Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Acme United Corporation (NYSEMKT:ACU)

Q4 2013 Earnings Conference Call

February 26, 2014, 12:00 PM ET

Executives

Walter Johnsen - Chairman and Chief Executive Officer

Paul Driscoll - Vice President, Chief Financial Officer, Secretary and Treasurer

Analysts

Jeffrey Matthews - Ram Partners

Frank DiLorenzo - Singular Research

Richard Dearnley - Longport Partners

Operator

Good day and welcome to the Acme United Corporation's fourth 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 Johnson, Chairman and Chief Executive Officer. Please go ahead, sir.

Walter Johnsen

Good morning. Welcome to the fourth quarter and yearend 2013 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 the Safe Harbor statement. Paul?

Paul Driscoll

Forward-looking statements in this conference call including without limitations statements related to the company's plans, strategies, objectives, expectations, intentions and adequacy of researches 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 risk 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 an excellent year in 2013. Our sales were $89.6 million, which was a record for the company. Operating income increased 10% to $5.9 million. Net income was $4 million, an increase of 13%. Our earnings per share was $1.22, which exceeded our guidance of $1.20 per share.

Growth drivers for the year included Camillus knives, which gained distribution in a number of large outdoor sporting good stores as well as in the mass market. Our PhysiciansCare and Pac-Kit first aid business had strong growth in the office channel, industrial safety market and in sporting goods.

The Clauss industrial cutting tools gained share in the hardware and mass markets and with industrial distributors. The Westcott, Titanium and Non-Stick scissors continue to gain market share globally. And our iPoint Pencil Sharpeners performed well.

In Europe, we had solid performance in the office channel with our traditional cutting tools. We offset the loss of sales from the bankruptcy of our largest European customer Schlecker with increased mass market sales of innovative kitchen knives, manicure sets and other cutting products. We were profitable in Europe for the first time in many years.

Our Canadian revenues decreased 8% during the year due to softness in the office channel. We are addressing this with new cutting and measurement tools for the office, greater sales emphasis on hunting knives and survival tools, and we are taking early steps to introduce first aid kits in Canada. We are very actively quoting new business in Canada and we expect to resume its historical growth.

The consolidation of our two North Carolina warehouses into the new Rocky Mount facility has progressed on plan. We moved out of the Goldsboro warehouse at yearend and just finished the move from our Fremont plant this past weekend. We have now listed the Fremont, North Carolina facility for sale for $900,000.

The savings from the moves have offset the extra cost of the new facility. We begin to gain operating leverage when we consolidate other operations from higher cost locations. The state of North Carolina is working with us on incentives, as we speak and we expect to be making decisions in the coming quarters.

We've reduced our inventory by $2 million during the year, despite our growth. In total, we generated $5.5 million in free cash flow during the year. Our net debt declined from $14.6 million at the end of 2012 to $11.3 million at yearend 2013.

Our guidance for 2014 at this point is $97 million to $102 million in revenues, with between $4.3 million and $4.6 million in net income. This will be fully taxed. This correlates to approximately $1.26 to $1.33 earnings per share in 2014.

I will now turn the call to Paul.

Paul Driscoll

Acme's net sales for the fourth quarter were $21.4 million compared to $19.5 million in 2012, an increase of 9%. Sales for the year ended December 31, 2013, were $89.6 million compared to $84.4 million in 2012, an increase of 6%.

Net sales in the U.S. segment increased 11% in the quarter and 9% for the year ended December 31. The biggest contributors to the sales increase came from Camillus Knives and first aid kits.

Net sales in local currency for Canada were constant in the quarter and decreased 8% for the year. The fourth quarter showed improvement over the previous two quarters. Net sales in local currency for Europe increased 2% in the quarter and decreased 5% for the year.

Early in 2012 we loss Schlecker, a large customer, due to their liquidation. However, the increased mass market business is mostly offsetting the lost Schlecker business.

The fourth quarter gross margin was 35% compared to 34% in the fourth quarter of 2012. The gross margin for the year was 36% compared to 35% last year. The gross margin increase was mainly due to better product mix.

SG&A expenses for the fourth quarter of 2013 were $6.6 million or 31% of sales compared with $6.1 million or 31% of sales for the same period of 2012. SG&A expenses for the year ended December 31, 2013, were $25.9 million or 29% of sales compared with $24.4 million or 29% of sales in 2012. The increase for the quarter and the year was primarily due to higher sales commissions and delivery costs associated with the higher sales, the addition of sales and marketing personnel, and higher spending on new product development.

Operating profit in the fourth quarter increased from $465,000 last year to $763,000 this year, a 68% increase. Operating profit for the year ended December 31, 2013, increased by 10%. Net income for the fourth quarter and yearend increased by 22% and 13%, respectively.

The company's bank debt less cash on December 31, 2013, was $11.3 million compared to $14.6 million on December 31, 2012. During 2013, Acme purchased a new distribution facility in North Carolina for $2.8 million, added $900,000 in refurbishments to the facility and paid $700,000 in dividends.

In 2013, the company also received $1.7 million from early repayment of a mortgage receivable and generated $5.5 million in free cash flow, which included a reduction in inventory of $2.1 million.

Walter Johnsen

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

Question-and-Answer Session

Operator

(Operator Instructions) And we do have our first question from Jeffrey Matthews of Ram Partners.

Jeffrey Matthews - Ram Partners

Hi Walter. Congratulations.

Walter Johnsen

Thank you, Jeff.

Jeffrey Matthews - Ram Partners

And I say that because I know you've been dealing with a lot of cross-currents, and you came out of it very well for the year. And first of all, congratulations on the balance sheet, I love that balance sheet. It looks really clean and I noticed that it looked to me like payables were even down, so it wasn't like you were stretching to look for cash. Could you just talk about the state to the balance sheet, and this is not a question of when you're going to buy stock or anything like that, but what's your view at this point?

Walter Johnsen

We did a couple of things a year ago to address first inventory. One of them was obviously you go through your product line and you begin to narrow some of its focus, and then liquidate that inventory. That's a continuing process, but we were aggressive with that.

Second thing we did was we reduced the safety stock by a week. And what that means is when we placed orders in China, there were certain restocking levels that we work with, and by taking one week out of the system that generates cash. The risk of course is that you're not close enough with your forecasting. And so it's a careful balancing act. I can tell you that affray was minimal last year, so we did that effectively.

Then the final thing is there were a couple of items that were heavy in the inventory, not obsolete, but heavy, and we reduced those. So the inventory reduction was particularly satisfying, because we grew. And in other area of course we then needed inventory. We also introduced the ScottsMiracle-Gro garden line and we had to stock for that. So at yearend we were building for garden products for its major launch in 2014.

Regarding the mortgage that we received that related to the Bridgeport facility, which was an environmental challenge a number of years ago. We did the remediation, we sold the building, put some of the cash back into completing our remediation. And the property is now completed as far as remediation and monitoring, and we're working with the final steps to get the transfer completed with the state, which I would expect to be done in the next two to six months, depending on how busy the state is. So that truly says that we've collected the money from the Bridgeport facility and that piece of land is behind us. The payable is really just related to new payables.

Paul Driscoll

Payables' being down is mainly a function of inventory being down.

Jeffrey Matthews - Ram partners

And I know it's just a snapshot in time.

Walter Johnsen

Well, I'm very happy with that. And it positions us because we continue to be building cash in our Asian operations. And we have the ability to act in many places of the world for acquisitions, so I'm very happy with that.

Jeffrey Matthews - Ram partners

And along those lines, you've done a great job kicking off things, some times it's just customer, while at some times its company that have bankruptcy, some times it's building stand in the Carolinas. Do you see anything more substantive out there or do you still continue to see kind of smaller things available?

Walter Johnsen

So we are seeing pretty active deal flow and we have always done that, but we tend to generate these transactions. Some of them may come in from bankers. But usually, for example, Brown Brothers brought us, I mean amazing thing what they did and it was a small transaction for them and we brought it from Brown Brothers there with a broker.

But generally we're generating them ourselves. And generally, they tend to be something that has either they have stepped away from the product family or they are in the product family like Pac-Kit was for the first aid kits. We are continuing to look at that. We're now positioned with the balance sheet that we're very comfortable taking another step forward, should something come along. And all I can tell you is that, it's like buses, there's always another one.

Jeffrey Matthews - Ram partners

And finally, Camillus, you highlighted, and I know that that you're building that into the fourth quarter. It's a more seasonal product. But could you talk about success there? And especially, sell-through, what you're seeing as far as sell-through and reorders go. Does that continue to expand?

Walter Johnsen

Camillus has been a very, very fun product lines. The hunting and fishing knives that they sell, the survival tools we pull together with less drought, all make an interesting package. In the fourth quarter, we shipped quite a number of Camillus knives, both for a Christmas and holiday gifts, as well as hunting. And it was active, and not only that -- but yes, it sold through. We also put together a Camillus survival kit that went into one of the mass market chains in the fourth quarter. And that's now got reorders for spring. So it carried over and it sold well.

As we look into this year, we're continuing to place more Camillus items in other major chains, hunting and fishing chains that we didn't had before or we're gaining additional space. So Camillus' growth has been exciting for us, and it got legs also in Europe. One thing about Europe, the Camillus' knife businesses has been introduced there. And next week we'll be at a trade show in Nuremberg with a number of European distributors as we launched that very seriously in Europe.

Operator

Our next question comes from Frank DiLorenzo from Singular Research.

Frank DiLorenzo - Singular Research

I had a question about The ScottsMiracle-Gro. Can you give us a little more detail on the wider launch for this year and the potential for that line up in Europe and possibly Canada?

Walter Johnsen

Well, Scotts is an exciting product family. It's our designs of course, and we pay royalty to Scotts. But as we speak, you'll be finding The ScottsMiracle-Gro both at Wal-Mart and Sam's in the U.S., so that's an exciting to get new customers for us. We've been able to get very good distribution in Canada, as well as other retailers in the U.S.

We're getting interest in places like New Zealand and Australia, some in Europe, not much, but the real impact with the Scotts line is we're making forward progress in the garden area and we're doing it with excellent products. My guess is that it will be a good year with them, this year, with those products, but it will continue to grow we hope for next year as well as we broadened the product family and gain additional distribution.

Frank DiLorenzo - Singular Research

And a quick question on margins regarding the Carolina facility and the consolidation. When do you think you're really going to see a positive impact from that, when everything is finalized? And is that more of a second half event for this fiscal year 2014?

Paul Driscoll

We have a number of things that we're working on. As I mentioned in the call, we're working with the state of North Carolina for incentives and that specifically to move some other operations into that facility. When we do that, we basically have a free facility and we're leaving behind substantial rents somewhere in the U.S., which you can probably figure the footprint. But the answer is they don't really starts to move forward. I would might note that we in the fourth quarter of 2013, we had about $130,000 of duplicate rent expenses and because we have the North Carolina facility plus the other two.

Paul Driscoll

And just moving expenses.

Walter Johnsen

And moving expenses. And somehow, we had enough profitability that we didn't even miss a beat with the numbers, but that won't be there next year or in 2014. We will be having some moving expenses as we relocate some locations, but the net is, probably back half of the year you'll start to see some things.

Frank DiLorenzo - Singular Research

So it's reasonable to assume that the full effect won't be felt until fiscal 2015?

Walter Johnsen

Well, in 2015, when we finished these moves, it's going to be very exciting.

Operator

And we'll take our next question from Richard Dearnley with Longport Partners.

Richard Dearnley - Longport Partners

I would like to second what Jeff had to say about the balance sheet. You did a great job. But is there more to go on SKU reduction and other ways to save in the supply chain?

Walter Johnsen

Dick, there is. And one of those areas relates to bringing some of the manufacturing eventually back from Asia. And this would not be in the scissors line, but there might be some things we do in first aid. And when we have space to be able to do that, you probably would be able to reduce inventory just because you've now deterrence of a manufacture. So that's on the horizon.

We are actively working on reducing SKUs, but unfortunately we are also adding SKUs. So I think that it's kind of run its course. We do have the Fremont facility for sale for $900,000 and has a serious buyer for that on a slightly reduced price. So I hope I can make an announcement soon about that facility. And then we're just continuing to generate cash.

Richard Dearnley - Longport Partners

As I remember, you were doing well with non-stick kitchen knives in Europe.

Walter Johnsen

Yes.

Richard Dearnley - Longport Partners

Did that continue?

Walter Johnsen

It was a very big success, yes. And when you look at the replacement of the Schlecker business, which was over $1.5 million in loss business, because they went bankrupt and disappeared. Those kitchen knives, the non-sticks have done extremely well. And we're working on similar programs that we hope to get in 2014.

Richard Dearnley - Longport Partners

Just to repeat, what you did some of the things?

Walter Johnsen

So as a repeat, there is additional products, there is more customers. So when I say repeat, I mean build on.

Richard Dearnley - Longport Partners

And any thoughts about bringing those kind of products to the U.S.?

Walter Johnsen

We really don't have the kitchen distribution in the U.S., and that means not just customers, but sales reps and the marketing brochures and the support. And it's a pretty competitive area, but it's also a big market. But I can tell you that we don't have active plans for doing that this year.

Richard Dearnley - Longport Partners

And other than the relocation expense in the first quarter with distribution center, are there any other expenses, have you -- you are sort of expecting some expenses both in the fourth quarter and the first quarter? Is that more than just relocation or is that done?

Paul Driscoll

Most of that's been place from a fourth quarter, there is still some, because we were continuing to move in the first quarter. We just finished moving one of the facilities. The bigger facility we moved in the fourth quarter, so there would be maybe another $60,000 to $70,000 of moving expenses and double running costs.

Walter Johnsen

And then we have some savings should we feel to build them, if that happens then maybe we'll pick up a little bit there.

Operator

And we have a follow-up question from Jeffrey Matthews of Ram Partners.

Jeffrey Matthews - Ram Partners

Walter, two questions, one is what's your relationship with Wal-Mart like these days? How you've been doing with them 2013 versus 2012, does anything look different, better or worse in 2014? Then I had a follow-up on Amazon.

Walter Johnsen

Well, I've got to be careful, what we talk about, because the customers they listen and certainly our competitors too. But Wal-Mart is a very important customer for us. It continues to be growing. Continuously if you walk the stores, more Camillus Knives in the hunting area. Some of our safety items at Wal-Mart, you see them online. You see lots of scissors and rulers in the office areas. And then the kids areas, you'll see our pencil sharpeners. Wal-Mart has got our paper trimmers. They're doing very well for us and they're growing and they treat us very well.

Jeffrey Matthews - Ram partners

And then on Amazon, I'm just curious, if you see any conflict there in a way other consumer products companies do, where stuff shows up on Amazon and undercuts their own sales channels or is there a partner of yours?

Walter Johnsen

Well, Amazon is a customer and it's a very growing customer. They don't get any special pricing relative to any of our other big customers. They have a very, very deep product mix of our offering with images and pricing, and that becomes available online. And you'll find the same thing at Staples and Wal-Mart and others that are online. I would suggest though that Amazon is a very active marketplace and for whatever reason it attracts our product from sources that we have no idea where they come from. And we're quite happy with that, because it's another way to sell more.

Operator

And it appears that there are no further questions at this time. Mr. Johnsen, I'd like to return the conference back to you for any additional or closing remarks.

Walter Johnsen

Well, if there are no further questions, then this call is complete. I would like to thank you for joining us. Goodbye.

Operator

Once again, that does conclude today's call. We appreciate your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Acme United's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts