Acme United Corporation (ACU) Q2 2013 Earnings Report, Transcript and Summary

Good day, everyone and welcome to the Acme United Corporation’s Second Quarter 2013 Earnings Conference Call. Today’s call 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 2013 earning’s 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 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 record quarterly revenues and profits for the second quarter of 2013. Our net sales were 28.4 million, an increase of 3%. Net income for the second quarter of 2013 was $2.2 million, an increase of 7% over last year. Both net sales and net income set new corporate highs. The comparisons were steep since we set records last year as well. Gross margins were 35.5% in the second quarter of 2013, which were approximately the same as last year. Our back-to-school sales were at record levels. Sales of children scissors, titanium shears, iPoint pencil sharpeners, Westcott rulers and math kits all gained share and moved our U.S. revenues forward; New Camillus knives, Clauss industrial cutting tools and Pac-Kit first aid kits and supplies all has good growth. However, we continue to see declines of between 3% and 6% in revenues of publically held super stores and distributors. It is within this environment that we are pushing ahead. Other channels however are proving far more favorable than the office market. Our Pac-Kit industrial first aid products and Clauss professional cutting tools are benefiting from a recovery in manufacturing and construction. We sell an increasing amount of safety products to the oil & gas markets, in drilling as well as refining. The Camillus knife business continues to gain distribution in the hunting, fishing and outdoor sporting goods markets. We are introducing new items to the market shortly for sale on the fall and as Christmas time gifts. The Scotts garden tools are being well received and we expect to begin shipping these items in the spring of 2014 with perhaps some sales in late 2013. As we look into the second half, we believe these new business activities will strengthen the third and fourth quarters and lead to growth over last year. Our guidance for 2013 continues to be approximately $90 million to $95 million in revenues and $1.20 to $1.25 per share. The higher end of the forecast would require securing some additional business in the coming quarters. I will now turn the call to Paul.

Acme’s net sales for the second quarter were $28.4 million compared to $27.6 million in 2012, an increase of 3% or 4% in local currency. Sales for the six months ended June 30, 2013 were $46.1 million compared to $44.5 million in the same period of 2012, an increase of 4% or 5% in local currency. Net sales in the U.S. segment increased 5% in the quarter, and 8% for the six months ended June 30th. The biggest contributors to the sales increase came from higher sales of Camillus knives, the added sales of the C-Thru business acquired on June 7, 2012 and back-to-school products. Net sales in local currency for Canada decreased 3% in the quarter and year-to-date. Sales were lower in Canada due to a slightly soft economy. Net sales for Europe increased by 2% in the quarter in local currency but declined 18% for the six months ended June 30th. The year-to-date sales decline was primarily due to the loss of Schlecker, our large customer as a result of their bankruptcy and liquidation in the second quarter of 2012. We expect the increased mass market business for the remainder of 2013 to offset the loss of Schlecker. SG&A expenses for the second quarter of 2013 were $6.9 million or 24% of sales compared with $6.7 million or 24% of sales for the same period of 2012. SG&A expenses for the first six months of 2013 were $12.8 million or 27.8% of sales compared with $12.2 million or 27.5% of sales in 2012. The SG&A increase was due to higher variable selling cost as a result of higher sales, and the addition of sales and marketing personnel. Operating profit in the second quarter increased from $3.1 million last year to $3.2 million this year, a 4% increase. Operating profit for the six months increased by 5%. Net income for the second quarter of 2013 was $2.2 million or $0.68 per diluted share compared to a net income of $2.1 million or $0.66 per diluted share for the same period of 2012. Net income for the first six months ended June 30, 2013 was $2.5 million or $0.78 per diluted share compared to $2.3 million or $0.74 per diluted share in the comparable period last year. The company’s bank debt less cash on June 30, 2013 was $17.6 million compared to $15.9 million on June 30, 2012. The primary reason for the increase was a $2.8 million increase in inventory for new business. We expect inventory to end the year at approximately $30 million the same level as December 31, 2012. Net debt should end the year at approximately $10 million to $11 million. This compares to $14.6 million at the end of last year.

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

Thank you. (Operator Instructions). And we will take our first question from Frank DiLorenzo with Singular Research. Please go ahead.

Good morning. Good quarter and thanks for taking my call. My first question is would you have an organic sales number for the quarter?

Well the acquisition of -- Paul I will handle it, the acquisition of Pac-Kit took place about the middle of June of last year. So it was only two weeks of a contribution, it was quite negligible. So most of this was organic.

Okay, great. And also it seems as though you are stabilized fairly nicely this past quarter. Can you tell us where you may've seen some strength and outlook for the second half by product segment in Europe?

Yeah the first thing is that most of our back-to-school products performed very well and that was pretty much across the board. As I outlined in the conference call whether it was iPoint pencil sharpeners, or it was titanium scissors or kids' scissors they performed very well, at record levels. Where we were softer was in the some of the office products and that is systemic with the environment we are in. We had last year a large loading of Camillus knives at one of the large retailers which did not anniversary because it’s in the stores currently, so that was a negative. But we have that every quarter, that something we are loading in and we are not, but that happens to be that case there. We also last year had Schlecker as a contributor pretty much up through its bankruptcy and liquidation, which would have been through June and we didn’t have that this year. However, the back – to – the mass market business that Paul indicated would be strong in the second half in Europe appears to be accurate. So that should cover the loss of Schlecker going forward. Looking at other areas that we would build in the back half and are building in the Camillus knives the – perhaps some of the Scotts garden items, we are seeing a lot more rounding of the business and less cyclicality because back-to-school continues to be our biggest quarter, but the other quarters are growing as we have moved outside of the office channel, the industrial business, Pac-Kit first aid business that’s all showing growth and we'll be adding strength to the remaining two quarters.

Okay. Thanks for the answer.

And no one else in the queue at this time. (Operator Instructions) And we'll now go to Richard Dearnley with Longport Partners. Please go ahead.

Good morning. Last call you mentioned that there has been an upgrade in your general quality of scissors and what not that you are selling, has that continued?

Yes, it has. And when I talking about the titanium scissors, that's a perfect example where we are shipping them in record numbers and part of the reason for that is we have gained distribution. But I believe people are moving higher up into the value chain. And that might be in relation to the recovery, maybe just a trend. It might be inventory adjustment, but we are seeing it.

And is that titanium non-stick?

Well we are selling more non-stick products across the board. One area that continues to be going well are the non-stick titanium putty knives that are in one of the large do-it-yourself retailers and they just simply outperform what's currently in the market, they clean up quickly and they don't rust. These are big attributes that no other product in the market that we know of is able to deliver. And as a result it's another growth factor. It's also an upgrade in the products that are currently out there. The non-stick product family continues to find applications even on some kitchen knives for sale in Europe that frankly we just didn't have a year-ago.

Right, good. It sounds like Europe really did quite well against what was a really tough comparison. Is that…

Our European team has dug in and they are working very, very aggressively. They are focused on new business. And while it takes time to get there, we certainly are seeing the progress and I am very proud of them.

All right, good and the comment about new introduction in the fall and for Christmas was that for Camillus, or is that across the Board?

Yeah, there is a quite a number of Camillus items that are being introduced. Also there may be some Scotts items that we might be able to get some tail end of the Christmas season in some of those. So that's all in our favour.

Good, okay, thank you.

We will now go to [Todd St. Mario] who is a private investor, please go ahead.

Good morning. I'd like to hear more about the Scotts garden item. I specifically would like to know what your expectations are going forward. I mean is this going to be potentially just an additional $1 million or $2 million a year or does this thing have the potential to be sizeable, $5 million, $10 million or bigger?

It's a very good question, Todd. And in our guidance we've assumed that it didn't exist. So we certainly have been spending a lot of effort in trying to build the garden business and with the clout from the Scotts branding and the quality of the products and the award winning features that we've got we think we've got a decent shot at building a good business there. However for this year it's not in the forecast at all, as we begin to see purchase orders for some of the larger retailer, if we are fortunate enough to do that. I will be able to roll that into a forecast. Right now you should assume that it's a small product family. By the time I give guidance for next year which will probably be at the end of next quarter I will have a better idea as to what we might expect for 2014. We didn't enter this for -- say it's a $1 million category and we are certainly trying to build it into a fairly substantial line for the company.

Okay, did you incur costs that were of any significance with the roll-out in this quarter?

I am sorry, I missed that.

Well my understanding is that the products were introduced in the current quarter, the quarter that just ended. And I am just wondering if there were any significant costs incurred with introducing the products.

Usually not, usually when we are introducing new products it tends to be incremental. Sometimes they have marked down money but I can’t recall that in this current quarter we had any of that.

Okay, that’s all I got. Thank you very much.

Thank you very, very much Todd.

And we’ll now take our next question from Chris Doucet with Doucet Asset Management. Please go ahead.

Good morning, guys.

Good morning, Chris.

Couple of questions for you. First of all, is Europe profitable?

Paul, why don't you go over that?

At this point, the euros are not profitable but we expect them to be at least break even or a little bit more than that, a little bit profitable at the end of the year.

Okay, but for the year…

So Chris, what will happen is -- I am sorry. In the second half of the year with the mass market business that we are booking right now and producing that should be sufficient to turn it into a pretty strong second half for them.

Okay. Is the reason that you had a change of heart about building the inventory because you are going to build inventory in anticipation of Scotts sales? In the last quarter you mentioned that you would reduce inventory by the end of the year, now you say you are going to be 30 million by the end of the year and I am wondering why the change of heart.

We are building inventory for some products that we will be rolling out and some of that should be the Scotts business, assuming that we get it, but you got to have it built because of the spring delivery and there maybe some putty knives we are building. There probably will be Camillus items. We continue to be gaining business with Pac-Kit and so as we are building our revenue base we didn't know where we were, looking into 2014 we see a lot more clarity in that right now so we are starting to build for it.

And you have no Scotts business in your forecast in 2013?

Right.

And is there a chance that you might see some Christmas sales in the Scotts business in fourth quarter?

Yeah there is a possibility but we don't have it right now.

Okay. Have you finished the test that you talked about, talking about putty knives, have you finished the test that you were doing in the major hardware store?

That test is continuing and is performing well and I couldn’t give you a date when I would either rollout chain wide or it would be dropped but it's performing well and that seems to mean that it may get more distribution.

What kind of estimates do you have for your putty knife sales in 2013?

Chris, we don't go into that kind of detail on our products families. You've got to understand us, I think we all do that, every competitor that we compete with listens to us.

Okay, do you have any, I mean have you put any putty knife sales in your estimates in 2013, maybe that’s a better way to ask it?

I am sure they were.

All right, I will step back in the queue. Congratulations on the quarter by the way.

Thank you, Chris.

And we’ll now take our next question from Jeffrey Matthews with Ram Partners.

Hi, Walter.

Good morning, Jeff.

You there? Can you hear me?

Yeah, I can hear you. Good morning.

Okay, good morning. Wanted to get a sense of how important the office products channel is for you today versus the peak because it seems like you are able to grow without it now.

Well, the office products business today represents about 35% of our sales and five years ago that would have been closer to 80%. So that’s changed quite a bit as we are growing with the -- in the first aid area, as we have grown in the Camillus knives as we moved into the hardware and in Clauss industrial tools, they have all gained in importance, which didn’t exist years ago.

Right, okay. That really get to my next question, at the same time that your dependence on that channel has dramatically declined your margin profile has shifted a bit and I think your gross margins peaked in the mid-40s and they now seem to have settled in around 35. Is that pretty much the way the business will look overtime roughly mid-30s gross margin, operating margin somewhere in the low double-digit?

A large reason that the margins fell was because the U.S. dollar declined over 40% during that period. And since we buy in dollars our cost went up. Part of that we offset by price increases, part of it through productivity, part of it through product material substitutions and so forth, packaging changes, but the net of it is the U.S. dollar fell apart and we buy in the global markets and produce in the global markets, that hurt us. If the dollar stabilizes then I think it’s fair to say that we might be able to regain some of the margin that we lost. It’s not the profile of business, it’s our ability to buy and source. So to forecast what goes forward, we have an unusual fiscal policy. I can tell you though that as we develop new products we price them based on our cost and so they tend to have margins that are higher than those that are older.

Got it. Okay and then my final question, speaking of China as opposed to sourcing over there, I am interested in your sales efforts over there, that economy seems to be – there is a kind of a taste great, less filling argument about whether the economy over there is getting better or hitting a wall and I am curious what you are seeing and what it means there, on the revenue side if anything?

Well I am in Hong Kong right now and I just came back from Beijing, visiting some customers and I can tell you that my view is that when an economy grows 7.5% and you don’t see any used cars and the highways are packed and the buildings are moderns, Beijing is just a city but there is 24 million people in it, it kind of gives you an idea that things are not so bad in China. And my impression is that it’s quite robust maybe there's levelling back and maybe they have got some banking issues as many countries do, but the lifestyles of the people that I have seen is continuing to get better and it’s a rich country. I think in fact my conclusion was surprising, was the opportunities in China are very good.

For Acme?

Well in general, for Acme that’s not the thrust in our Asian sales. We do sell into the China, but we are selling a lot more into Australia, the Philippines, Indonesia, Thailand, Japan Taiwan, all those are contributing far more than China but there is potential.

Okay, great. That’s a terrific answer I appreciate it. That's all.

Thank you.

And we’ll now go to Michael Wasserman with Moors and Cabot Michael Wasserman - Moors & Cabot, Inc.: Walter, hi. Can you comment on the labor cost trends in China please and so far as Acme is concerned and also raw material pricing?

Sure. First on labor, it’s continuing to increase. Last year our numbers were about 14% increase in wages over the previous year. And I see every indication that we will be having numbers of 12% to 14% increases in labor again in the coming year. Relative to raw materials they've pretty much stabilized, the plastic that goes in the packaging and goes in the handles of scissors has increased, because petroleum's gone up a little bit. The steel, which is the larger part of the product cost is about stable. We are working on productivity, on packaging and automated some more steps, particularly in the processing and some of the steel and packaging. All those things tend to offset some of the labor increases but the net is the labor costs continue to be increasing. Michael Wasserman - Moors & Cabot, Inc.: And do you see that continuing indefinitely and what other than looking for additional efficiencies, what might that cause you to do in the long term, if anything?

Well, I know there our products are as competitive if not more so, particularly in the scissor line than any other supplier globally and we know that because we are selling not only private label but the main stay scissors to -- well, we are the largest in the industry so it's probably everybody. And I also know that there doesn’t seem to be any let down on the cost of labor going up in China, so that’s a problem in a five or seven year period for the Chinese economy perhaps but there's a lot of productivity that you can do and we are still in the early stages of that. So it’s something we can manage and we have to manage. Michael Wasserman - Moors & Cabot, Inc.: All right, thank you.

Thank you, Mike.

And at this time there is one name remaining in the roster. (Operator Instructions). And we’ll now take a follow-up question from Frank DiLorenzo with Singular Research. Please go ahead.

Thanks. Could you talk about the possibility for the rest of this year and into 2014 of potential acquisitions, whether it’s a company or product acquisitions? Thanks.

Frank, we are always working on that and what I would tell you is it would be likely that we would do an acquisition that’s a stretch from where we are right now in our core businesses, a half step away perhaps. We have got quite a number of leads that we are continuing to follow-up and if we are successful in making another acquisition that would be in addition to any of the forecast we've given of course but you know I can’t identify anything right now publicly.

Would that potentially be in the first year neutral, accretive do you have a goal there or it depends on the strategies there?

Well every acquisition we have done has been accretive almost immediately and I can think of a couple that’s three or four months but these are accretive acquisitions. And it’s an important part of the strategy but the ability to talk about those before you do them is little bit difficult.

Thanks.

And we’ll now go back to Jeffery Mathews with Ram Partners. Please go ahead.

Hi, I just wanted to follow up on that last question on acquisitions. You have tended to do very shrewd deep discount, sometimes out of bankruptcy type things. Are those -- do you still see opportunities along those lines or are you thinking in the back of your mind there is an ability down the road to buy more of an established on-going business?

Well, I think that you've got to keep an open mind on the types of acquisitions that you do. But the ones that I think we are very, very good at are those that we can add value to quickly and they tend to be in trouble. But they tend to be in markets where we add value, where we can add either customers or we can do sourcing or product innovation very quickly and turn them around. And whether was Clauss or that was Rotex years ago in Canada, or Pac-Kit to name a few, we've been successful doing it, or C-Thru last year. I wouldn't rule out buying something that is a more established business and in fact we've looked at numbers of them. But again it's a case-by-case basis. I try [to forget] just we have bought a lot of companies with value.

Okay, great, thanks for that.

Thank you.

And there are no other questions. So I will turn the call back to Walter Johnsen for any additional or closing remarks.

Well, I'd like to thank you for joining us. This call is now complete. Good luck.