sales-wise rather than cost-of-goods-wise?

Well, we do sell out of our Hong Kong office into Australia, New Zealand, Korea, Taiwan, Japan, Philippines, Indonesia. It's about $1 million a year. It's small, it's growing, it's profitable, and it's consolidated with the U.S. operations so we don't break it out. But it's a very good piece of business, and it's profitable. In China itself, we sold for a while, and we had trouble collecting just a few years ago. And finally, I decided -- we decided as a team that maybe that was not the best market for us. It wasn't a big deal, and we just shifted to the more -- the other countries in Southeast Asia.

And gentlemen, at this time, it appears we have no further questions from the audience.

Well then, this call is complete. We look forward to speaking with you again after we release first quarter earnings in April when we will also provide guidance for 2018. Thank you for participating, and goodbye.

Once again, ladies and gentlemen, that concludes our call for today. You may now disconnect.