Welcome to the Acme United Corporation's first quarter 2016 earnings call. Today's call is being recorded. At this time, I'd like to turn the conference to Chairman and Chief Executive Officer, Mr. Walter Johnsen. Please go ahead sir.

Good morning. Welcome to the first quarter 2016 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 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 had a strong first quarter of 2016. Our net sales for the first quarter were $25.2 million, up 11% from last year. Net income for the quarter was $565,000, compared to $436,000, a 30% increase. Earnings per share were $0.16 compared to $0.12 last year, an increase of 33%. We had growth in the U.S. from strong sales of Westcott scissors and pencil sharpeners. Our sales of Smart Compliance first aid kits were at record levels. Sales of Clauss, Cuda and Camillus tools and knives were below last year due to timing of shipments. This group has a strong backlog for deliveries in the coming quarters. We're now shipping new Westcott ceramic box openers to major chains in the U.S., Canada and Europe. These openers are for personal use and have rugged ceramic blades that are much safer than traditional metal cutters. Retail demand has been strong and we will begin to see the impact of these items in the second quarter of this year. Our nonstick iPoint pencil sharpeners have proprietary coatings and are being very well received in the mass market. We expect increased sales of these items during the back-to-school deliveries in the second and third quarters. The first aid business just won a 40,000 unit kit order for all the stores, trucks and warehouses at a very major retailer in the United States. We have begun shipping new kits for hurricane preparedness at another large retailer. We have new tests at airlines, food chains and large manufacturers. These new business wins and potential wins lay the groundwork for a very strong performance in 2016 in first aid. The Cuda, Clauss and Camillus businesses have new initiatives in mass-market retailers and sporting goods chains. The Cuda line of high-quality fishing knives and…

Acme's net sales for the first quarter were $25.3 million compared to $22.8 million in 2015, an 11% increase. Net sales for the first quarter in the U.S. segment increased 12%, mainly due to higher sales of Westcott scissors and pencil sharpeners and our first aid kits. Also contributing to the increased sales were our recently acquired DMT products. Net sales in Canada increased 12% in U.S. dollars and 22% in local currency. The office products market appears to be strengthening and this is showing in our higher sales. Net sales in Europe decreased 6% in U.S. dollars and 4% in local currency. We expect the second quarter to be ahead of last year. Gross margins were 36.3% in the first quarter of 2016 versus 36.9% in the first quarter of 2015. SG&A expenses for the first quarter of 2016 were $8.2 million or 33% of net sales, compared with $7.6 million or 33% of net sales, for the same period of 2015. The SG&A increase was due to higher variable selling costs as a result of higher sales and the added DMT business. Operating profit was $955,000 in the first quarter of 2016 compared with $826,000 in the first quarter of 2015, a 16% increase. Other expenses declined approximately $110,000. In the first quarter of 2015, we incurred foreign-exchange transaction losses in our Canadian and European subsidiaries as a result of the sharp decline in the Canadian dollar and euro. Net income for the first quarter of 2016 was $565,000 or $0.16 per diluted share, compared to net income of $436,000 or $0.12 per diluted share, for the same period of 2015, a 30% increase in net income and 33% in earnings per share. The Company's bank debt less cash on March 31, 2016 was $34 million compared to $26 million on March 31, 2015. During a 12-month period, Acme purchased DMT for $7 million and paid $1.3 million in dividends. Additionally, the Company generated $2.2 million in cash flow from operations.

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

[Operator Instructions]. We will go first to Jeffrey Matthews with Ram Partners.

I wondered what the cash flow looked like in the quarter versus last year.

The cash flow in the quarter was similar to the prior quarter last year. It was a little bit better than the three-month period, mainly due to not as much growth in inventory and better earnings.

And what is CapEx looking like this year versus depreciation?

CapEx is looking at about $2 million. Depreciation is about $1.8 million.

And then Walter has mentioned that or Paul has mentioned that the office market appears to be strengthening. What are you seeing out there that tells you this? And is that strictly a U.S. comment or does that apply to Europe and Canada as well, ex currencies?

Well, I can tell you that the U.S. office market in January and in December and November for us was very soft and then it came back much, much stronger in February and March. And it's feeling strong right now, so it's a solid market. In Canada, it's improved. And despite the commodity freefall and some of the cutbacks in spending in Canada, we're seeing growth now and it feels as if it's rebounding. In Europe, it's going to be another record year in office sales for us.

And is Europe getting better in general or are you just taking share? And I know you have had a lot of issues with customers going bankrupt and stuff over the years, but the economy is getting better in general?

Yes, that seems to have been behind us. We're gaining share in things that cut. And the Westcott scissors are gaining share; the pencil sharpeners are gaining share. We're starting to get placement first aid kits in Europe. But then in the knife area and now with the DMT acquisition, those are other areas where we think we're going to be growing. Certainly, we will be with the Cuda knives and the Camillus knives. So a combination, we're gaining share, but are also introducing new products.

Okay. And if I may, one more. You mentioned booking $1 million in additional revenues DMT. How are you doing that? What are the synergies here? What are you able to do that they weren't able to do on their own?

One large retailer that we sell a lot of Camillus knives to did a review of sharpeners shortly after we bought the company. And we won at least $0.5 million of new business there, perhaps more, for this year. And then there was another large chain that they were doing a smaller amount of business but it was an existing DMT customer and we basically doubled it. There are a lot of runway here in some of the industrial distributors that we currently sell to that they don't, as well as we'll now be stocking directly these products in both Europe and Canada with local shipments and local currency purchases. I'm sure we will be able to build that. But the $1 million has already landed.

[Operator Instructions]. We will go next to Richard Dearnley with Longport Partners.

To pick up on Jeff's question about DMT, it might be new enough that you don't have an answer, but is DMT pulling Clauss and Camillus or do Clauss and Camillus going to pull DMT?

When we looked at the company, we assumed it would actually lose some business and the numbers worked very well for us. What we found is that DMT has some customers, particularly in the industrial area, that we don't have currently. Well, we don't have them in volume. And we're looking at putting some of the Clauss industrial shears into those customers. We're looking at some of the nonstick coated items that the customers could buy. So in that case, DMT is pulling us. Also in Europe, DMT has some very, very good industrial distributors and outdoor hunting distributors that we simply didn't have. And we're now getting some Camillus sales in Europe from that direction. However, in big mass retailers in the U.S. and Europe, DMT had very, very limited distribution and we're quite strong there. That represents about a third of our revenues corporately. So the big impact on volume at DMT will come if we're successful bringing that into the mass market.

Right, I see. And then Walter, in your remarks, you said we have a solid book of new business in 2016. Are you talking about the new -- is that new product? Or it sounds like the first aid compliance kits are booming. Is that new or what do you mean by new?

As I outlined in the presentation, the ceramic box cutters that are going into -- I might be wrong with some of these retailers, but there are many, many retailers in the U.S. There's an order of several million dollars that will be shipped this year. That's new business. The Cuda business, the Cuda fishing tools, a lot of new business in both new items as well as new customers. With the first aid area, the standard for first aid was shifted to something called ANSI 2015 and the compliance time for that is during 2016 now. So, we're shipping ANSI 2015 kits to many, many industrial accounts and gaining them. The cost savings that our customers have from our Smart Compliance kits appears to be evident to these customers and that's where we're getting pilot runs at some major manufacturers, a couple of the airlines, a number of the fast food chains. This isn't one or two stores. We're looking at corporate sales. So that's new business. And finally, the scissor business is gaining intrinsically with the growth in online shipment deliveries, but we've just regained some scissor business at a large retailer that had tried in some markets a competitor's product and gave up on it. So, that's all come back to us. We just won, in the past year, another large office supply retailer which is continuing to roll out into the commercial market. That's all new business. Those are the ones I can think of offhand. So when I am talking about the guidance of $120 million and the potential ability to take a second look at that in June, the success of all of these programs will become more evident and we'll be able to make another assessment.

Right, I see. The customers taking the first aid kits recognizing the cost savings, what is the cost savings -- if they didn't have first aid kits or are these cheaper than their existing kits or where is the cost savings coming from?

So, what we've got is ANSI compliant industrial first aid kits for industrial America. And many of these kits that we're going up against are being purchased by safety managers at large plants and is a van-based system where there are refills being done by vans. And ZEE Medical and Cintas just merged. They are the largest van-based system in the United States. That business is about $500 million or $600 million. Very expensive to get personalized delivery once a week to refill things. We're doing it by the installation of these kits which are, at the initial shipment, fully compliant with the requirements for OSHA and ANSI and then the refills are being done mostly through Internet sales. And it's very, very cost-effective vis-a-vis van-based delivery.

Sure. And so are your refills significantly cheaper than ZEE Medical's?

Absolutely because we have a different cost structure. Absolutely and that's the savings. Our typical first aid business in total runs $1 of first aid kits and then $1 of refills. So as we get these things installed, there's a long tail of continual refills. And it's that piece that gives the big savings to the customer.

We will take our next question from Jeffrey Matthews with Ram Partners.

I wanted to ask a couple of different things. One is does the guidance for this year contemplate anything new happening in the Staples/Office Depot merger as far as shutting stores or anything?

If Staples and Office Depot merge, then that's about 1,000 stores, we estimate, that would be closed over the next three years. And we have been running about 400 stores a year, at least last year, between the two of them. So actually the pace of closure would be less than we're currently. If they don't merge, well, Staples might close 50 stores, but it's not many. And Office Depot would probably have to close some of their stores, but not at that magnitude. That's all upside for us.

And then, on the China currency, has that been a help to you in cost of goods negotiations?

I just got back from a long trip to China and we were reviewing that with our major suppliers. And since the last time we were together with the suppliers in September, the currency, the U.S. dollar, had about a 2.5% improvement in purchasing power and we have been able to negotiate that pickup for our Chinese purchased goods, so it's a very successful trip. But we're using that money to do incentives to grow our business as well as, in some cases, we keep a piece of it. But in general, we're just very aggressive with using those savings to build our collective business.

Okay. And then my final question was just on capital structure and I'm just curious on the debt portion of the balance sheet. How does that look going forward? If, for some weird reason, the economy really tightened and rates went up, how are you positioned? I'm sure I could read the 10-K and figure it out, while I had you, I thought I would ask you.

Our debt is LIBOR plus 1.75, so we borrow at a little over 2% interest. And if the LIBOR were to go up 2 points, well, we'll pay a couple hundred thousand more in interest, but it's not a major issue for us. We don't have very many covenants. We do have an interest coverage ratio which we easily exceed and a net worth covenant which we easily exceed. I think the bigger thing is the cash flow that we generate this year which, if we can hold the inventory and grow that topline which would be somewhat difficult but possible, we'd throw off a ton of cash. It will be a very good cash flow year.

That's really the heart of my question because you know me, I'm always a little nervous with a lot of debt and this business can be cyclical. And I'm happy to hear you say that you really could envision a scenario where you could throw off a bunch of debt. Do you think the change in the dollar which has got to help you in a lot of different ways, does that help as well? Does the environment in general just help as well as business comes back and the dollar is on your side? Does that help on the cash side?

Well, yes, because we're buying at a lower price when it's translated into U.S. dollars. But the real thing is we've got two operations now which are sizable that are manufacturing domestically. That's our first aid business which is consolidated in Vancouver, Washington and currently it's over a $45 million business and now DMT which is $5 million business as of last year. And between the two of them, turns are very high. The cash flow thrown off them is very high and we're increasing the margins. So all of that speaks well towards generating cash. And there's a number of initiatives we're working on in the imported piece where I think we could narrow down some of the product families, so perhaps we can hold that inventory as we grow.

If things went okay, not off the charts great but okay cash flow-wise, how much free cash flow do you think you could throw off this year order of magnitude?

I think I know the number, but I'll turn that over to Paul.

Free cash flow, probably $5 million.

[Operator Instructions]. Gentlemen, we have no other questions at this time.

In conclusion, we've just completed a record first quarter in 2016. There are major new business opportunities we're pursuing for the remainder of the year and we're looking forward to delivering strong results. I would like to thank you for joining us. Goodbye.

That does conclude today's conference. Thank you all for your participation.