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Acme United Corporation (NYSEMKT:ACU)

Q1 2013 Earnings Call

April 19, 2013 12:30 PM ET

Executives

Walter Johnsen - Chairman and CEO

Paul Driscoll - CFO

Analysts

Jeffrey Matthews - Ramb Partners

Chris Dusett - Dusett Asset Management

Richard Dearnley - Longport Partners

Tom Spiro – Spiro Capital

Jeffrey Matthews - Ram partners

Operator

Good day and welcome to the Acme United Corporation’s first quarter 2013 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.

Walter Johnsen

Good morning. Welcome to the first 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?

Paul Driscoll

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.

Walter Johnsen

Thank you, Paul. Acme United had a good first quarter of 2013. Our sales increased 5%, gross margins improved 1.2 percentage points, operating incomes grew 12% and net income increased 19%.

Sales in our largest market, the U.S., increased 12%. This was driven by growth in our proprietary titanium scissors, sales from the C-Thru lettering and measuring products, new Clauss cutting tools and additional Camillus knives sales.

Revenues in Europe were off 31% due to the loss of Schlecker after their liquidation in June 2012. This was our largest customer in Europe accounting for about 1.5 million in annual sales.

We have new mass market business in Europe that we expect to offset the Schlecker sales but the timing is in later quarters this year.

Gross margins increased from 35.2% to 36.4% due to sales of more proprietary Westcott and Clauss products and in addition of Camillus knives. We manage our SG&A expenses carefully in the quarter; will continue to invest in new products. The tight cost control provided operating leverage, and led to a 12% increase in operating income.

During the quarter we began a test of proprietary non-stick putty knives at a major hardware chain. These products resist corrosion, clean up quickly and provide excellent application properties. The early results in this category and this test is very promising. We also began shipping a new series of first-aid kits to a large industrial distributor. These are for heavy-duty use in factories and industrial sites and have had early and excellent sale through.

In April, we announced a partnership with ScottsMiracle-Gro for the sale of cutting tools for the garden. Scotts is one of the largest suppliers of branded lawn and garden tools in North America and we are encouraged by the early market reception.

We believe we are on track for $90 million to $95 million in revenues in 2013. If this occurs, we have given guidance of the $20 to $25 per share for the year.

I will now turn the call to Paul.

Paul Driscoll

Acme’s net sales for the first quarter was $17.7 million compared to $16.9 million in 2012, a 5% increase. Net sales for the first quarter in the U.S. segment increased 12% mainly due to higher sales of Camillus knives and the added sales of the C-Thru business acquired on June 7, 2012. Net sales in Canada decreased by 2% in both U.S. dollars and local currency. Sales were lower in Canada in the first quarter due to a soft economy but we expect growth for the rest of the year from new business.

Net sales in Europe decreased by 31% in both U.S. dollars and local currency primarily due to the loss of Schlecker, a large customer, as a result of their bankruptcy and liquidation. We expect to increase mass market business for the remainder of 2013 to more than offset the loss of Schlecker.

Gross margins were 36% in the first quarter of 2013 compared to 35% in the first quarter of 2012. The higher margin in 2013 was primarily due to favorable product and customer mix.

SG&A expenses for the first quarter of 2013 were $5.9 million or 32% of net sales compared with $5.5 million or a 32% of net sales for the same period of 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 was $513,000 in the first quarter of 2013 compared with $258,000 in the first quarter of 2012, a 12% increase. Net income for the first quarter of 2013 was $309,000 or $0.10 per diluted share compared to net income of $260,000 or $0.08 per diluted share for the same period of 2012.

The company’s bank debt less cash on March 31, 2013 was $15.5 million compared to $12.8 million on March 31, 2012. During the 12 month period, we spent 1.5 million on C-Thru and paid $900,000 in dividends. Inventory increased $6.8 million primarily due to new Camillus products, C-Thru products and other new business for 2013.

Walter Johnsen

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

Question-and-Answer Session

Operator

(Operator Instructions). And it does look like we have a question from Jeffrey Matthews with Ram Partners.

Jeffrey Matthews - Ramb Partners

The inventory growth, is it controlled and what will free cash flow look like over the course of the year do you think?

Walter Johnsen

Well, first on the inventory growth well that is some inventory from the C-Thru acquisition because we went from a domestic manufacturer to moving it offshore and so obviously you’re going to be adding some substantial inventory there; however, you also increased the margins very much as well. The inventory on some of the other items are getting ready for back to school and that’s pretty normal. We’ve had growth over the past year. We’re working on reducing inventory in a number places where frankly we have too much and we worked to cut the replenishment parameters back a little bit to squeeze some inventory so we’re working and addressing that.

Relative to the inventory by year end, I don’t have that in front of me but I know that we’re working to drive down the overall number.

Jeffrey Matthews - Ramb Partners

And what would you be expecting free cash flow for the year to look like; do you have any sense of that?

Paul Driscoll

I think free cash for the year will be about $5 million, we’re expecting that we’re going to level out the inventory and not grow very much over December of last year at the end of the year, despite the growth on the revenue side.

Jeffrey Matthews - Ramb Partners

And is there Walter, any related issue in terms of supply chain as cost in China have increased. How does the supply chain look for the coming year versus a year or two ago? Any big changes snooping there?

Walter Johnsen

Well, there continues to be wage and cost inflation in China. There continues to be more and more inflation. We do get some productivity improvements from the factories as we mature products. We put through some price increases but in general it’s not a major issue. The one area that I can't really address well is the U.S. dollar because if we get hit with continued weakening of the dollar as we’ve had in the past, well than that changes the margin impact, not initially but sometime in a year's time. Frankly even that's been fairly stable lately.

Operator

Our next question comes from Chris Dusett with Dusett Asset Management.

Chris Dusett - Dusett Asset Management

Paul, I think this question is for you. Without me having to go look at up, what was your revenue for Europe or in Europe in 2012 and what was it for the first quarter of 2013?

Paul Driscoll

In the first quarter of 2013 it was 1.6 million and for – you’re asking what it was for 2012, is that what?

Chris Dusett - Dusett Asset Management

Right.

Paul Driscoll

That’s your question?

Chris Dusett - Dusett Asset Management

Yes.

Paul Driscoll

The quarter, this year it’s 1.8, last year it was 2.6.

Chris Dusett - Dusett Asset Management

And so Schlecker the $1.5 million number is kind of annual number that we or that you historically have gotten from Schlecker?

Walter Johnsen

Correct.

Chris Dusett - Dusett Asset Management

Okay and you said that you had customers to replace it with is it, is it you expect similar margins?

Walter Johnsen

Yes, let me address that Chris, those customers are large mass market customers in Europe primarily Widal and Aldi, Reve and Norma and they place orders and when they do they are large orders, so in the fourth quarter of last year we benefitted from some pretty big orders both Widal and Aldi, and the margins tend to be at least comparable to what we were doing at Schlecker or better. In the second half of this year, we are seeing already quite a bit of booked business for that mass market so that’s why we are saying it appears that we are going to be at least comparable in overcoming Schlecker perhaps because we still have a lot of selling time to close things well exceeded.

Operator

And our next question comes from Richard Dearnley with Longport Partners.

Richard Dearnley - Longport Partners

Good morning, I am intrigue that you called out sales strength in titanium scissors. Why scissors all of the sudden? Is that a new channel or…?

Walter Johnsen

No it’s not a new channel but it just had a lot of sales. And that’s kind of an interesting thing because we have been seeing more of our common scissors gaining share and impacting some of the margins for the business and in this quarter that really reversed, and I do not know whether customers are buying up or whether we have just had a couple of promotions that have driven it. But the titanium sales did very well in the quarter.

Richard Dearnley - Longport Partners

And is that nonstick or just titanium?

Walter Johnsen

Just titanium.

Richard Dearnley - Longport Partners

Okay and could you characterize the sell through at Wal-Mart and some of the other new mass change you have gotten?

Walter Johnsen

Sell through?

Richard Dearnley - Longport Partners

Well sell through/reorder rates?

Walter Johnsen

We are doing well with them I mean to my knowledge there is nothing where we have loaded in and we are not getting success at this stage so the sales was excellent, for example the Camillus knives which a year ago, we were entering into new channels continues to be successful not only with more placement of products almost across the Board, but then the new introductions that we're coming in with are also being well received and selling through.

I mentioned on the call a test we're doing with putty knives, these are a proprietary non-stick that we developed so that the putty would easily come off the knives and when they, you probably aren’t aware of this but when you use a putty knife and you're putting in normal plaster that's very acidic material and so rust happens on most, on all the putty knives that are out there and fairly quickly, that rust then streaks on to the wall when you're applying putty. Use it for a week you've got a problem that is on the wall. Because of our non-stick coatings they don't rust. second thing is they clean up remarkably well.

So the test that we're doing is with professionals and it's one that we're excited about because we think we might be able to change the way these tools are used. And that's a fairly big market, not only in the professional house building and building trades but the home user as well. Hopefully as that plays out over the course of this year, but the test is going well so far and we're pretty excited about the benefits that we're conveying.

Richard Dearnley - Longport Partners

Actually I do understand, I am an expert taper in Schlecker. It feels like your sales are changing seasonally. Is that because of the Camillus influence?

Walter Johnsen

Well, we've been seasonal, traditionally first quarter's the weakest and we've had strong second and third quarters for back to school. The Camillus knives sell in the spring particularly around Fathers' Day and then there's another push in the fall for hunting and Christmas time, so that's a change. The industrial business is growing pretty much across the board and it’s too seasonal and the packet, safety and first aid products tend to be more in the first half but they sell pretty much all year as well. So, I think we’ll probably find some more sales in the fourth quarter than we had in the past because of the Camillus knives. Also with Europe moving more into the mass market, a lot of the items that they are selling some of the specialty knives and manicure sets in the last year at least, that’s been a fourth quarter sale, so that may change some of the dynamics.

Operator

(Operator Instructions). We do have Tom Spiro with Spiro Capital.

Tom Spiro – Spiro Capital

The Scotts arrangements, did we initiate that early enough to capture the spring selling season?

Paul Driscoll

We initiated it plenty early year enough. There was a partner negotiations that took a lot longer than we expected in lot of details. But the fact is, this is really more of a 2014 product family. We may very well sell some of our new Scotts powered by Clauss garden tools in the fourth quarter. But really the change we are talking to and the changes they do in their planograms, a lot of that will be in the first quarter and second quarter of next year. There is a big show coming up in Las Vegas called the National Hardware Show and we are working hand-in-hand with Scotts to promote the products, meetings. It’s a powerful endorsement and we are optimistic but we will probably won’t see any sales until probably fourth quarter at best than clearly in the first and second if we were…

Tom Spiro – Spiro Capital

And who is responsible for getting the placement, do we get the placement or do they?

Paul Driscoll

We do.

Tom Spiro – Spiro Capital

We get the placement I see.

Paul Driscoll

Absolutely (inaudible) sell our products, they will, I think the number is a $180 million in advertising for their whole company and we will be getting some of that benefit. But the selling and the warehousing and our products and the development and customer service that’s all ours.

Tom Spiro – Spiro Capital

Did the Scotts already have the similar kinds of tools, are there similar kind of tools out under the Scott’s name?

Paul Driscoll

The Scotts who has the Miracle-Gro fertilizer, they have got.

Tom Spiro - Spiro Capital

Right, that’s what I know.

Paul Driscoll

Riders for garden seed and fertilizers, insecticides, and very-very high quality, I think brand recognition and they are known for being a quality organization. These tools will be their first entry and it’s exclusively ours.

Tom Spiro - Spiro Capital

I understand, and as I recall, when we initially ruled out the gardening line, we had difficulty getting good placement. I guess we still don’t know at this early stage what kind of placement we are going to get.

Paul Driscoll

I can tell you that we have got a powerful brand working with us. And we are getting a lot of attention. But again, until we get orders and see sale through in those orders…

Tom Spiro - Spiro Capital

Sure, and just to switch subjects for a moment, the Office Depot Office Max, a situation there, are we feeling that much. How do we expect it to affect us?

Paul Driscoll

Well, I don’t think its good news for us. Because you go from two customers to one, and I think it's bad news because we sale to both of them but I also don’t know that I really believe it’s going to happen and my reasoning for that is Office Max shareholders would be getting Office Depot shares and I don’t believe that they are performing anywhere near where they justify their price well. There is no great positive I see out of that although maybe we would sell more products to the combined entity because…

Tom Spiro - Spiro Capital

No, I would think it would be at least negative for a while because there would be a lot of extra inventory floating around out there.

Paul Driscoll

Perhaps, I don’t know. Office Depot is a struggling company. And maybe it’s better to keep the stores going, but they have got so many stores in places they shouldn’t be.

Operator

Our next question comes from Richard Dearnley with Longport Partners.

Richard Dearnley - Longport Partners

Actually my question was about Scotts also, so we have covered it. Thank you.

Operator

Next question comes from Jeffrey Matthews with Ram partners.

Jeffrey Matthews - Ram partners

Hi, Tom Spiro as usual, asked most of my questions but Walter, I am wondering if, given what’s going on in China, if you foresee a day down the road, maybe in the next five years that you are sourcing more from say Mexico in a significant way.

Walter Johnsen

Well that’s something we work with and struggle with a lot and we’re awfully good with China right now despite the inflation and the wages which are going up. We’re getting productivity improvements. Mexico everything we read is that it’s going to be a real contender in the next five years but that’s a thing say static and I don’t know that they will, but we don’t do much, we don’t do hardly any production in Mexico anymore in fact the scissors we used to make in Mexico stop being made last November and went to China, so that was a little bit frustrating.

We’re doing some production now in Columbia and some in Spain, but China is still very important for us and you will see that changing in five years, we’re going to have to be moving at a very aggressive rate somewhere to actually shift that kind of volume unless we do an acquisition that brings us there. So, I think about it and I worry about it but that what we’re doing and we’re doing it well.

Jeffrey Matthews - Ram partners

Okay two others, one is, what’s the status of Fiskars these days in the scissor business?

Walter Johnsen

Well Fiskars has as some of you may know is a really quality company based in Finland, it’s publically traded and they have tried lots of different divisions. They’ve been lately for example in the last two years moving into house-wares. They just brought Royal Copenhagen which they are marketing as a premium product into department stores. They have the Gerber knifes which are excellent and they do well specially the multi-tool.

In the scissor area, we pretty much ripped them out of most of the office channel. They still sell kid scissors. They sell some craft scissors particularly at Joann Fabrics but they’re not the competitor they once were in that areas. On the other hand, knives their grills endorsed as their survival tools and knifes and use them with the Les Stroud has a large following. They’re very-very good company and they compete head to head with us. As I said we've ripped them out of most of the office channel and a lot of the mess.

Jeffrey Matthews - Ram partners

And then in terms of Eastern Europe, not the usual Germany, UK stuff but more in Eastern Europe what’s the status of your efforts there?

Walter Johnsen

We have one distributor in Austria that sells into Eastern Europe in a somewhat sizeable way and it’s a really quality company. We use to sell to Office Depot in Hungary but they closed that operation. We use to sell into the Russian market but we didn’t get paid so we stopped doing that. It’s really the distributor in Vienna that handles Eastern Europe and I think they do pretty well.

Operator

(Operator Instructions). And there are no further questions in the phone queue at this time.

Walter Johnsen

Then I’d like to thank you for joining us. We have our annual meeting on Monday at 11 o’clock at the Cornell club, should anybody want to attend you’re more than welcome and I’d like to thank you for joining us. Good bye.

Operator

And that does conclude today’s conference. We do thank you for your participation.

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