Acme United Corp (ACU) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Acme United Corporation's Second Quarter 2018 Earnings Call.

At this time, I would like to turn the conference over to Walter Johnsen. Please go ahead.

Good morning. Welcome to the second quarter 2018 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 limitations, 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 second quarter 2018 net sales of $39.8 million compared to $38.8 million in 2017, an increase of 2%.

Our net income for the quarter was $2.4 million compared to $2.8 million during the same period last year.

Net sales in the second quarter for the first aid and safety business increased 7% to a new record.

Our Westcott back-to-school products declined 5%, which we believe reflects a shift of our online sales close to the times students go back to class and will be made up in our third quarter.

Our Cuda fishing tools, Camillus knives and DMT sharpeners had record sales for the second quarter.

Canadian sales decreased 1%, while European sales grew 14%.

Our gross margins in the second quarter was 37%, which is the same as for the comparable period in 2017.

The first and second rounds of U.S. tariffs have not had an impact on our product costs.

However, we may have savings in the future from the strengthening of the U.S. dollar compared to the Chinese RMB.

During the second quarter, we continue to improve our operating performance at our Rocky Mount, North Carolina distribution facility.

This was gratifying, since our team worked very hard during the past 12 months to become more efficient and they're seeing the results.

As you may recall from prior calls, steps included adding experienced executives and managers to improve the accuracy, speed and cost of deliveries, installing new software modules to improve the efficiency of the pick lines and building a mezzanine level for storage of online products close to the point of shipment.

We have started the third quarter strongly, including large back-to-school and online orders.

Although, it is early in the quarter, Westcott sales through yesterday was strong, including sales through Amazon.

We plan to begin to roll out new first-aid and safety products to a large industrial distributor during the third quarter and expect strong Cuda fishing and Camillus hunting sales during the next 6 months.

As we look into the remainder of the year, we are reaffirming the guidance we provided in April of $140 million in net sales, $5.7 million net income and $1.53 earnings per share.

I will now turn the call to Paul.

Acme's net sales for the second quarter were approximately $40 million compared to approximately $39 million in 2017, an increase of 2%.

Sales for the 6 months ended June 30, 2018, were $72 million compared to $67 million in the same period in 2017, an increase of 7%.

Net sales in the U.S. segment increased 2% in the quarter and 6 -- and 7% for the 6 months ended June 30.

Net sales in local currency for Canada decreased 5% in the quarter and were constant year to date.

Net sales for Europe increased 5% in local currency for the quarter and 7% for the 6 months ended June 30.

The sales increase for both periods was primarily due to new customers in the office channel as well as higher sales of DMT sharpening products.

The gross margin was 37% in both the second quarter of 2018 and '17.

Year-to-date gross margin was 38% compared to 38% in last year's period.

SG&A expenses for the second quarter of 2018 were $11.1 million or 27.9% of sales compared with $10.6 million or 27.3% of sales for the same period of 2017.

SG&A expenses for the first 6 months of 2018 were $21.9 million or 31% of sales compared with $20 million or 30% of sales in 2017.

The SG&A increase for the 3 and 6 months was due to higher variable selling costs and the addition of sales and marketing personnel.

Net income for the second quarter 2018 was $2.4 million or $0.67 per diluted share compared to a net income of $2.8 million or $0.75 per diluted share for the same period of 2017.

Net income for the first 6 months ended June 30, was $3.2 million or $0.88 per diluted share compared to $3.5 million or $0.94 per diluted share in the comparable period last year.

The company's bank debt less cash on June 30, 2018, was $46 million compared to $41.3 million on June 30, 2017.

During the 12-month period, we purchased a first aid manufacturing and distribution facility in Vancouver, Washington for $4 million and paid $1.5 million in dividends.

Inventory increased $6.9 million, mostly in anticipation of new business.

We expect to end 2018 with approximately $37 million of net debt and to generate approximately $4 million in free cash flow.

On May 24, we renewed our $50 million loan facility with HSBC.

The maturity was extended from 3 to 5 years and the interest rate was reduced from LIBOR plus 2% to LIBOR plus 1.75%.

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

(Operator Instructions) And we will take our first question from Michael Kawamoto with D.A. Davidson.

Just on the first aid business, it's great to see another quarter of solid performance. Can you just elaborate on the strength you're seeing there? And then maybe talk about the safety hub and any traction you're seeing there as well.

Well, the first thing is, the first aid business is a strong business for us. And we have gained some major distribution, which is gradually rolling out through this year and will continue into next at higher levels. The -- we won a -- the largest industrial distributor in the United States at year-end. And that begins to be shipping in volume the new business does during the third quarter and continues. We also initiated a major distribution arrangement with a food service company that is now taking this product throughout its entire customer base, and that's very exciting to us. And we're hopeful that, that piece of business becomes one of our largest customers in the company. The safety hub, as you may recall, allows a customer to record the use of components in our first aid incidents at the time the products are being used. Those are then relate to the safety manager who can refill our cabinets. And more importantly, when minimum order quantities are reached, it automatically places fulfillment orders to the distributor that's servicing the account. And our distributors love this product, because it has tightened the link between the original product sale and the ongoing annuity of refills. We give this product away for free, and we train their sales force. I believe it's one of the reasons that we've been successful out in the marketplace, landing these major distribution partners. The other thing that we've done is, we have migrated from a variable rate commission basis on many sections of the country through a direct sales basis where our first aid salespeople are full time employees and are dedicated to driving both our SmartCompliance first aid kits as well as our general safety items. And this is having a strong benefit to us. So as we're looking into the year, we've had a very good first half. And the second half, we believe it's going to be stronger.

Good to hear. And then I think ICAST was a couple of weeks ago. Can you talk about any takeaways you have there in the reception of your Cuda product?

So the ICAST is the largest fishing show in the United States, and it's held each year, at least for the last several years in Orlando, Florida. We had an excellent show with a lot of fishing pros in attendance. We've had major buyers from chains coming to us to expand the line for next year. And so the goal is not only visibility, but also to close future business. And we achieved both of them this past several weeks ago.

Got it. And then last -- or couple more for me. But do you expect this trend of buying closer-to-use to continue with the growth of your online sales? Or do you see a more normal seasonal growth pattern going forward? And then I think there was some impact from hurricane and may be a difficult retail environment that weighed on 3Q growth last year. So as we model the back half, would you expect more growth in 3Q this year, given the easier comps?

Well, first, the online business. It's not just our Amazon and Walmart.com growth, but all of our retail customers have online businesses. So even though we don't -- we're not able to break out some of the customer's online business, we can see it in the order patterns. And we know that, for example, Staples -- go to Staples.com, with Target doing Target.com. Home Depot does their thing. Office Depot does online business, Walmart does of course. And so it's this aggregate of being closer to the customer. It's not just Amazon. However, Amazon is now our #2 or #1 customer, depending on the quarter. And it's growing very, very quickly. So its impact would arguably continue to be shifting products next year and in the future from the second quarter for back-to-school into the third. And we're clearly seeing it right now in the July orders.

Got it. And then just last one. I think last time, you said free cash flow was $4 million to $5 million. You said $4 million this quarter. What's the difference there?

Paul?

The main difference is our -- the inventory forecast that we had done earlier was slightly lower than what we're forecasting today. When -- I think we're going to make a lot of progress and -- with our inventory. And we're going to reduce it between now and at the end of the year. But not necessarily as aggressively as I thought 3 months ago.

And we'll take our next question from [Alan Kaplan].

I'm a longtime shareholder. And I noticed that in 2017 or for 2017, you awarded an atypical an extraordinary number of options. And I'm wondering, if you could comment on that.

I'm not really prepared to [Alan], because I don't know exactly what you're talking about.

Well, unless I've made a mistake, I thought that the number of options in your 10-K showed that the number of stock options of what it were, like 8% of your total number of shares. Am I incorrect in that?

We'd be happy to get back to you on that. So maybe after the call, you can call and we'll get the facts.

And we will move on to Brad Shiveley with Capital Management Corporation.

Walter, I'm stepping in for Tim today on the call here. I just wanted to ask you around the -- looks like you've added quite the staff since last quarter. And is this kind of setting you up to better be prepared to fill Internet orders? And so should Q3 margins kind of rebound, do you think, from last year's lower levels?

Paul, why don't you go over that one?

I think your question was, did we add staff? Is that what -- I didn't catch that word.

Yes. Did you add staff since last quarter?

Well, we added the staff more in the second half of last year. Not -- they weren't recent staff additions. What was the second part of your question?

Well, do you think this should help you see margins kind of rebound from the last year lower levels?

Well, the addition of staff for our sales and marketing, so it's to drive sales in the future. It's not necessarily to affect margins.

Okay. And then moving on, you seem to be showing pretty strong reoccurring Internet sales growth and a rebound in margins from Q3 2017 levels. Could that impact your full year guidance essentially, prove that to be a little too conservative, you think?

Well, I think we want to wait until we finish the third quarter to determine if we're going to change our guidance at this point.

One thing that you should note perhaps is that, when we're doing online sales, particularly with the back-to-school items, it should be increasingly gross margin, because it's a more efficient delivery. And we'll see if that occurs. But it seems to be happening.

Okay. No. I appreciate that. And then also around your Internet sales, I might have missed it. I think someone might have asked this. But there seems like there continues to have -- continued strong growth there at about 100%. Do you believe this might impact Q3 sales growth to approach 50% overall total Q3 sales?

No. I don't expect Internet sales to approach 50% of our total sales. But they're continuing to be strong. And at some point, it has to top out. And it'll be more aligned with what online sales are growing. But we're gaining market share right now. And that's in both first aid as well as in the Westcott family. So it's a good thing.

And we'll take a question from Justyn Putnam with Talanta Invest Group.

I was just wondering if you might comment a little bit on what you're seeing in the overall retail environment, especially, maybe compared to last year or 2.

Well, as you know, the retail stores have certainly changing the complexion of how things get sold. And in the case of the office products business, which is a much smaller part of our business than it used to be, it's still about 1/4 of the revenues. And within that, more is business-direct sales, so that would be within -- I mean, with truck delivery to various locations than business-to-business delivery. The retail emphasis at Staples and Office Depot continues to decline. The contract business continues to increase. Their online businesses also are increasing, and that's where most of the retail business is winding up, I believe. The -- stores such as Walmart have been very, very aggressive in implementing online business, and we've been working hand-in-hand with them. That's, I think, consistent with what's happening with online deliveries in total. And I think the mass market stores, particularly Walmart, are absolutely in tune with what the overall market is doing. Relative to the back-to-school, the latest report by Deloitte that I reviewed suggested that we should have a pretty strong back-to-school. So not for us specifically, but in the aggregate. So we're looking forward to that.

Okay. We've seen some recent macro retail data that's like a little bit encouraging, a little bit of improvement, and I just -- try to get a sense of that's the tailwind that you're seeing as well or not?

Well, again, our online businesses, we're gaining share. So sometimes you're not quite sure whether it's the macro environment, overall retail, or whether we're just doing a more effective job. But the reports that I'm seeing suggest that, at least in the back-to-school, it should be a very strong back-to-school and better than last year.

And we have a question from Richard Dearnley with Longport Partners.

To continue on the higher margins on back-to-school, is -- being online. So does that mean that the Staples business -- you're seeing more of the volume go through Staples online or -- as opposed to the store? In other words, the woman -- the shopper isn't going to the store. She's just doing online through Staples to you.

Dick, Staples doesn't break out to us how the sales are being -- how the products are being sold, whether it's online or contract or through the retail stores. But when we do store checks, we see less apparent activity in the stores than we remember and it used to be. The margins occur, because we make better margins in our Westcott product family on some of the online retailers than we do with some of the superstores.

Right. I see. I guess, I -- the question was getting to the office supply, people's traffic. Just instead of traffic in the stores, it's going to online, which I guess it's been going on for a while.

Yes. Yes.

And the tariffs -- the proposed tariffs, have -- didn't affect you at all?

The first round of tariffs were for basically unfinished Chinese deal in aluminum, and that was a 25% tariff. It included some other items but -- like ball bearings. But by and large, that's what it was, and that certainly didn't impact us. The second round, which was a 10% tariff related to other items that were bringing in steel, that was basically unfinished deal. It was also some chemicals. But the products like ours, which are made in China, Chinese steel and they don't have U.S. competitors, really. It just was a nonevent. The second round of tariffs also affected some of the steel in the refrigerators and washing machines that came in from China, for example, through Haier. And that compensated in part because of the raw material cost that would increase for domestic manufacturer. Again, that -- it didn't impact us. What has impacted us is that the dollar has strengthened against the Chinese currency to the order of about 7.7% since my trip in May. And since we buy in dollars a portion of their products, we might anticipate some improvement in our product costs due to the currency during the future quarters.

Do you hear any chatter that the currency depreciation is China's way of striking back at our tariffs?

Well, the exchange rate is not comparable except for (inaudible) and the Chinese do have a complex equation. I wouldn't be surprised if they had some impact in that.

Yes. Okay. You mentioned that Cuda cutting was strong. Is that specifically excluding Cuda's non-cutting? Or was it a general...

What I'm talking about is the entire Cuda family, which is primarily knives for fishermen. But that whole family is doing very well this year.

And we have a follow-up question from Michael Kawamoto with D.A. Davidson.

Just one more quick one. You guys have done a pretty great job of innovating this across the portfolio and you highlighted some new things you're doing in first aid. But I was wondering if you just talk about some of the new product innovation you guys working on, maybe over the next 12 months that will come to market?

Well, one of the things that we've announced perhaps the most important is the back-end analytics that will be available with our safety hub, our online reordering app. And it'll allow the safety managers in large corporate entities to be able to evaluate where the accidents are occurring, what types of accidents they are within the sites and how they're being treated with our first aid products. Those analytics may eventually include being able to do comparative analysis within industries as we roll out that software throughout our customer base. That's pretty powerful, and our customers love it. So that's significant. We've shown to a number of customers the line of new scissors that will be hitting the retail chains next year. And I don't want to go into too much detail with that, but they're all in the Westcott family. We've extended the glue gun business with additional segmentation for the different types of glues, also a broader line, including some that are lighter-weight and some that are heavier-weight glue guns, and we're getting good reception from those. The Cuda fishing area has a whole line of professional tools that are now being shown into the commercial fishing market and for the food preparation market. We don't know yet, whether that's going to be meaningful or whether it will be. But there seems to be a lot of interest with the food processing industry with these products. The Camillus knives have recently won the Boy Scout Knives for Eagle Scouts, and that's about $1 million new piece of business and that comes out in the second half. And we're shipping some of that in Q3. So there's quite a portfolio of items that we're rolling through. And that would be pretty much consistent with what we've done every year.

And we'll take our next question from Jeffrey Matthews with RAM Partners.

The inventory build, 19% build versus 2% sales increase, and it sounds like based on your cash flow -- the free cash flow forecast at this point that it was somewhat of a surprise inventory build. And you would expect that if sales come in a little lower than anticipated. But what I'm trying to square is, you're saying that the inventory build was related to new products, new customers. And I wonder why would it have grown so much.

Let me give you a little color on that. We've landed a major piece of new business in the food service area, and those products are rolling out as we speak, and it's throughout the entire customer base of this large distributor. We've also won, as I mentioned, the largest industrial distributor in the U.S.'s first aid business, and that's preparing to be shipped. There's another aspect, which is some of the direct sourcing of our components that are coming from China and that's taking a longer delivery cycle -- a longer supply chain than the domestic manufacturer, but there's sizable phasings by doing that. And so on some items, we've added quite a bit of first aid components that are now imported directly from China. And that'll be rolling into our gross margins in first aid as we begin to utilize those products.

Got it. Okay. That makes sense. I appreciate that. And then the -- your space at Rocky Mount, you seem to be doing all kinds of things there. Do you have -- this sounds like a goofy question, given how big the space was, and I remember visiting it a few years ago, when you weren't utilizing much of it at all. Do you have enough room down there? Is that -- you ever going to run out of space there and need more?

Well, we've modeled to be able to pretty easily accommodate about $160 million in sales out of there, and I think that's probably pretty accurate today as well. We are adding more capacity in first aid into that facility. And we're storing more raw materials there than we had originally when more of these items would -- sourced indirectly in the U.S., which would have had faster delivery times, just-in-time delivery, but substantially more expenses. So we've been utilizing that space, and we anticipate to be driving down the cost to some of our first aid kits. The 33 acres that are there, there's plenty of room for an expansion if we wanted to build another facility. But I don't see doing that in the near term. I -- rather, I see utilizing some of our locations if we are in a tight situation. So it's adequate.

Got it. Okay. And then my final question is, you're adding people. You talked about like a lot of other companies are. Is it getting tougher? Is your turnover higher? And are your expenses going up higher than you might have thought when you were doing the budget last year?

The ability to attract and retain an organization is a critical thing to do. And we've got to pay competitive prices for that, wages and benefits. And there's some upward movement in that for sure. The recruiting for some key positions has been more expensive than we expected. But the quality of the people are excellent. And so I wouldn't say there's any surprises here. But there's a -- clearly a -- it's a competitive market to keep your people and we're competitive.

And we have a question from Richard Dearnley with Longport Partners.

Did you all write the back-end analytics app in-house?

Yes.

And we have a question from Steve Chick with Yucaipa.

Walter, I was wondering if you could quantify the dollar sales impact of the Westcott back-to-school shift that it had on the quarter. And then given your comments on the strength you're seeing of the online ordering in back-to-school trends to date in this quarter, can we expect to get that equivalent dollar sales, I guess, back in Q3?

I haven't done that analysis, Steve, and I'm not sure I'd be able to share it with you. But we're clearly seeing changes from last year. And the aggregate isn't done for the back-to-school, so I'm not sure what's coming in the rest of July and August, compared to what didn't ship in June. But what I can say is that, we're running substantially ahead of last year in the July Westcott shipments, substantially ahead.

Okay. All right. That's helpful. And then second thing on the first aid business, which obviously looks good. The 7% growth rate. Do you have -- I know you added, I think, some new business in the first quarter. Do you have what that growth rate was in the first quarter this year? And then given that what you're adding -- or expect to add in the second half with some new customer business, can we assume that the growth rate in the second half will be higher than that 7%?

Okay. I'll let Paul address this one.

The growth rate was 24% in the first quarter, 17% in the second quarter. For the remainder of the year, it will be in excess of 7%, but probably not more than 10%.

Okay. So -- sorry, what you say is 24% in Q1, 7% in Q2 as you reported today? And then, it'll be in excess of the 7% in the second half. That's what you're assuming?

Right.

(Operator Instructions) And it appears, we have no further questions in the queue. I would like to turn the conference back over to our speakers for any closing remarks.

Thank you. There are no further questions, then this call is complete. We look forward to updating you in October regarding our continued progress, and I'd like to thank you for joining us. Goodbye.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.