Good day, and welcome to the Acme United Corporation First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Mr. Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the Acme United first quarter 2023 earnings conference call. 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 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 resulting from the COVID-19 pandemic, and we may experience supply chain disruptions in the future. We're also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission and our current earnings release.

Thank you, Paul. Acme United made progress in the first quarter of 2023. Our net sales were $45.8 million compared to $43.3 million last year, an increase of 6%. Net income was $990,000 versus $830,000 in 2022, an increase of 19%. Earnings per share were $0.28 versus $0.22 or a 27% increase. The first quarter results mark an important improvement in Acme United's performance. Net sales increased despite ongoing reductions in inventory by our customers. Our gross margins benefited from productivity improvement. The expense reductions in SG&A that we began in 2022 are becoming evident. With sales up, gross margins up and SG&A down, our operating income increased to 60% in the first quarter. We believe that our customers are making progress with their inventory reduction programs. And that some are now rightsized, others are understocked and some are reducing depending on the item. We anticipate these kinds of customer actions to continue, particularly with back-to-school items. However, we also believe that our customers will have essentially completed their inventory reduction efforts by the third quarter. Acme United has also been reducing inventory. We reduced our stock levels by approximately $5 million from December 31, 2022 to March 31, 2023, and anticipate further reductions during 2023. We've been careful not to reduce too quickly to be in a position to meet customer demand that is not forecast. We are seeing improvements in productivity, particularly at our major warehouse in Rocky Mountain, North Carolina. As you may recall, we installed new warehouse management software in 2021, and we had difficulties with implementation. It took two years, but we are now seeing efficiencies. We also have less turnover of our workforce due to higher wages and air-conditioned environment and new leadership. We believe we will continue to see improvements due to improved workforce stability, experience and automation. The cost of shipping containers from China spiked last year. In the first quarter of 2022, the ports of Shenzhen and Shanghai closed due to COVID; the war in Ukraine began; and the ports of Los Angeles, Long Beach and Rotterdam were overwhelmed and clogged. We incurred over $4 million in abnormal expenses in 2022 and $500,000 in the first quarter of 2023. These expenses are largely behind us. At the end of March 2023, we had approximately $41 million in variable debt and 7% interest. We also had mortgages of approximately $11 million at now our Rocky Mount, North Carolina and Vancouver, Washington properties at fixed rates of 3.8%. We are addressing the impact of rising interest rates by lowering debt through inventory reduction efforts, scale back capital spending and earnings. We are not providing guidance at this time, but we look forward to stronger performance in 2023 than last year, and we continue to look for potential acquisitions. I will now turn the call to Paul.

Acme's net sales for the first quarter were $45.8 million compared to $43.3 million in 2022. Net sales in the U.S. segment increased 9% in the quarter, mainly due to higher sales of first aid and medical products. Net sales in Europe for the first quarter of 2023 declined 2% in local currency compared to the first quarter of 2022. Net sales in Canada for the first quarter of 2023 declined 5% in local currency, mainly due to customer inventory reductions. The gross margin was 35.5% in the first quarter of 2023 versus 34.5% in the first quarter of 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022. SG&A expenses for the first quarter of 2023 were $14.1 million or 30.7% of net sales compared with $13.6 million or 31.4% of net sales for the same period of 2022. Operating profit in the first quarter increased 60% due to higher sales and improved gross margin and lower SG&A spending as a percentage of sales. Interest expense for the first quarter of 2023 was $900,000 compared to $300,000 in the first quarter of 2022. The increase was almost entirely due to higher interest rates. Our overall average interest rate in the first quarter of 2023 was 6.4% compared to 2.4% for the first quarter of 2022. Net income for the first quarter of 2023 was $990,000 or $0.28 per diluted share compared to net income of $830,000 or $0.22 per diluted share for the same period of 2022, an increase of 19% in net income and 27% in earnings per share. The Company's bank debt less cash on March 31, 2023 was $48 million compared to $46 million on March 31, 2022. During the 12-month period, we paid approximately $11 million for the acquisition of the assets of Safety Made, paid $1.9 million in dividends and generated $11 million in free cash flow, including an inventory reduction of $3 million. Net debt declined $6.5 million from December 31, 2022.

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

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

Very nice quarter. I have a couple of questions. I suppose the first one that I'd like to ask is with regards to what you're hearing from clients. So you said there's a little bit of an uptick with regards to the back-to-school space. But I'm just curious about your thoughts with regards to back-to-office because it seems like that space is under -- it seems to be under pressure. A lot of the commercial REITs are actually finding themselves in trouble, and I think it's just a result of the back-to-office. So, if you could just perhaps provide a little bit of color on that, and then I'll ask my second question after that.

Sure. Well, the office channel in the first quarter was reasonably good and -- for us. We are a little concerned about some overstocking with our retail customers with back-to-school products that they bought in very heavy supplies in the second quarter of last year. We'll see what happens. But in general, the back-to-school tends to be a pretty stable business because the number of works is more or less 3.8 million children in North America a year. The actual going back to the office, where maybe it's two days a week and working at home the rest, is still requiring supplies, and it may be purchased at different places. We may get more Amazon sales because individuals are buying. But for us, at least, the office channel has been reasonably good. Where we're seeing some softness is some retailers would have just overstocked a year ago, and they haven't quite worked through all their inventory to normal levels, and I see that coming to an end sometime fairly shortly.

Great. And my second question is with regards to acquisitions. So you mentioned that you're looking to do an acquisition sometime in the near future. Are we looking at it in terms of 2023 or beyond? And what type of acquisition are you looking to make? Is it something that just to expand product lines? Or is it a geographical footprint? And if it is a product line, is it going to be within the first aid kit? Or will it be cutting tools and scissors or something completely different? If you can just give a little bit of color to that, that would be great.

Sure. Well, in general, buying competitors that are already in the same space as you tends to be a pretty good way to gain market share and perhaps some capacity to produce product or warehouse in the space. So those are good acquisitions. Now in the first aid area, which is more than half of our business now, we might also be looking at vertically integrating first aid kits. So that might be similar to our Med-Nap acquisition, where we bought a company that made alcohol wipes and prep pads, which go into kits and which then give us the capability to more vertically integrate. We might be looking that way. Or you may remember that we bought Safety Made about a year ago. In that case, it wasn't a direct competitor, but it was in the personalization of first aid and medical items, and that was a half step away but within our knowledge base of the products. So, I think you would normally see that, and that would be what I would expect. Relative to geographic distribution -- I mean just geographic acquisitions, we might buy something in Canada, where we already have the space, but that wouldn't be a -- it wouldn't be a transformative acquisition by any means. We have a pretty steady flow of new possibilities. And my guess is sometime in the back half of the year, at least the work we're doing, integrating our past acquisitions last year, getting the systems in place, looking for new space where they've been growing out of their existing space, a lot of those things will start to have been completed. Therefore, we would be in a position to take on another transaction. Of course, it's very opportunistic.

Great. And is there a particular target price you are looking at or a range? Are you looking at something under 10x EV to EBITDA or 10% to 15% or 15% to 20%? Is there any particular number that you look at or a range in order to find the...

No, we really don't look at it that way. We look at it as how we're adding value to our shareholder base and in some cases the synergies where you truly are adding value quickly. In some cases, they're very accretive. But really, we pay market prices. So -- and whether it's in the medical area, the first aid area or in the office channel, in each case, they have different multiples, but we would be very competitive.

[Operator Instructions] Our next question comes from the line of Richard Dearnley with Longport Partners. Please proceed with your question.

What was the mix of first aid and Westcott, Clauss, et cetera?

59% was first aid in the first quarter.

Okay. And do you have what that was last year?

It was -- I think it was 55%.

That sounds right. And then could you -- there was a good discussion of Westcott and back-to-school and back-to-office inventory. How is -- what's the over-inventory situation in first aid?

Well, there've also been some customers that have purchased more inventory than they needed, and one big online retailer a year ago purchased a great deal of first aid kits that took some time to work through. So, it's -- they tend to be similar. The difference, of course, is with first aid kits, there are expiration dates. And so, if they overstock, they're taking some product risk that they probably wouldn't want to do. So, they tend to keep it lower than Westcott, where our product family is -- just doesn't have much obsolescence.

No expiration, right?

Right.

Because it looks as though medical usage is -- Hospital Corp had a good sales and usage and so on, so that channel looks pretty strong. Okay.

I think it is.

Our next question comes from the line of Michael Wasserman with Moors & Cabot. Please proceed with your question.

Walter, how would the Company reactive interest rates headed north rather than south from here?

Well, Mike, we've certainly seen in the past year, as Paul pointed out, the interest rates that we paid went from about 2.5% to 6.5%, and you pay more interest. And it may very well go up higher, and we're working quickly as quickly as we can to drive debt down. And I mean you could double the debt, and we're still profitable, double the interest rate.

Okay. So you're not overly concerned about possible additional...

I'm concerned because I think we're seeing stresses in the financial system globally, and this is not a free trade. There are trade-offs across the board relative to how businesses operate, how banks operate and how the consumer responds. But I think for us, the level of debt and the kind of margin improvement that we've had have more than offset each other right now.

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

With no further questions, this call is complete. We'd like to -- we look forward to speaking with you after the second quarter and thank you very much for joining us. 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.