Acme United Corporation (ACU) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Acme United Corporation’s Second Quarter 2012 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Walter Johnsen, Chairman and Chief Executive Officer. Please go ahead sir.

Good morning. Welcome to the second quarter 2012 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 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 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 2012 sales of $27.6 million, an increase of 15% over last year. Our net income was $2.06 million for the quarter, an increase of 18%. Acme’s 6-month sales increased 16% with net income increasing 25%. The results for the quarter and for the 6 months of 2012, were the best the company has ever achieved. All of our major brands performed well. Westcott School and Office product family had record back-to-school sales. The iPoint pencil sharpeners and TrimAir paper trimmers were particular standouts. The Clauss industrial and professional tools set sales records with strong results from heavy duty scissors and other cutting tools. Physicians Care and Pac-Kit first aid products each set new highs with market share gains in new products. The biggest single issue during the past 6 months has been the bankruptcy of Schlecker, one of our large customers in Europe, which purchases our manicure products and distributes them in 17,000 outlets. In June, Schlecker announced that it would liquidate most of the company although some divisions may continue under new owners. They will continue to be taking orders under bankruptcy protection, but they are understandably lower. Our maximum exposure during the next 6 months is about $200,000 in lost gross margins. The European team is actively working to replace the lost business. Our C-Thru Ruler Acquisition is now fully operational within the Acme United System. Revenues last year were about $2.5 million with 40% gross margins. We added one person in customer service to the staff, and there was an opportunity to expand the product line to our global customer base and to bring our cutting instruments into its craft and school markets. We will be actively developing new products within this segment and of course leveraging our combined purchasing power. The C-Thru Acquisition is already accretive. The Camillus knife business is expected to continue to grow during the next 6 months. The product family is now shipping in volume to the mass market, and many major sporting goods chains. This will be largely incremental business to last year with sales for the fall hunting season and Christmas. We gave guidance earlier in the year of $80 million to $85 million in revenues. Our revenues to-date and our back order, suggest that we may be at the higher end of that range for the year. I’ll now turn the call to Paul Driscoll. Paul?

Acne’s net sales for the second quarter were $27.6 million compared to $24 million in 2011, an increase of 15% or 15% on local currency. Sales for the 6 months ended June 30, 2012 were $44.5 million compared to $38.4 million in the same period in 2011, an increase of 16% or 17% on local currency. Net sales in the U.S. segment increased 22% in the quarter and 21% for the 6 months ended June 30. The biggest contributors to the sales increase came from Camillus Knifes, paper trimmers, the iPoint pencil sharpeners and first aid kits. Net sales for Canada increased 4% in the quarter in local currency but declined 1% in local currency for the 6 months. Net sales for Europe decreased by 11% in the quarter in local currency due to the recent loss of Schlecker, our large customer. Sales for the 6 months increased 13% in local currency compared to the same period last year due to higher sales in the growing mass-market channel. The loss of Schlecker sales amounts to approximately $1.5 million annually. We are aggressively seeking new business. SG&A expenses for the second quarter of 2012 were $6.7 million or 24% of sales compared with $6.2 million or 26% of sales for the same period of 2011. SG&A expenses for the first 6 months of 2012 were $12.2 million or 27% of sales compared with $11.3 million or 30% of sales in 2011. The increase for this quarter and 6 months was primarily due to higher sales commissions and delivery costs associated with increased sales and higher personnel related costs. Operating profit in the second quarter increased from $2.5 million last year to $3.1 million this year, a 25% increase. Operating profit, for the 6 months increased by 34%. Net income for the second quarter 2012 was $2.1 million or $0.66 per diluted share compared to net income of $1.7 million or $0.56 per diluted share for the same period in 2011. Net income for the 6 months ended June 30, 2012 was $2.3 million or $0.74 per diluted share compared to $1.9 million or $0.60 per diluted share last year. The company’s bank debt less cash on June 30, 2012 was $15.9 million compared to $14.4 million on June 30, 2011. During the 12-month period we spent $1.5 million on C-Thru Ruler, $400,000 on Treasury shares, paid $800,000 in dividends and generated $1.3 million of cash from operations less capital expenditures.

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

[Operator Instructions] And we’ll first go to Jeffrey Matthews from RAM Partners.

The fact that -- first of all, congratulations. And secondly, the fact that you highlighted Camillus in the commentary first among reasons for the U.S. increase implies that that’s the biggest reason or at least the large chunk of the reason for the increase. And I just wanted if you could talk about Camillus and where it stands in the Acme portfolio now versus when you bought it? And what your plans look like over the next few years for it?

Okay. Well, first, the big increase in the year so far has not been Camillus although it’s got a lot of orders. The big growth driver is in the iPoint pencil sharpener and some of the paper trimmers, just a lot of growth in other items in the Westcott family. Camillus has grown well, but it’s not been the driver for the second quarter. If I were to break it out, I would tell you it was maybe at a $1.5 million for the quarter. So what’s happening is this product family which only did about a million last year has a lot of legs now. And part of it was for, I think by our agreement with Les Stroud, which we announced in January, but had been talking to many outdoor sporting goods chains well before that. Les is a survival expert, he’s got a major television show called Survivor Man on Discovery Channel. And he endorsed the Camillus line and we developed the survival tools with him. Well, that plus a lot of really good products and some floating [ph] technologies on the knives themselves that are still open -- major chains and some of them include Wal-Mart and you’ll see our items now on the shelves there. Others are Academy Sports, Tobillos and Smoky Mountain Knife Works there is a host of them, Fast Pro. And as that happens and as we start to ship more, particularly the back half when we’ve got the hunting season and the fishing type presence, we’re gearing up for some more substantial volume. I can’t give you a real feel yet for what that means, but if I were to guess, it’s the backend half of $4 million to $6 million of additional growth. So in the back half of this year, there is an incremental piece that we haven’t had before. Relative to the entire portfolio, Camillus gives us a platform of high quality, more expensive items to sell. It gives us the ability to differentiate with coatings. I can see doing things with Les Stroud, on more survival tools. I can see bringing this into some of the military markets outside of the U.S. And we’ll be seeing how that plays out over the next 6 months. Plus, it’s an exciting rebirth of this product’s family. And we’re just seeing the beginning of it I think.

Great. And just to follow-up on that, this obvious point that you -- obviously it sounds like the Les Stroud relationship has worked out at least as well as you thought it might have?

Well, it’s worked out better than I thought it would work out. And working with Les has been a real pleasure. I’m sure there is going to be more things we do together. And the nice thing is he’s got very real experience surviving in harsh environments. And he trained special forces and we can put things together that with our cutting technology, with our safety items, which all add real value to the product category and I think we can get placement with it. So there are other things we can be doing in the future with him.

And we’ll now go to Louis Meltzer [ph] from MaxEx Investors [ph].

The loss of the European customer, I’m not sure I have the figures right, but it appears to amount about $0.16 a share for the year, is that the ballpark?

I don’t know because I haven’t done that arithmetic. How did you get that?

I believe you said $200,000 would be the number and compared it to $3.5 million outstanding?

Yes, that was a loss of $0.06. I want to confirm that. It’s $200,000 in gross margin and there is a lot of new business that we’re working on right now. One of the things Louis and for the audience, losing the manicure business at Schlecker which was low-margin Private Label, opened up the opportunity to fill that channel in other ways including selling through the mass market, which is through Laffa, Adual [ph], Lidl. And so, there is a demand for the product, we need to find other avenues to distribute it. It’s unfortunate for the Schlecker shareholders who lost billions. But we’ll be doing fine.

The outstanding accounts receivable from that company prior to bankruptcy, how do you look at recovery?

What we did was we had insurance for the receivables so we were covered entirely.

Covered. Going forward, what is the biggest growth area, I caught the call late and I’m not sure if you’ve covered that which of these new products do you think has the most potential?

Well, really we’ve got a portfolio of products. And as I mentioned in my conference call, every single one of our 5 major brands hit records this quarter, which meant they were pulling their weight. In the Westcott family, with the school, home and office, we’ve got a lot of growth with the iPoint pencil sharpeners. We’ve had very meaningful growth with the paper trimmers. We introduced a new product called a Scissor Mouse which is now distributioned in the office and mass channel. And that will be carrying more weight in the fourth quarter. So the Westcott family, which is the main family, is doing well. The Clauss line, which is the industrial tools, in part we’re benefiting from arrangements we’ve got with customers such as Granger, who have taken on some exclusives for the category. There have been others where it’s been pulled through our Pac-Kit first aid industrial line, because our industrial cutting tools are also being sold out in the channels where Pac-Kit is sold. So we’re getting good growth at Clauss. And that we’re also seeing in the hardware and do-it-yourself market with things like our Clauss Shears now at Home Depot and other items at Lowe’s all of which we didn’t have 18 months ago. Finally, with the Camillus line, I outlined that we’ve got substantial growth sitting with the back end of this year, with the sporting goods and mass accounts. We just acquired C-Thru Ruler, annually that’s $2.5 million if we are unable to grow it and we certainly have plans for that. We kept the gross margins and our incremental cost was one person in customer service, so that’s a very accretive acquisition. So that’s the net of the vectors that get us to grow.

One last question. There is one analyst it appears that does cover earnings for your company, your estimates and he has, or she has $1.5 for the current year and $1.20 next year. Is there an opinion from management in terms of those numbers?

Well, I haven’t given guidance on the earnings. I just gave a little bit of guidance on the top. I previously suggested $80 million to $85 million. We’re probably looking close to at the 85 level now. And depending on what happens, it could be a little bit more. So with the $1.5, we didn’t help the analyst get to that number, but I’m sure there’ll be recovering it and taking another look at it.

Yes. Because he had, of course he had $83.5 million as the year total sales and you’re saying that...

Yes, yes, so we’re pushing ahead of that.

And then the next year estimate was $95 million in sales, is that doable?

I haven’t rolled up next year’s numbers yet. And usually we do that when we give guidance but the momentum that we’ve got across all the segments, and then with new products backing up next year, it doesn’t seem unreasonable.

Are there any effort on management’s part of increase the number of the analysts, I know you’re coming up with going through a presentation shortly I believe if I read it correctly?

Yes. I would encourage analysts to cover it. Of course it’s a small cap stock and it’s hard for analysts to make money doing that in traditional manner. But we’re certainly open to that.

We’ll now go to Bill Jones from Singular Research.

Obviously it was ahead of my estimates as the last caller mentioned both on the top-line and the bottom-line. So we’ll be revisiting that. But I wanted to ask on the C-Thru Ruler Acquisition. Has that closed or when did it close?

Yes, we closed that the first week in June, around the 7th of June.

Okay, so that’s when it was announced. And now, you said it's about $2.5 million, about $40 million gross margin, and obviously $2.5 million in sales, I’m sorry. Obviously a lot of that’s going to fall to the bottom-line. So I mean, could you give us any sense of how accretive, I mean, could it be $0.08 to $0.10 accretive on an annual basis?

Well, let’s just take some real simple example of 40% of $2.5 million is $1 million. You’ve got some shipping, so maybe that’s 3%. And maybe you have one person and that person is $50,000 to $70,000. Everything else is accretive. But basically it’s very accretive.

Okay. And then, so, I mean, that should more than offset the lost customer I would think.

Oh, yes.

Okay. And as far as back-to-school, just generally speaking, it seems like it’s been very strong despite the weakness we’re hearing about in the economy. Maybe you could just talk kind of broadly, big picture, why do you think back-to-school has been going so well?

Well, I know the reason it is for us. We’ve gotten market share gains in things like the iPoint pencil sharpeners in the mass markets also in the office superstore market. And that’s been millions of dollars. We’ve gained share in the paper trimmer area, both in the mass market and the office superstores, and distributors. We’ve gained in erasers and some of the smaller items that we don’t talk about much. But when you put that whole basket together, it leads to a record back-to-school. We sell to the retailers, we don’t sell to the school district much, we do a little bit. And I would guess that business would be under a lot of budget constraints. But the parents who are buying our products seem to be spending the way they have in the past.

Excellent. So you’re seeing that momentum into today?

Yes.

Great. And then one last question on Europe, I mean, you were just getting to the point where you’re getting some scale there. I mean, is that now -- back to losing money in the European business?

Well, I just got back from Europe, because obviously we had to address loss of a customer and get our arms around the implications. There is some really good new business that we have a chance to be pulling in, in the back half of this year, which if we’re successful, we won’t even miss a blink. But there may be -- we have to make up $200,000 in margin in the back half. And we’re all working on that. So after the third quarter, I think we’ll have a really good idea what fourth looks like and certainly for next year. The mass market continues to be growing with us, and that Lidl and Aldi, and Rewi, these are major European retail chains. So I in the long term I don’t think this is more than a blip. But in the short-term, well, we have a couple hundred thousand we've got to address.

[Operator Instructions] We’ll now go to Tom Spiro from Spiro Capital.

My line was dropped for a couple of minutes, I’m sorry if this has already been addressed. But our sourcing in China -- how is that going, any changes we should be aware of, any changes on the horizon?

Well, there are some changes. One of the things that we’re seeing is the factories are running a little bit less heavily than they had been in the past. And I see it almost across the board. And what that means for us is, we should be able to get faster turnaround on our orders. And last week I met with one of our major suppliers who said "look, our lead times are dropping from say 120 days, which we had been at, to the 90- maybe even 70-day turnaround". So that’s much, much faster. There continues to be pressure on wages and I don’t see that stopping, that’s for us, it’s about 15% annually. But the factories are clearly working on automation. And in my trip to China back in May, we were going factory by factory on steps to drive our productivity up and we have to. Relative to raw materials, it's stabilized. And with currency, the RMB has actually weakened. So that’s different than the environment we had a year ago, where the RMB just kept strengthening. And I think they are protecting in part, the Chinese export market right now. So it’s actually improving for us, if you add all that up: shorter lead times, stable raw materials, automation and stable currency.

Well, that’s helpful. And lastly, the Air-Shock line of gardening tools. How has that done this year and what are your thoughts for improving performance next year?

We had great hopes for Air-Shock and we’ve gotten several million dollars of business. So it’s not as if the line hasn’t done well. But we have not been able to get one of the major retailers to commit to big volumes. And by those retailers, I mean, a Home Depot or a Lowe’s where you move millions and millions and millions. We have been in places like Orchard supply and Piers [ph] online and I think Wal-Mart online, been in Canadian Tire and Home Hardware in Canada. We’ve been in specialty shops. But the big volumes has eluded us so far. We’re working on that and there are a couple of things in the pipeline that might make me really optimistic going forward. But right now the facts are, it’s a product line that is excellent but it’s not making the sales kind of contribution that I’d like.

But what was the principal impediment, was it price-point or design or something else?

No, it’s not that at all. It’s really our competitors jealously maintaining their market share. And widely because they’ve got big market shares and they pass money around legally to their customers, through rebates and slotting [ph] fees and it’s just -- it’s been very tough to crack it. I think we might have a shot at this.

[Operator Instructions] We’ll now go to Jeffrey Matthews from RAM Partners.

Walter, I have 2 unrelated questions. One is a follow-up on Tom’s question on China. I recall a year or 2 or 3 ago that you were on the verge of making a push of selling into China end markets with your scissors. Am I wrong?

Well, no, you weren't wrong. We are selling into China. Our 2 big customers there are Wal-Mart and Staples. What we haven’t done in China is gone to many of the local distributors for lots of reasons. First, they change a lot and second, it’s hard to have the same kind of confidence with credit. Where we’ve really been successful though, has been selling into Thailand, the Philippines, Taiwan, South Africa, New Zealand and Australia. There, the market seems more stable. And again, the major customers that we’re selling into and we get paid for them. And the business is growing -- it's about USD $1 million in total at this stage.

Okay. And secondly, on the health of the U.S. retailing customer base, so without naming names. But I’m just curious what you see out there as far as the health of your retail partners and whether you’re nervous down the road with the distribution that you’ve got?

Well, if we don’t get our office channels, and that’s one of our big channels. Our biggest customer is Staples. Financially, I think they are quite stable, they're excellently run. They are not adding stores the way they had been. And the number of office workers seems to be flat, not much is happening there. I don’t worry about Staples as an entity going forward. Office Max and Office Depot are smaller customers in the office channel. And both of them have varying degrees of balance sheet. I would say Office Max is better than Depot in that regard. Again, I don’t really worry about collecting because I think what would happen would either -- probably Depot would be acquired. In the mass market, our major customers are Targets and Wal-Mart. I think they are excellent credit and the business is growing with them. In the industrial channel the big ones are Fastenal, MSC and Northern Tool, Ranger. They're all solid and growing. The real area is in the Office channel and it’s because there is not a whole lot of employment growth going on. And so, as we’ve been gaining, it’s been because of new products and office share gains. But a lot of it is new products. I mean, we’re very active with that. That iPoint pencil sharpener family is a great example of starting with a concept and building it into an sizable force within the office industry.

And to your credit, I think if you would -- that list is a lot longer than it would have been a few years ago?

We’ve been very active Jeff in developing new products. And when we talked about the Air-Shock line, it generated a couple of million dollars so far. Some of them don’t hit the way we’d like, only some of them, like the iPoints have done way more than we ever anticipated.

We’ll now go to Laura Vaughn from Doucet Asset Management.

Just a quick question, in relation to the balance sheet. I see that the long-term debt has grown from around $18.6 million to $23 million. Can you speak to that a little and what your plans are for the debt going forward to the end of the year?

Paul, would you take that?

Yes, the debt went from $18.6 million last year to $22.9 million principally due to the purchase of C-Thru for $1.5 million. And then we had $400,000 in purchase of Treasury shares and $800,000 in dividends. I expect that, that debt will be at about $22 million at the end of the year.

Laura, one thing that you should note is the amount of cash that has built over the year as well. It’s about a $3 million build. So in our global operations, we’ve got about $7.1 million compared to $4.2 million this time last year. And that money would be taxed the second time if we brought it into the U.S. So instead, when we employ it, it's for our other global business.

Okay. And so, and the years going forward, are you comfortable with that in and around $22 million that level of debt or are you going to try to reduce it over time?

Well, we’re trying to grow the business. And we signed a new bank arrangement with HSBC in April, which was a $30 million facility, on energy [ph]. Some of you may recall, our interest rate dropped from LIBOR plus 2 to LIBOR plus 1.75, which means we’re borrowing at about 2%. The facility is a 5-year facility and they would love to be able to deploy more capital with us if there were appropriate acquisitions or things that might be -- a good piece of money. Our cash flow right now will improve when we are able to get some of the debt, some of the inventory down. But it’s complicated because we’re -- for example the Camillus line we’re gearing up for maybe some more volume later in the year and we’re adding inventory for that.

And it appears there are no further questions.

Well, I would like to thank you for joining us. This call is complete. Goodbye.

This does conclude our presentation for today. Thank you for your participation.