Acme United Corp (ACU) 2020 Q4 法說會逐字稿

Good day, and welcome to the Acme United Corporation's Fourth Quarter 2020 Earnings Conference Call. At this time, I'd like to turn the conference over to Walter Johnsen. Please go ahead.

Good morning. Welcome to the Fourth Quarter and Year-End 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 the 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, 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 our current earnings release.

Thank you, Paul. Acme United had a record fourth quarter and year in 2020. Our net sales in the fourth quarter were $40.9 million, an increase of 21% over 2019. Our net income for the fourth quarter was $2 million, an increase of 109%. We had similar strong performance for the entire year. Net sales for 2020 were $164 million, an increase of 15% over last year, and net income increased 47%. Our earnings per share for 2020 was $2.31 compared to $1.60 last year an increase of 44%. We have been investing in our e-commerce teams and platforms for many years. And by 2019, online sales represented 16% of revenues. We've also been actively building our mass market presence with retailers such as Walmart, Home Depot and Costco. And we have made acquisitions of Pac-Kit, First Aid Only, DMT, Spill Magic, First Aid Central and Med-Nap, all U.S. and Canadian-based manufacturers.

When the COVID-19 epidemic occurred, we were positioned to quickly shift our sales focus to e-commerce and mass market retailers that we believed would be heavily shopped. We used our sourcing team in Asia to procure large quantities of 3-ply masks, nitrile gloves, and disposable personal protection gowns to be used in our first aid kits, bodily fluid kits and personal protection kits. We've built large quantities of Westcott craft scissors and tools to Camillus hunting knives and Cuda efficient tools, not knowing whether the supply chains would operate smoothly or what demand would be.

We kept our entire team focused on growing our new business, selling our products and responding to market shifts. As you may recall, we increased our inventory by approximately $10 million starting in July. This proved to be a good move as it helped us respond to supply chain disruptions and customer demand well in excess of forecasts. The results of these actions are apparent. We had outstanding performance in every one of our subsidiaries and business units during 2020. Behind the scenes, of course, we are trying the best we could to operate remotely with operations in Europe, Canada, the U.S., China and Hong Kong. Our supply chains were damaged with COVID creating shortages of workers at the factories, barriers to movement of goods to the ports, port congestion, container shortages and shipping delays in the U.S. We closed our warehouses and U.S. factories for deep cleaning multiple times and overtime, hazard and weekend pay and incurred many other inefficiencies related to the pandemic.

We made 2 acquisitions during 2020. In January 2020, we purchased First Aid Central in Laval, Canada. During the year, we succeeded in increasing their e-commerce first aid sales. We began selling Health Canada registered first aid products to our traditional mass market, industrial and office products customers and expanded sales to current multinational customers in Canada. The team at First Aid Central has done an outstanding job, and we are accomplishing the growth we planned.

In December 2020, we completed the acquisition of Med-Nap LLC, which is a U.S.-based supplier of alcohol whites, alcohol prep pads, BZK wipes and other items that are used in our first aid kits and in health care. These products also have broad use as disinfecting wipes in homes, restaurants, offices and factories. Med-Nap had revenues of approximately $4.8 million in 2020 with EBITDA of $1 million. We plan to purchase $2.6 million of additional equipment to increase production in 2021 and look forward to a substantial expansion in the coming years. At year-end, we terminated our defined benefit pension plan. The plan had been frozen to employees since 1996, and its participants and obligations had gradually declined over the years. We had about 25 retirees in the plan at closure with all the costs, audits, paperwork and oversight that are required. The charge to close the plan, which was mostly non cash, was approximately $750,000, resulting from the recognition of accumulated losses, which normally would have been amortized over the remaining years. Our past employees now have annuities from a major insurance company, while Acme United has transferred the pension risk and will save approximately $75,000 annually.

We leased a new headquarters in January 2021 in Shelton, Connecticut to accommodate growth and provide social distancing. The office has 35,000 square feet which is approximately double our current space with numerous offices, meeting rooms and cubicles. Our associates will each have individual workspaces in a large modern facility as we return to the office with a flexible work schedule. The cost is comparable to our former space.

We continue to see strength in sales and earnings growth so far in the first quarter of 2021. Our businesses continue to gain market share, and we have new production capacity coming on stream at DMT and Med-Nap. We will not be providing guidance at this time, but we are very optimistic about another strong year.

I will now turn the call to Paul.

Acme's net sales for the fourth quarter were $40.9 million compared to $33.9 million in 2019, an increase of 21%. Sales for the year ended December 31, 2020, were $164 million compared to $142.5 million in 2019, an increase of 15%. Net sales in the U.S. segment increased 14% in the quarter and 12% for the year ended December 31, the sales increase mainly came from first aid and safety products, primarily in market share gains and to a lesser extent, gains from COVID-19-related service demand. Net sales for Europe increased 55% in local currency for the quarter and 25% for the year ended December 31. The sales increase for both periods was primarily due to increased sales of Westcott and Camillus products in the e-commerce channel as well as higher sales of DMT shelfing products.

Net sales in local currency for Canada, excluding First Aid Central, increased 23% in the quarter due to growth in Camillus and Cuda products. Year-to-date sales declined 3% in local currency mainly due to COVID-19-related office and store closings earlier in the year, including First Aid Central, sales increased 56% for the year. The gross margin was 36.7% in the fourth quarter of 2020 compared to 36.3% in 2019. The gross margin for the year ended December 31, 2020, was 36.3% compared to 36.5% for 2019. The major contributor to the decline in gross margin percentage was COVID-related expenses.

SG&A expenses for the fourth quarter of 2020 were $12.2 million or 30% of sales compared with $10.9 million or 32% of sales for the same period of 2019. SG&A expenses for the year ended December 31, 2020, were $48.2 million or 29% of sales compared to $43.6 million or 31% of sales in 2019. Net income for the fourth quarter of 2020 was $2 million or $0.54 per diluted share compared to a net income of $1 million or $0.28 per diluted share for the same period of 2019, an increase of 109% and net income of 93% in earnings per share.

Net income for the year ended December 31, 2020, was $8.1 million or $2.31 per diluted share compared to $5.5 million of net income or $1.60 per diluted share in the comparable period last year, an increase of 47% of net income and 44% in earnings per share. The company's bank debt less cash on December 31, 2020, was $41.3 million compared to $30 million on December 31, 2019. During the 12-month period, we paid $11.4 million for the First Aid Central and Med-Nap acquisitions, spent $1.6 million in dividends and generated $3.2 million in free cash flow.

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

(Operator Instructions) And it does look like we've had a question come on the line from Tim Call with Capital Management Corporation.

Congratulations with another strong quarter and a strong year, all that hard work -- you have this industrial cutting tool business and silver business. Industries were closed and schools were closed and offices were closed and you keep picking up new distribution and winning new accounts. When America reopens, are you going to be able to supply enough cutting tool inventory to your expanded distribution? Because it looks a...

That's a very good question. And it's hard to forecast demand. But we have good quantity of inventory in the U.S. right now, specifically focused for when things reopen. And we are seeing strength with some of the office superstores and the distributors as we speak. And of course, that's in addition to the mass market, which has been strong. So I would anticipate that we will have a strong demand as people go back into the office, we'll see. But we feel we are prepared.

As sales rebound there, and we have ongoing growth in health care. Do you think as Acme grows because of economies of scale, margins might expand over time?

Well, I don't think it will come from growth. Margins have been impacted because we've been very inefficient with our production due to COVID and the cost of shipping and extra handling, and it's an extra people and social distancing and working weekends all these things are going into client closures, that toll is showing up in our cost of sales. And despite that doing, the gross margins for the year are about comparable with last year. When these things are removed, it's possible that we'd see some improvement in margin based on no longer having these kinds of costs.

Congratulations again on such a strong year, all your hard work and now is having that mentioned, all great news.

Well, Tim, thank you for the support.

(Operator Instructions) We'll take our next question from Peter Mork with Mork Capital Management.

Walter, just first off, obviously, a great year. I mean -- and great job navigating a really difficult year and just outstanding results. Just kind of a quick follow-up on the inventory. And you talked about in your comments, this past July, it's about $10 million above where it would normally be. As we look at the year-end number of $50 million, is that still reflective of the buildup that you preemptively did, anticipating some of these supply chain disruptions? Or is this a new level just with the sales and acquisitions? How should we think about that? Is there some working capital that could be freed up there?

I believe there is, in our internal models, we're assuming that the inventory holds and hopefully would grow. But as we speak, if there was a static inventory and the static sales would certainly work off some of that inventory. There was a question earlier from Tim Call about people returning back to work, and will that stimulate demand, we think it will. And we think we're prepared to supply into that growth. If we wind up growing at the pace that I hope we do, then we'll have less inventory reduction and more that will be into working capital. But if it was just static in revenues, we're clearly driving down the bulk of that $10 million.

All right. Sounds good. And then just kind of like a higher-level question on the -- you also mentioned the capacity expansion. Both for the Med-Nap and then the DMT. How -- in terms of the DMT, where are you at just in terms of being constrained there? And any additional color you could give on that product would be appreciated.

Yes. So with the DMT product line. We have been capacity constrained for the past couple of years. And every time they seem to get more capacity, we sell it, which is a terrific thing because it's high-margin and is getting better and better utilization in the plant. So we went through another expansion starting around September of last year of 2020. And that is mostly in still hold now, and we're seeing benefits from increased production.

We're going to be doing some new layouts of the facility, so that we would like to be able to increase capacity by about 50%. But what we're finding is our customers want more and more. And it's a good problem. In the case of Med-Nap, it's a little bit different because there's a lot of potential volume that we could generate through Acme's sales efforts. So Acme was a customer and a reasonably important customer to Med-Nap, but we can be a far bigger customer by opening up our industrial distribution, our distribution into retail and into the mass market and into Amazon. And there, we've added 3 machines that, in time, will generate about $2 million or more in revenues each. So they'll be coming on stream between now and August. And I really don't know what we're going to do after that. We'll probably be evaluating the sales levels, we're possibly investing again at year-end to continue to grow it.

That's great. Well, congrats again on a great year and best of luck in 2021.

Thank you so much, Peter.

(Operator Instructions) And it would appear at this time there are no further questions on the phone line.

Well, if there are no further questions, this call is complete. I would like to thank you for joining us, and we look forward to sharing our first quarter results in April. Goodbye.

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