Good day and welcome to the Acme United Fourth Quarter 2022 Conference Call. 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-end 2022 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 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, including those resulted from the COVID-19 pandemic and we may experience supply chain 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 in our current earnings release.

Thank you, Paul. Acme United encountered and addressed a difficult macroeconomic environment in 2022. We faced supply chain issues at ports in Asia, the US and Europe; war in the Ukraine; rapidly increasing container expenses; product costs continually increasing; wage inflation; rising interest rates; and shortages of workers. Despite these issues, we had net sales in 2022 of $193.9 million compared to $182.1 million in 2021, an increase of 7%. This was the 13th consecutive year of record sales. Our net income was impacted by the increased costs. In particular we had over $4 million of extra expenses in container costs, port demurrage fees and drayage which we did not pass to customers. Net income for 2022 was $3 million, compared to $10.1 million in 2021 and earnings per share of $0.82 versus $2.57 last year. While our financial performance was not what we had planned, we supported our customers with timely deliveries at fair prices. It was a difficult period and we emerged -- positioned we believe for improved performance. During 2022, we expanded the first aid in medical business, introduce new Westcott cutting products, broadened distribution of our Camillus hunting knives and tools, and purchased the assets of two companies. We broadened our first aid and medical product lines, which now account for more than 55% of Acme United's revenues. During 2022 we expanded distribution in the industrial and retail markets in the United States and integrated the Med-Nap line of Prep-pads and BZK wipes into our refills. We also acquired Safety Made in June 2022 entering the market for personalized medical and safety products. In September 2022, we acquired Ready 4 Kits and merged it into Safety Made. Our team expanded distribution of our line of refills for industrial first aid kits during the year. These are…

Acme's net sales for the fourth quarter were $44.1 million, compared to $45.8 million in 2021, a decrease of 4% or 2% in constant currency. Sales for the year ended December 31, 2022 were $194 million compared to $182 million in 2021, an increase of 7% or 8% in constant currency. Net sales in the US segment decreased 2% in the quarter but increased 8% for the year ended December 31st. The decline in the quarter was mainly due to some large customers reducing their inventory. The growth for the year was primarily due to increased sales of first aid and medical products. Net sales for Europe increased 13% in local currency for the fourth quarter and 10% for the year ended December 31. The sales increase for both periods was mainly due to new customers in the office channel. Net sales in local currency for Canada decreased 16% in the quarter due to reduced consumer demand for knives and fishing tools in comparison to the same period in 2021 when there were unusually high sales of these products driven by the pandemic. Customer inventory reductions also affected the fourth quarter. Sales for the year ended December 31, 2022 were constant in local currency. Gross margin was 32% in the fourth quarter of 2022, compared to 35.1% in 2021. The gross margin for the year ended December 31, 2022 was 32.8% compared to 35.6% in 2021. The decline in both periods was primarily due to higher ocean freight and related transportation costs for imported goods. Also contributing to the decline were weaker currencies in Europe and Canada where we purchase most of our inventory in US dollars. SG&A expenses for the fourth quarter of 2022 were $40 million or 32% of sales compared with $30 million or 28.4% of sales…

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

Thank you. [Operator Instructions] Our first question comes from the line of Jim Marrone with Singular Research. Please proceed with your question.

Yes. Thank you for taking my call. My question is in regards to the fourth quarter results. Now I understand the loss on the bottom line as a result of supply side constraints. But I'm just trying to reconcile with regards to top line why the softness in US and Canadian sales given that there's a reopening with regards to schools, offices and factories. And so if you can just share some light with regards to why the decrease in sales with regards to those two markets that would be great. Thanks.

Yes. Thank you. That's a very good question. Several of our major retail customers have been reducing inventory in a very significant way. And I'm sure you've read about Walmart, Target, Amazon all doing that kind of thing. And it's been a broad brushed reduction of inventory. At the same time that they have been reducing inventory, the consumer has continued to be spending. So the actual turns of the products continue to be reasonably strong and so they're driving down their inventory, and at some point that will be completed. We're estimating that to be pretty much behind us fairly shortly.

Okay. Great. Thank you. And so I know you're not giving guidance for 2023, but if you can just give us some idea with regards to what we could expect in the first quarter and second quarter. I would imagine it's going to be a return to profitability given that the supply side has kind of abated a bit. But can you give us some idea with regards to top line expectations as well as bottom line expectations?

Well, a lot does depend on what the retail market does. And I know that Walmart has reported that their inventories are getting more in balance. We're expecting a solid performance in the first quarter and in the second. And I think I'd leave it at that. Clearly, the cost savings are being implemented and have been implemented. So -- and the container costs have gone to near historic levels. So, that's all in our favor. But on the topline that's an area that I really can't control because it depends on the retailers reducing their inventory. But I would expect two solid quarters.

Okay. Thank you. And just one last question. What are your expectations in regards to acquisitions for 2023? Are we seeing -- well, could we expect any activity with regards to maybe expansion of product line or geographical footprint?

Probably won't be geographical footprint at this time, but vertically integrating further in the first aid and medical area similar to what we did with Spill Magic and Safety Made, it's a very logical place for us to be looking as well as competitors who are directly against us in the first aid space. So, those are the two areas that I'd be looking at and I'm looking at. It's probably more towards the back end of the year if we do something.

Okay. And so are you getting offers that are coming to you, or are you kind of looking out into the market?

With our acquisition strategy, almost all of our deals are self-generated. So, the offers are really companies that we've contacted over the years and we continually stay in touch with them. So, we're very, very unlikely to be acting on a book that's put by an investment banker. It's much more likely to come from one of our self-generated deals.

Great. Thank you for taking my questions.

Thank you. Our next question comes from the line of Richard Dearnley with Longport Partners. Please proceed with your question.

Good morning. Paul could you refresh my memory on what were first aid sales as a percent of sales in 2021?

They were approximately 50% in 2021 and 55% in 2022.

And then the square footage expansion in Canada is probably not a great deal of feat. Is that for the Canadian market, or is part of that for the US market as well?

The expansion is in Canada and it's for the Canadian market. As I mentioned in the conference call we're getting increasing business, not only from organic growth through our First Aid Central business, but also the multinationals that operate in Canada that are taking our products, primarily from the US and would like similar products made in Canada, which would of course be in our factory and then ship there. So, it's a combination of both. And First Aid Central has done a terrific job since we've acquired them.

Great. Then the $4 million cost saving estimate out of supply chain, I would guess that comes largely into cost of goods. Would that be correct?

Correct.

Yes. And then the $5 million of just cost savings, how might that break down between cost of goods and SG&A?

It's a combination of both. It's probably 60% cost of goods, 40% SG&A.

Great. And then, Walter, in your discussion, in the notes, were you implying that SG&A would be down in dollars in '23?

I'm not sure, Dick. What I know is that, we continue to be facing inflation. So, I'm not sure about that. What I am sure about is, there's a solid chunk of reduction in the spending, in the aggregate pool, but that over -- the additional, I don't know the answer to that. We're also growing. So I...

Because we're growing, SG&A is going to grow as well.

Well, that's why I was -- just looking at the words and saying, hmm is that -- okay. Good. That's logical. Okay. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Peter Sidoti with Sidoti & Company. Please proceed with your question.

Good afternoon.

Hi Peter.

I'm sorry. It looks like Mr. Sidoti has disconnected by mistake. [Operator Instructions] It seems there are no other questions at this time. I'll turn the floor back to Mr. Johnsen for any final comments.

If there are no further questions, this call is complete. We look forward to sharing the first quarter 2023 results in April. Thank you for joining us. Goodbye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.