Acme United Corp (ACU) 2020 Q1 法說會逐字稿

Good day, and welcome to the Acme United Corporation's First Quarter 2020 Earnings Conference Call.

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

Good day. Welcome to the First Quarter 2020 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 provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties such as, among others, those arising as a result of the effects of the COVID-19 pandemic, including the ongoing economic downturn, and the other risks and uncertainties described in our periodic filings with the Securities and Exchange Commission and in our current earnings release.

Thank you, Paul.

Acme United had a strong first quarter of 2020. Our net sales were $35.8 million compared to $31.4 million in the first quarter of 2019, an increase of 14%. Our net income was $1.27 million, an increase of 58% over the first quarter of 2019. Earnings per share increased from $0.24 to $0.36 or 50%.

Sales of first aid and safety products led the growth. The company has gained market share with its Smart Compliance industrial first aid product line and patented SafetyHub digital replenishment system. We have new sales at some of the largest home improvement and industrial distributors in the United States. Our online sales of consumer first aid kits, antiseptic wipes, medications and refills have all been at record levels. The growth in the first aid and safety area was very strong in the first 2 months of the quarter and then surged with what we believe was additional COVID-19 demand. Revenue of our Westcott product line in the U.S. declined compared to last year, but this was offset by growth in Camillus knives and DMT sharpening tools. Sales in Europe increased 19% due to growth in Westcott, DMT, first aid and online business. Our revenues in Canada, without the impact of First Aid Central, were comparable to last year. A critical factor in achieving our strong first quarter results is that our production and distribution facilities, both domestic and international, have remained open during the COVID-19 pandemic.

In January 2020, we acquired First Aid Central, a first aid and safety supplier in Laval, Canada. This company expanded our ability to provide safety products which meet Health Canada regulations through our existing Canadian customer base as well as our large multinational customers. First Aid Central has a strong online presence. Together, we are leveraging both our customer bases and sourcing strengths. First Aid Central contributed about $1 million to our revenues in the first quarter.

As we are all aware, the world is battling a global health crisis and significant economic disruptions. Our first aid and safety products are essential to meeting a small portion of a very large problem. There is extremely strong demand for masks, gloves, protective equipment and many other items that go into our personal protection, steel cleanup, bodily fluid, bloodborne pathogen and first aid kits. We are also seeing record demand for our fever-reducing medications. In many cases, we are purchasing items on the spot market at costs well above normal but then adjusting prices to our customers. Acme's goal is to consistently deliver supplies to our customers at the best values we can.

Our first concern has been the safety and well-being of our employees as they fulfill our operational activities. In our production and warehousing sites, we are monitoring health, providing protective gear, staggering shifts and doing regular deep cleaning. Our sales teams and our associates in offices in the U.S., Hong Kong, Canada and Germany are working remotely together. Acme's 5 plants and warehouses in the United States are running multiple shifts. Our offices in Guangzhou and Ningbo, China are fully staffed. And our factories in China are generally running at 65% to 80% of capacity. Our Canadian and European offices are working remotely, but their warehouses are functioning. I'm truly proud of our teams, who are making a slow but global difference.

We finished 2019 with strong results, and our team again delivered in the first quarter of 2020. Demand for our first aid and safety products remains very strong. However, we believe that the global demand for Westcott cutting tools, DMT sharpening products, Cuda fishing tools and Camillus knives will be weaker than last year. Many of these items are sold in stores that are either closed or have limited traffic. We see our online business continuing to grow, which may help to offset some of the projected weak in-store sales. Overall, we believe we are in a strong position to move forward. However, due to the many COVID-related uncertainties we face, we will not, at this time, be providing guidance for the coming quarters or year.

I will now turn the call to Paul.

Acme United's net sales for the first quarter were $35.8 million compared to $31.4 million in 2019, a 14% increase.

Net sales in the U.S. segment increased 11% in the quarter. The sales increase came from first aid and safety products, primarily market share gains; and to a lesser extent, gains from COVID-19 related surge demand. Net sales in Europe for the first quarter of 2020 increased 19% in local currency compared to the first quarter of 2019, mainly due to new customers in the office products channel, increased e-commerce sales and continued growth of DMT sharpening products. Net sales in Canada, excluding First Aid Central products, for the first quarter of 2020 increased 1% in local currency. Sales of First Aid Central products amounted to $1 million in the first quarter.

The gross margin was 37.8% in the first quarter of 2020 versus 37.6% in the first quarter of 2019.

SG&A expenses for the first quarter of 2020 were $11.5 million or 32% of net sales compared with $10.3 million or 33% of net sales for the same period of 2019. Operating profit in the first quarter of 2020 increased 31% to the first -- compared to the first quarter of 2019. Interest expense declined $187,000 in the first quarter due to a lower interest rate as well as lower bank debt.

Net income for the first quarter of 2020 was $1,277,000 or $0.36 per diluted share compared to net income of $807,000 or $0.24 per diluted share for the same period of 2019, a 58% increase in net income and 50% in earnings per share. The company's bank debt less cash on March 31, 2020, was $32.9 million compared to $41.2 million on March 31, 2019.

During the 12-month period, we paid $2.1 million for the First Aid Central acquisition, spent $1.8 million on dividends and stock buybacks and generated $14 million in free cash flow. We reduced inventory by $4 million during the 12 months.

Our credit facility with HSBC Bank is $50 million. Availability on the line was $16.1 million at March 31, 2020. We firmly believe that the line is sufficient for the foreseeable future.

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

(Operator Instructions) And we have a question from Chris Lahiji with LD Micro.

Gentlemen, quick question. On the supply side, are there any disruptions that you guys are already kind of seeing right now? And where do you feel the most demand is going to come in the next 6 to 9 months moving forward?

Well, Chris, there's a lot of disruption on the first aid and safety side. As you can imagine, many of the items that we're selling, gloves, masks, protective gear which go in our first aid and isolation kits as well as sold individually, well, there's a lot of competitors buying, and so we're buying on the spot market in some cases. Relative to our own stock, we are stocked quite well. And we've been very aggressive with our team on site, many sites, in China, buying, getting things on vessels and coming in and then packed out in our facilities. The ability to be able to respond hands-on on site, write a check right through our Hong Kong office is a reasonably big advantage relative to distant purchasers. And in most cases, these are suppliers that we've worked with for many years. There are disruptions relative to airfreight. A great number of the airfreight carriers are focused right now on delivering safety supplies to governments around the world. And so to get planes for doing airfreight is very expensive right now. It's approximately 3x what's normal. And so supply disruptions and challenges, but I'll tell you it's an opportunity as well for people that can execute well.

Understood. And then one more question. There has been significant demand on the gun and ammo side in the last 6 to 8 weeks. Have you guys seen any type of surge on the knives side on your end?

Yes, we have. The Camillus knife business, both in the U.S. and in Europe, has been doing well online. Many of the -- not everywhere, but in some places, gun shops are closed. But online, it's kind of amazing. And what they buy seems unusual. For example, machetes. We sold an incredible number of machetes. And that's a product that we sell regularly, but we didn't expect that kind of demand.

(Operator Instructions) And our next question comes from Richard Dearnley, Longport Partners.

In the annual report, you talked about being ready for back-to-school because of getting inventory, Westcott and related, which was good planning. I guess, any feel for how much extra inventory in the end of March is kind of early inventory?

Well, the number of births in the United States tends to run about [3.8] million young -- babies born each year. A few years later, they're in fifth grade, sixth grade, seventh, eighth grade. And so the back-to-school has a reasonably predictable population. And there will be a back-to-school. And our customers are lined up and are buying and taking deliveries in back-to-school products. We know that some schools have closed, most schools have closed early. We believe that most of the supplies that are in lockers are going to be removed. And there's going to be a lot of fresh demand, we think. In any case, the purchase orders that we executed against in the fall and brought inventory in early is in our warehouse. It does ship in the April, May, June time frame, a little bit in July. Our factories are producing some items for new business that we've won at some of the largest mass merchandisers, particularly in the craft area, so that inventory has a place in a home. And I'm not saying it's business as normal, because it isn't. But again, when you remember the number of students that each year are going through the grades, that hasn't changed [that much].

In a bigger look at inventories, your inventories were down $4 million-or-so last year. Is there more tighter inventory still to go?

Well, there is some work. But one of the things we've done over the years, and I'll tell you, in the past 5 years, through acquisitions, we have moved more and more of our business into manufacturing sites. The Pac-Kit first aid company, the First Aid Only acquisition, the DMT acquisition, the Spill Magic acquisition and now First Aid Central, these are all manufacturers. And the turns on manufacturing are much quicker than they are when you've got a long delivery from China, time on the water, through customs, intermodal, to your warehouse. And typically, for us, the products that we import will turn 2 to 2.5x a year. With a good manufacturing site, we should be able to move that up substantially. And to look at 4x turns on manufacturing is not at all unreasonable. So as we do that, what we're seeing is we're freeing up inventory and then turning that into cash. And then we're also using that to pay down debt at this point.

Right. In the current environment where there is a liquidity squeeze and so on, it's hard to contemplate acquisitions. But I would think there might be some distress appearing here and there.

Well, I hate to look at that as an opportunity because there are companies struggling. And they may find that we'd be a good home for them. We had a call as recently as this morning for something that did not work for us. But there may be opportunities, and we certainly would welcome the phone calls if we can help.

And our next question comes from Jim Marrone with Singular Research.

My apologies if you've already covered it. If you have, perhaps just if you could provide maybe a little bit more color. But just in regards to the emphasis on PPE as of late as well as going forward, just can you give us a sense or a little bit more commentary in regards on how that could impact the -- your first aid line? And can you capitalize on it? And yes, just a little bit more commentary in regards to that.

So we sell a full line of first aid and safety products, as you know. And typically, that's been about half of our global sales. It's higher right now, in part because we won some major new business with large industrial distributors and hardware chains in the United States that came online in the first quarter and will, hopefully, be long-term business for us. So we've got a piece there that continues to grow. And that's being driven in part by our SafetyHub replenishment system, in part just through competitive pricing and good service, but we're winning new business. And the second thing is a portion of the first aid product line, all the PhysiciansCare medications, which are fever reducing, we've carried them for years. The bloodborne pathogen kits and the bodily fluid kits which are used to clean up various bodily fluids, that's all incorporating our Spill Magic material as the active ingredient, and we've built kits around them. That business is not only growing, but because we are manufacturing the active ingredients, we're leveraging 2 plants that are making the products. And we believe that's a business that will continue to grow nicely because, I think, many of the changes that we're making in our behavior globally impacts isolation and proper cleanup of spills and bodily fluids. With the isolation gowns, the masks and gloves, every first aid kit that we sell has the first -- has a pair of gloves in them. So it's been a long-term product for us incorporated in the kits. And when we started to get more demand for acrylonitrile gloves in packages, we sold them. I mean we have the sources. And that business, we think, will be continued good business for us going forward. In the case of masks, the N95 masks are used in our spill cleanup kits, our bodily fluid kits, our isolation kits; and we also sell them individually. And that's been a strong business for us. It's not been the main business. And PPE is not the main business, but there's an extra piece where it's now being required by our distributors, and we're happy to supply them.

The thing that we have that will stay with us is our distribution base, whether it's the largest industrial distributors in the world or the largest food service distributors or the largest contract distributors of office and those kinds of supplies. We're locked in with some major distribution, both in the U.S. and in Europe, and we're filling that demand. As we're looking into the fall, what I see is a continuation perhaps with some different kits utilizing some of the personal protection, some of the alcohol prep pads that we sell and the alcohol wipes to clean wounds, and putting them in different forms and including those in kits. And that thrust is one that I think has continued growth. There probably will be a catch-up in operating kinds of gowns because there's massive production going on with that right now for the hospitals. We don't really participate in that market, and I would not expect us to, but for the broad-based people working in factories, working at home, working in offices, we are very much in the mainstream.

Excellent. And just as a follow-up is if you could just discuss maybe the other product lines. Now I know you mentioned quite a bit about the back-to-school supplies and all, but maybe more, a little bit more specifically in terms of the sharpeners and the scissors and that type of product line.

Well, so if you took the scissor business as an example, my guess is, in the past 2 days, almost everybody on this line has opened a FedEx package. And many people use scissors to open those. And the demand for these products tend to be higher performance, ones that can cut through cardboard and don't -- nonstick is a good feature. Of course, we lead in that category. In the craft area, that's an area where our scissors are constantly in use. And with a separation in retailers, as we see it, there are large mass merchants -- mass merchant accounts such as a Walmart or a Target or a Costco, which offer food, and they're thriving. There are others where they don't have food, where they have special niches, and they tend to be closed right now. And so you've got a migration going to some retailers who are thriving in a very big way. And then, of course, you have a migration online. What we've found on our online business is that, last year, online was just off the trough. It's about 12% to 13% of our revenues. But somewhere in the first quarter, it was up to 18%, and it continues to climb. So more is going online, and we're certainly seeing that in the scissor area. We're seeing in the cutting arena in general. When we gave the cautionary statements about Westcott, our concern was that, when stores are closed, the sales that would normally go there have to get diverted, and some do get diverted to the thriving stores and online, and some probably is lost. Plus, my guess is there's some lesser demand because people have less disposable income. But in general, the Westcott product line is a good product line. It's a healthy product line. And particularly with back-to-school, it's quite predictable.

And our next question comes from Ralph Marsa -- Marash, First Manhattan Company.

As you increase sales of certain products and divert certain products into different distribution, certainly, in terms of online or in your first aid product category, you're obviously going to have increased costs that normally don't get factored in. Can you quantify at all the relationship of increased costs to increased sales?

Well, Ralph, that's pretty granular. I'll take a crack at this. So if we sell to an office superstore, the margins tend to be very compressed. They have a small number of products. It's very competitive business. And if we sell that same product online, the margins probably are better, but there are some more costs in the backside on shipping. And we spent a lot of money improving our North Carolina major distribution center. And as you may remember, over the past 1.5 years, it was not only capital spending, which is continuing, both capital spending, both training and systems; and we've gotten a lot more efficient there. And you see it, frankly, in the operating income. The online business also has the [one piece], which means the -- say an Amazon is buying it for retail. It also tends to be more profitable than a sale to, say, an office superstore. On the other hand, if we're selling to a small specialty store, we may be getting very good margins. And so you have that, then you have a mix change. And again, that's complicated. Higher-margin things like the nonstick products and titanium-coated scissors have a lot of high-performance attributes, but they tend to be higher margin. And we sell a lot of that online. The good news is, whether it's been on online accounts or it's been -- or existing business with other accounts or new accounts, once we have a customer base, we're not getting new accounts. We're just shipping more to them. And so orders are effectively managed. If I were to point you to the gross margin in the first quarter and compare it to last year, it was about flat. So the net of all that: It was about flat. If you look at how we process those orders, we did a better job, and that's showing up in the operating income. And as we continue to work on that area, I think we can even do better.

And we are seeing more costs in the first aid side when we buy on the spot market. For example, N95 masks, which are in the news a lot, well, they're in our first aid kits. And so when we've been buying those, we've had to increase the price to our customers to reflect our higher costs. But we're supplying the products to the customers and sell them a need that they really have. And when we're running our factories, we're not running at -- as efficiently as we might in normal times because we have staggered shifts. We have overtime. And this weekend, most of our factories are working on Saturday. So there's more costs to meet demand. There's also extra wages that we're paying. There's 2 clients that I can think of immediately who shut down for 2 full days in order to do deep cleaning because we suspected an employee had the COVID virus in both each of the 2 plants. They didn't, but you're down for 2 days, and you're continuing to pay workers. So there's some inefficiency that's popping around both in our costs as well as how we're running the factories. But the flip side of that is the volumes have been more than covering, and in aggregate, even with that in the first quarter, we were about comparable in cost of sales and in gross margin.

So what I heard was that the increase -- the puts and takes in gross margin versus the increased sales, the increased revenues, the increased throughput that we saw in the first quarter are likely to carry through during this emergency period.

Well, our attorneys have been careful to tell us not to give that kind of guidance because there's a lot of uncertainty, but they said you can certainly be factual. And what is factual is we're running overtime right now in our factories. And sales at this point are ahead of this time last year, in the second quarter.

Okay. I mean, essentially -- so I understand. I'm not really, obviously, trying to get you to say anything that you don't ordinarily guide to. But in the puts and takes, so there's -- on the negative side, there's increased overtime and, as you said, other factory overhead that factors in. On the positive side, there's more throughput. In the case of some of the first aid supplies, there's the extra costs, first of all, on the spot market and, second of all, in terms of shipping, on the negative side. On the positive side is you may sell X times the number of gloves that you used to sell.

Right. And well, perhaps then through price increases when we buy on the spot market. Now it doesn't match exactly, but we're trying to pass the best value to our customers, but on the other hand, if our cost goes up by double, which it could, then that's going to be passed on.

I appreciate it. That actually was good color, and I understand that you can't be as specific as maybe my question was framed.

And our next question comes from Stephen Percoco with Lark Research.

Walter, I know you've said both in your press release and on the call that you're not giving guidance for the full year. But you just alluded that -- or told us in the second quarter that, so far, your sales are running ahead of last year. I wonder then if it's possible to provide some kind of picture on what the second quarter should look like more completely.

Well, I'll take a cut at that. We can expect probably the Westcott sales to be softer, because there are stores that are closed, but not soft so much that it's a terrible quarter in Westcott because you still have a very strong back-to-school, and we won some new business in the craft area with some major customers. So I don't see that as a growth segment, but I don't see it as falling way, way off. On the other hand, with the first aid business, at the levels we're at now, so far, it's been leading the company as it did in the first quarter. And I think that, that should continue. In the Camillus knife business and the Cuda fishing tools: In the fishing area, a lot of those smaller stores are closed, but that's a small business, so it will be down a little bit. And Camillus knives, they've been holding their own and maybe not through some knife shops, although partly, but more through the online sales and through some mass market retailers. So as I look at it, if you were down a little bit [and the bulk with the] non first aid and the first aid continued at a strong level, then you're coming with a decent quarter.

Okay. And then the other side of that, you said your costs are a little bit elevated. Are there any other factors that you can talk about there? And then also, are there any cash flow items, whether it be working capital or whatever, that might be markedly different this quarter compared with a year ago?

Well, the working capital, the inventory, the receivables tend to go up in the second quarter for the back-to-school. That will happen because we'll be [giving] terms and shipment. The second quarter tends to be the biggest quarter of the year because of back-to-school. And that trend, it's hard to call, but that might happen. The interest rate has dropped. So we're borrowing at -- And Paul, help me here. It's prime less 1.25%.

Right. So it's we're -- prime is 3.25% now. So we're borrowing at a 2% interest.

Yes. And so Steve, the -- a year ago, I think we would borrow -- and Paul, help me here. Was it like 3.5%...

It was 200 bps higher.

All right. So we're borrowing at 4% instead of 2%. And we've cut in the debt by, let's say, net debt, $9 million...

$7 million, yes.

$7 million. So there's a saving...

On average, $7 million to $9 million.

Yes. So you've gone from 4% to 2% and got $7 million less debt. So there'll be a swing, continued swing, in that. And we are working to manage our inventory tighter. But I -- on the other hand, you're writing checks to take inventory in on the spot market so that can be resold. So really, probably inventory is still the same.

Okay. And then if I can maybe push a little bit. You've got -- back-to-school, you've said, is -- for you guys, is mostly a second quarter event. It sounds like, with the retailers being closed, that it's possible that some of those orders could shift into the third quarter. Or to the extent that your retailers haven't sold through inventory, maybe the ordering is not quite as strong into the third quarter. I mean I understand that you may not have visibility into all of it, but at the same time, you're doing planning, presumably. And so the issue is, if the economy starts moving back to normal over the next couple of months or so as states push to end the lockdown, it seems to me like while some of your business could be impacted in the third quarter, that you shouldn't have -- based upon what you've told us right now, that your business should not go through as much of a dip in the second and third quarters, again assuming that we start to move back to normal. It's your business shouldn't go through as much of a dip as maybe other manufacturers or retailers or the like would experience. Is that fair? Can you provide some color on that?

Well, I think you're right, Steve. And as I mentioned, you've got the same number of kids going to school each year. And so they need supplies. And this is really global. So what we're doing in Canada or in Europe or the U.S. or in Asia, there's a base demand. Now whether it goes mostly in the second quarter or the third, that used to be all in the second. And lately, we've been seeing more online business moving to the third quarter because parents were buying from, say, Amazon, before the kids went to school and some of them went to school in the beginning of August, so they'll be buying in July. In some areas, they went to schools end of August, beginning of September, so they're buying at the end of August. And so the Amazon piece probably shifts more into the third quarter, and it's been doing that as a trend. And Amazon Prime, we understand, has been shifted to August of this year. And so what was going on in July is now August. And it's still in the same quarter but tends to be a lot of sales. When we're stocking stores -- and please don't think that all stores are closed. There are some stores that are closed, but if you look at the biggest retailer in the United States, they are absolutely open. And if you look at Costco, they're open, and Target's open. And a lot of shoppers are going to those places, and they're going to Amazon. And so while some are closed, others are gaining share and making an impact. And of course, we're shipping more to these. So it's I think, overall, there'll be less demand because of disposable income, but you still have the underlying requirement for the kids.

(Operator Instructions) So our next question comes from Richard Dearnley, Longport Partners.

I forgot to ask. What was the mix between first aid and sharpening and other in the quarter?

Paul, do you have those figures?

I believe that first aid was close to 55%; and the remainder, the cutting was 45% [play, obviously].

Okay. And then to expand on Ralph's questions about gross margins, essentially, taking the same kind of look at G&A or SG&A. There's been a 200 or 300 basis point increase in the SG&A-to-sales over the last couple of years. Do you think that's permanent? Or can, well, SG&A...

Yes. What we did [with our debt is] -- we were concerned that maybe there's going to be more bad debt. And so we reserved for some things like that in the event that one major customer or another had more difficulty. [So we] increased the reserves there.

And I take it the customer didn't go bust but is still around.

Oh, we don't even know which one we're talking about. It just seems...

Oh, well...

There's enough uncertainty. Let's be cautious.

And there are no further questions at this time.

Well, if there are no further questions, this call is complete.

Our thoughts are with anyone who's ill and their families. We look forward to speaking with you again in the second -- in the third quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.