Acme United Corp (ACU) 2023 Q4 法說會逐字稿

Good day, and welcome to the Acme United Corporation fourth quarter 2023 earnings. At this time, I'd like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the fourth quarter and year ended 2023 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 capital and other 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 among others, those arising as a result of a challenging global macroeconomic environment characterized by continued high inflation and high interest rates. In addition, we have experienced supply chain disruptions, we may experience these disruptions in the future. We are also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission and in our current earnings release.

Thank you, Paul. Sales in 2023 were $191.5 million, a 1% decrease from 2022. Gross margins were 37.7% versus 32.8% in 2022. Net income was $8.2 million compared to $3.6 million last year. Earnings per share were $2.23 compared to $0.82 in 2022. Highlights of 2023 included new retail distribution of our first aid kits, expansion of our Westcott ceramic cutters and new craft planograms in the mass market.

Our gross margins increased as we successfully implemented our productivity plans. The productivity improvements and reduction in SG&A expenses resulted in annual savings of approximately $6.5 million. We sold our hunting and fishing business for $19.8 million. We acquired or Hawktree solutions at a bankruptcy auction for $1 million, providing new customers in the Canadian market. We decreased net debt from $55 million at year-end 2022 to $19 million.

As we entered 2024, we are optimistic. we have won new distribution of first aid kits in one of the largest drug chains in the United States and expanded our Spill Magic clean-up line to a major mass market retailer. We have innovative DMT sharpeners in the kitchen jet category with significant incremental distribution and new planograms in the craft market.

Our Canadian business is expanding from organic growth and the Hawktree acquisition. In Europe we continue to secure new first-aid and Westcott business. With investing in new products, facilities and people, the company is developing the next generation of our safety hub digital requisition system for first aid refills and was recently awarded new patents for its design. We have broadened our ceramic safety cutters to expand their personal and industrial uses.

We are developing new alcohol and antiseptic wipes and lens cleaners for production at our Medina facility for sale in the United States and Canada. We are upgrading our production and distribution facilities in Rocky Mount, North Carolina, and its Spill Magic in Smyrna Georgia and Santa Ana, California.

Our growth plans over the next three years requires additional space. We are expanding our first aid production in Vancouver, Washington, doubling our first aid facility in Laval Canada, and expanding our MedCap plant in Brooksville Florida. In each case, we believe we have the business to make these acquisitions accretive. These expansions accretive.

We continue to build the entire organization. The company has talented new sales executives, logistics specialists, plant managers, distribution heads and shift map supervisors. We are promoting from within and hiring from without. The team is the best we have ever had.

I will now turn the call to Paul.

Acme's net sales for the fourth quarter were $41.9 million compared to $44.1 million in 2022, a decrease of 5%. Excluding the impact of the Camillus included product lines sold on November 1, 2023. Sales for the fourth quarter of 2023 declined 1% compared to 2022.

Sales for the year ended December 31, 2022, were $192 million compared to $194 million in 2022. Net sales, excluding Camillus, included in the US segment declined 2% in the fourth quarter. Sales were constant for the year ended December 31.

Sales of school and office products for the year were impacted by customer reductions of inventory in the first half of 2023, sales of first aid products were strong. Net sales for Europe decreased 13% in local currency for the quarter and 6% for the year ended December 31.

The sales decrease for both periods, it was mainly due to the economic recession in Canada, net sales in local currency for Canada increased 12% in the quarter and 5% for the year due to growth in first aid products. The gross margin was 39.1% in the fourth quarter of 2023 compared to 31.9% in 2022. The gross margin for the year was 37.7% compared to 32.8% in 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022, as well as lower inbound transportation costs.

SG&A expenses for the fourth quarter of 2023 were $14.3 million or 34% of sales compared to $14.1 million or 32% of sales for the same period of 2022. SG&A expenses for the 12 months of 2023 were $59 million or 31% of sales compared with $58 million or 30% of sales in 2022.

Camillus and Cuda hunting and fishing product lines were sold to GSM holdings on November 1, 2023 for $19.8 million. The sale resulted in a gain of $12.6 million This was recorded in other income. The gain net of tax was approximately $9.6 million.

Interest expense for the fourth quarter of 2023 was $500,000 compared to $940,000 (sic - see press release, $937) in the fourth quarter of '22. The decrease was due to lower average debt of approximately $32 million, partially offset by higher interest rates.

Interest expense for the year went from $2.4 million in 2022 to $3 million in 2023, and average debt declined by $12 million. However, the weighted average interest rate went from 4% in 2022 to 6.5% in 2023. Today, our average interest rate is approximately 5.6% due to the mortgage being fixed at 2.8%.

Net income for the fourth quarter, excluding the gain on the sale of the Camillus and Cuda product lines was $1.6 million or $0.40 per diluted share to compare compared to a net loss of $600,000 for the same period of 2022. Including the gain, net income was $11.2 million.

Net income, excluding the [Camillus and Cuda] sale for the year ended December 31, 2023 was $8.1 million or $2.23 per diluted share compared to $3 million or $0.82 per diluted share last year. Including this, the gain on the sale net income was $17.8 million.

The company's bank debt less cash on December 31, 2023 was $19 million compared to $55 million on December 31, 2022. During the 12-month period, the company paid $2 million in dividends and generated $24 million of free cash flow, including an inventory reduction of $5 million. Additionally, the $30 million (sic - see press release, $13 million) of net proceeds from the sale of the Camillus and Cuda product lines was used to reduce debt.

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

(Operator Instructions) Jim Marrone, Singular Research.

Yeah. Good afternoon. My question deals with what you anticipate going forward? Are you going to continue looking at term making the business smaller by selling further product lines or are you looking at acquisitions? I'm just looking to get your thoughts on that.

Look, Jim, we have growth plans that we see very clearly. And in my mind, I'm looking at over the next three years, somewhere around $100 million of growth. And we're doing that from organic growth as well as acquisitions. The focusing of our business by selling our Camillus line for 100 times our investments.

Now all the shareholders benefited from that, it's an example of if we get an opportunistic sale, we'll take it. But where we're going is building. That's why as we're doing things like expanding in Canada because we did an acquisition and has a heck of a lot of business sitting behind that and we need a bigger boat.

Similarly of Spill Magic. We're lending major new business that's coming in this year and we need facilities for. Med-Nap that we're working big time on the expansions there because we use the products ourselves. We're growing our top line in the first aid area, and we're gaining business from outside customers. So now we're not shrinking the business, is it aggressive growth plan.

Okay. So then is it safe to say that you're looking at more geographical expansion as opposed to adding product lines? Is that the focus going forward?

No, there's two ways. In the first aid area, we're looking at acquiring companies that are competitors in the space or have step away as well as vertically integrating the products that go into the first aid and safety markets. So it's a horizontal expansion, mostly in the US and Canada as well as some vertical integration.

Okay. Thank you for taking my questions.

Sure.

Tim Call, The Capital Management Corporation.

Congratulations. Getting through a of a year of many challenges and hopefully on the upcoming years are much easier. But post pandemic, Cuda and Camillus had negative sales growth and we're holding you back. And so you've sold them should we think now overall sales growth could accelerate with healthcare being the largest part of the company and replenishment sales and healthcare possibly being the fastest growing area of Acme?

Tim, I think that's a pretty perceptive question. The Cuda and Camillus business were about flat, maybe a little bit of decline. And after the very strong period with the COVID but really the sale was because we got a good price and because we focused the business and now we've got a much stronger balance sheet to be working on acquisitions, mostly in the first aid area. The organic growth in the first stage is substantially better than what Cuda and Camillus have been in the past couple of years.

So your question holding us back in the top line, I guess it would have because it was flat for two years. The other piece of that is Westcott has gained this year, new business in the cutting area and in planograms. And so we're feeling pretty positive about growth there over and above what it normally has grown. So yeah, I'm looking for meaningful growth and frankly, orders are good right now in the first quarter.

And so the first half of '23 softer sales as retailers and wholesalers cut inventory levels. And you don't see that repeating in 2024 necessarily?

Now we believe we're beyond that.

And then when we look at our gross margins and profit margins, again, health care, it seems to have higher margins and replenishment sales in health care might even have higher margins as your overall sales mix skews toward healthcare and toward replenishment sales to do exact overall corporate faster sales growth and margin expansion?

Well, the margin expansion, let me just say on that. There is also inflationary pressure and we have a lot of uncertainty in the global world and that generally means more cost not like we'd had in the past, but that's sort of a headwind on some margin expansion from the levels we finished in the fourth quarter.

But certainly on the growth side, some of that, for example, the refills on first aid kits do have higher margins than some of the other products. And that is the fastest-growing part of our business. As we look to make acquisitions with competitors, we're also expanding the base of refills.

So that helps on margin improvement. So as we're looking at it. I think for sure, the first aid emphasis and the growth there is faster than the rest of the business normally. And that's pulling organic growth going forward. And our margins I probably wouldn't model much more over the fourth quarter. And if we do better than that's a pickup.

Okay. So organic sales growth, strong margins, probably much lower interest expense and possibility of accretive acquisitions?

Yes.

It sounds wonderful. Thank you for all your hard work in getting us to this corner.

Tim, thank you for -- and for everybody on the call. Thank you for your support because we focus on growing and there's a lot of people supporting us in the background. Thank you.

Thank you, Walter.

Richard Dearnley, Longport Partners.

Good morning. The what's the headcount at year-end versus last year's head count. Your comment about best-ever? It's interesting.

Well, Paul will trying to answer the numbers, but we have somewhere around 650 people today. And what I know is that our Rocky Mount leadership is much stronger than it's ever been. Our leadership in Santa Ana and both plants on our Acceleron. We've had some new people join us that Med-Nap, and that's helping us expand there. And we've started very strong at Med-Nap, which I'm cheering about, but also strengthening some of the people in our accounting and in our IT area. So those are the kinds of people that are really making a difference.

Right. Do you have a feel for what where the headcount was at the end of '22?

2022 or 2023?

No, (inaudible)

'22 was 620.

620 and we're about. (multiple speakers) I think we're at about 650 right now.

(multiple speakers)

It's yes, that's close enough. Now on the -- It's the sale of Cuda and Camillus was $19.8 million and taxes were $2.9 million. That suggests proceeds of [$16.9 million]. But you said the net proceeds were [$13 million]. where is the other $3.9 million [growers] by [natural] ?

On the taxes was -- what is -- were $3 million, but we -- [but] there's a holdback of $1.5 million that we haven't received yet that we'll receive at the end of this year at for November 1.

Right. But there would still be another $1.5 million missing?

No, I don't think so, but what -- sorry what was done the math again?

Could that be a well, the $19.8 million was the sale, tax is $3 million --

Yeah, where we had expenses associated with the [discount] --

Okay. And so okay, that would account for that already. And then the sales mix between what [Scott] and first stayed in, you might want to break down the pro forma as you leave '23, is it significantly different. But for the fourth quarter and the year?

Are you asking what the percentage of the first aid business for --

Yeah, first aid -- yeah, the mix sales mix between the two pieces?

There was 60% for the year. (multiple speaker) 54% last year. The fourth quarter, I'm not sure I would think it would be like 62%, maybe.

Okay. And [X] without the Cuda and Camillus, we can just adjust the math for one-month in the fourth quarter and --

Yeah. Once.

Once, right.

Right. The share count is the bump in the share count from the third quarter to fourth quarter fully diluted, is that because you closed the year at a high?

Absolutely, it's a stockprice.

[Okay]. And then in October, you mentioned that the sales had started strong generally and so it looks like the fourth quarter tailed off. Am I reading that correctly?

Well, we sold 6% of the company and the sales were a little softer in November and December. But I mean, I guess there's ways that a [notion] to January and February were really strong.

Yeah, that -- and do you have a feel some folks said they were expecting back to school to be down in '24. Do you have any advance feel given the over inventory situation as you got into back-to-school in '23, it would seem like (inaudible) things should be more quote normal.

Yeah. I don't know what somebody else that has the experience, but we're expecting a good back-to-school. And the orders that are coming in are solid. And as far as inventory reduction, if there are customers still out there with inventory reduction programs, then they have a problem.

Understand. Okay. Thank you.

Okay, thank you.

Thanks, [Rich].

(Operator Instructions) Sam Namiri, Ridgewood investments.

Hi, guys. Great year. I like the free cash flow generation. I had a question about that. It was on the press release, you were at $24 million of free cash flow with the $5 million reduction. So I just wanted to make sure that was cash flow from operations. Is that right?

No, It's free cash flow. Cash flow from operations less the capital expenditures.

Okay. But that doesn't include the Cuda sale.

No, it does not.

Okay. And then (inaudible) so I mean that's pretty solid. And then the other question I had was so with the expansion plans. Are you -- I guess you're going to see spending some CapEx on that. Do you have a sense of how much CapEx you're going to spend on that and the timing of that? as well so we can think about cash flows?

Yes, we'll be spending about $6.5 million this year on CapEx. And our depreciations and amortization is somewhere like $5 million.

How much did you spend last year on CapEx for '23?

So $4.3 million I think this is just for [memory] $4.7 million.

Okay, so not really much more than the normal?

No, but it's impactful on spending, for example, in Canada that Hawktree acquisition has taken a lot of business and there's no place to put it. I mean, it's a good problem. But you got tod do [it].

I get it. So I mean, like if I back out the $24 million minus the $5 million of reduction inventory, I get like $19 million. And then assuming everything even stays flat, which I assume won't because you guys seem to have some nice business. I get to like $17 million of actual free cash flow. And, I don't know (multiple speakers)

No, the thing is we're not going to drive down inventory the way we did in 2023. So inventory is going to grow based on our sales growth so you're not going to get that impact is going to the other direction.

Got it. Okay. But then you should have an impact of growth from demand you're seeing as well --

Yes.

[To] understanding. Okay. And another question I had was you've reduced your debt quite a bit. If you make an acquisition, I assume you're going to use debt to finance?

Yes.

Hope you having a [path]. Okay.

Yes.

Okay. And then your growth, is it coming from like take like, I guess, like winning against competition for maybe kind of give some color as to like the market or the market's expanding that you're in. Are you again beating competition? Like can you is there any color you can give in terms of that?

Well, let's take Westcott first, because that's the one that, you would think, well, the cutting area is probably the slowest growth and it is but people are continuing to open boxes and using them for different graphs and so forth. We have gained market share there. So the overall market is expanding it, maybe 2% to 3% in my best estimate, but we're looking at much greater growth in Westcott this year.

And it's from some cutting tools that are going into a mass market retailer that we never had before [with a] customer we've had before, but not for the products. And there, it's a replacement of a competitor in the case of Westcott, again at a major hobby store. It's a replacement of a competitor with many, many new products. So it's a multimillion-dollar expansion.

Again is winning against a competitor. In the case of first stage we we're seeing an expanding market growing faster than Westcott, where we're gaining growth this year, make two drug chain where we pushed out a competitor. And then I believe at a another industrial hardware chain we're not only pushing out a competitor but gaining more shelf space that didn't exist dedicated to the first aid.

In the case of foodservice, we're gaining new wipes and lens cleaners, we're also gaining, and that would be against probably a competitor, but I don't know what's [going on]. And then we're also gaining first-aid, which is going into restaurants that we've done quite a bit of work, but would this just new business that we're gaining.

At Spill Magic, we gained a major piece of new business at a large grocery chain. And you know, that's Spill Magic's use, for example, at one large retailer in the United States where anybody this spill something on their floors or gets sick. They use it for cleanup. And this is a multimillion dollar expansion of new business this year.

I'm not sure whether they converted from another competitor. I don't think so. I think it was really a new use. In Europe we've gained against a competitor in the Westcott several hundred thousand dollars that -- I just became aware of yesterday, and we're introducing new first [aid] items there. Probably that's the in first aid area that would be new products to our existing customers in a new category.

So that's a flavor of how we're doing that Sam, there is organic growth and then a DMT, we've replaced the kitchen area at a large retailer, sharpening tools for knives, and that's a multimillion dollar new piece of business. So there was a competitive win. So that's why we're seeing this coming year with some pretty good winds at our back.

Thank you. And then I just wanted to get a sense of how much room in terms of -- how do you think about your capacity for debt and what level of debt you'd be comfortable with going to for an acquisition?

Well, we have a lot of capacity right now. As you know, we were at $55 million in debt in December 2022 and we're at where we now feel like $19 million the net debt, I mean so we've got $35 million, $36 million of excess capacity, right now and we're generating cash flow. So the kinds of acquisitions we're looking at are tuck-in acquisitions where we can leverage our distribution channels and our product mix to grow them. So we're not looking for some transformative deal where I've got adding a tremendous amount of debt. That's probably not what's in the cards. Is that helpful?

Yes, that's helpful. I guess part of what I'm thinking is also is with what your outlook is looking like, does it make sense to increase buyback as well or other? I don't think you actually have I'm not sure if you have a buyback in place, I don't know if you do, small but --

Yeah, we have a buyback in place for over 160,000 shares, and we could do that. But I'm not thinking right now. [Well] we could do with some options because that would be a very advantageous for the company because you've got the strike price offsetting the number of shares, we may do some of that. And opportunistically, we may find a block that's available and we take it because if we're right with where we think we are going, then that would be good purchased for the company.

Okay. And of the $100 million you mentioned in the call said $100 million of revenue in what three years is what you expect to build organic and --

I'm not expecting that's my objective, holder to watch it.

Okay. But I guess from the objective there, what would you they is the mix of organic versus positive growth?

So just for round numbers, we say we were [$200 million] were left to finish the year at [$191 million] and we sold 6% of the company. So let's remember that. So let's say we're at [$200 million] and we grow 10% a year in three years. That's to [$20 million to $40 million to $60 million] the some compounding that's [$270 million], and we buy [$30 million] of companies. So that's how it would happen. I can see that happening.

Got it. Great. Thank you. I really appreciate it --

Sam, thanks for your support.

Richard Dearnley.

Paul, the tax rate in the fourth quarter, it looks like they operate X the capital gain was really minimal. Am I what am I getting that right? And if so what why was that?

The tax rate in the fourth quarter was 20% does we --

Well in the --

The gain on the sale is that the capital gains rate is the same as the ordinary rate. But that -- I think the tax rate in the fourth quarter was 20%. [you think] --

But the -- well the [$2 million or $3 million] that you show there is basically the tax on the capital gain suggesting the risks, the operating pre-tax, which was about $1.6 million or something had no factory.

Well, [such a dynamic tax rate take] during the year, we estimate the full year taxes and we use the effective annual tax rate. So in the fourth quarter, we true up the taxes based on the actual pre-tax. So there's always some differences in the fourth quarter.

Okay. That's what I guessed. Okay. Thank you.

Thanks, Richard.

Jake Patterson, Talanta Investment Group.

I was just some curious, you said 6% of the company sold its stake $11 million and $12 million of revenue for those hunting and fishing lines that sound right.

Right.

Yes.

And then that for '23, what does that have -- you said that was flat versus '22 probably or is that down a little bit?

I think it was down a little bit I think in 2022 is $12 million and in 2023 it would have been $11 million.

Okay.

There are two models (multiple speakers)

Okay, got you. And you [are not expect] there's not going to any like SG&A reduction from that? (multiple speakers)

There was SG&A reduction, sure, Jake. We had to rightsized ourselves when Dick certainly was doing as arithmetic and saying, well, you know, there must be other expenses. Sure, though there was severance on [average]. But as you can imagine.

Yeah, do you have a number for maybe onetime expenses in Q4 [maybe] we can back out?

Well, those just I'll put you got six -- you sold for $19.8 million. You can work backwards and come up with a number.

Okay, So I guess going forward, like looking at a $59 million SG&A this year you expect, and that's it. We probably stay steady going forward in '24.

Well, as we grow, we'll increase a little bit. But the other variable costs is a lot of freight to the customers and commissions and so variable selling on. So that will those who go up with a sales increase and the rest of the SG&A will stay fairly flat and some savings on Camillus and Cuda, but then we got cost increases, wage increases and so on.

Yeah. All right. That's [it for me]. I Appreciate it.

Thank you, Jake.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Well, thank you very much for joining us. We look forward to speaking with you after the first quarter. Goodbye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.