Acme United's (ACU) CEO Walter Johnsen on Q2 2014 Results - Earnings Call Transcript

| About: Acme United (ACU)

Acme United Corporation (NYSEMKT:ACU)

Q2 2014 Earnings Conference Call

July 24, 2014 08:30 ET

Executives

Walter Johnsen - Chairman and Chief Executive Officer

Paul Driscoll - Chief Financial Officer

Analysts

Jim Collins - Portfolio Guru

Tim McCall - Capital Management

Jeffrey Matthews - Ram Partners

Richard Dearnley - Longport Partners

Operator

Good day and welcome to the Acme United Corporation’s Second Quarter 2014 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 - Chairman and Chief Executive Officer

Good morning. Welcome to the second quarter 2014 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 - Chief Financial Officer

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 anytime 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 - Chairman and Chief Executive Officer

Thank you, Paul. Acme United had record sales and earnings for the second quarter of 2014. Our revenues for the quarter were $33.4 million, up 18% from last year. Net income was $2.5 million, an increase of 15% over the second quarter last year. Earnings per share for the quarter, was $0.72 compared to $0.68 last year.

In June 2014, we acquired First Aid Only of $13.8 million, which increased our revenues for the quarter. Without First Aid Only, our sales for the quarter were $31.6 million also a record. We had strong contributions during the quarter from all of our operating units. The Westcott family had strong back-to-school sales, with growth in our iPoint pencil sharpeners leading the way. The Pac-Kit and PhysiciansCare first aid items had solid internal growth reflecting new customers and broadening depth of our product lines. Clauss, Camillus and our new garden products had record sales. Our Canadian business grew 17% and Europe grew 5%.

We see this momentum continuing in the third quarter. We are extremely excited about First Aid Only, which is a leader in providing first aid solutions to large corporate customers. Its smart compliance kits enable a customer to ensure that it meets the first aid needs of its work environment and provides comfort that it meets OSHA, ANSI, and other regulatory requirements.

First Aid Only sells refills for its kits, that is specially designed to dispense individual units thereby providing savings over traditional (VAM) based systems. In 2013, First Aid Only had revenues of $17.4 million and operating income of $1.1 million. The acquisition is a strategic and meaningful step for Acme United. It provides combined first aid revenues of over $40 million and brings new products with recurring refill sales. It broadens the combined customer base and provides cross-selling opportunities. The transaction is accretive without cost-cutting, but becomes increasingly profitable with projected cost savings. We are now combining our teams, bidding our purchase components, negotiating freight rates and strengthening our sales and training organizations. We believe there are also significant combined growth opportunities.

We are increasing our guidance for 2014 to reflect our current business strength in the First Aid Only contribution. We currently see revenues in 2014 of approximately $108 million, up from $97 million to $102 million in our earlier guidance. If that occurs, we see earnings per share of $1.35 to $1.38, an increase from $1.26 to $1.33. Although it is too early to provide detailed guidance for 2015, we see revenues at this point of $125 million to $130 million based on internal growth and the full year impact of First Aid Only.

I will now turn the call to Paul Driscoll.

Paul Driscoll - Chief Financial Officer

Acme’s net sales for the second quarter were $33.4 million compared to $28.4 million in 2013 an increase of 18%. Excluding the impact of First Aid Only, sales increased 10%. Sales for the six months ended June 30, 2014 were $52.5 million compared to $46.1 million in the same period in 2013, an increase of 14%. Net sales in the U.S. segment increased 19% in the quarter and 17% for the six months ended June 30. Excluding First Aid Only, sales increased 11% and 12% respectively. The growth in the quarter came from Acme first aid products, First Aid Only products and pencil sharpeners. The year-to-date growth came from first aid including First Aid Only products, pencil sharpeners and the introduction of a new lawn garden product line.

Net sales in local currency for Canada increased 24% in the quarter and 16% year-to-date. Sales were higher in Canada for both periods mainly due to a strong back-to-school and the introduction of lawn and garden products. Net sales for Europe were constant in the quarter in local currency and declined 9% for the six months ended June 30. The year-to-date sales decline was primarily due to the timing of shipments to mass market customers.

Gross margins were 34.5% in the quarter of 2014 versus 35.5% in the second quarter of 2013. The gross margin percentage was lower mainly due to ramp up costs in our distribution facility in North Carolina. In August 2013 we purchased a new facility in Rocky Mount, North Carolina. We moved in the first quarter of 2014. In the second quarter we incurred approximately $200,000 in incremental personnel costs related to training and building a qualified and productive work force.

SG&A expenses for the second quarter 2014 were $8 million or 24% of sales compared with $6.9 million or 24% of sales for the same period of 2013. SG&A expenses for the six months of 2014 were $14.2 million or 27% of sales compared with $12.8 million or 28% of sales in 2013. The SG&A increase was due to higher variable selling costs as a result of higher sales and the additional sales and marketing personnel. Also we incurred approximately $100,000 in the second quarter of 2014 for costs related to the First Aid Only acquisition.

Operating profit in the second quarter increased from $3.2 million last year to $3.5 million this year, 11% increase. Operating profit for the six months increased 12%. Net income for the second quarter was $2.5 million or $0.72 per diluted share compared to net income of $2.2 million or $0.68 per diluted share in 2013. Net income for the first six months was $2.9 million or $0.83 per diluted share compared to $2.5 million or $0.78 in the comparable period last year. The company’s bank debt less cash on June 30, 2014 was $28.9 million compared to $17.6 million on June 30, 2013. During the 12 months we purchased First Aid Only for $13.8 million and spent $4.5 million on the new distribution facility.

We have received cash of $1.7 million from early repayment of a mortgage and $800,000 from the sale of our Fremont, North Carolina property. Also during the 12 months we generated $6.1 million in cash flow from operations and paid $1 million in dividends.

Walter Johnsen - Chairman and Chief Executive Officer

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question today will come from Jim Collins with Portfolio Guru. Please go ahead.

Jim Collins - Portfolio Guru

Good afternoon, guys. Congratulations on the quarter.

Walter Johnsen

Thank you.

Jim Collins - Portfolio Guru

My question is on return of capital to shareholders, if you look at your dividend right now, on a trailing 12-month basis, it’s about 22.5%, which seems to be a little low compared to some of your comparables. And also given your 15% quarterly growth in net income plus the First Aid Only there would seem to be some scope and we are increasing that. So, can you just talk about dividend policy and also potential for share repurchase, because your share base actually has been growing a little bit, not going the other way? Those are my questions.

Walter Johnsen

Those are very, very good questions, Jim and I appreciate them. The first relates to the dividend policy. We generally look at our projected cash flow for the coming year and make sure that we have got sufficiently strong cash flows that if we didn’t increase, it really would be in line with the kind of growth that we would expect. We often have done increases every six or seven quarters. And this July would be the sixth quarter without an increase. So, we will be looking at those kinds of things in the coming quarters. I agree with you at 23.5% payout that it’s somewhat below some of the others, but in our industry we are by far growing faster than many of them. Regarding stock repurchases, we have the ability to repurchase those under our bank line as well as a standing authorization from our Board of Directors. And during periods of weakness, we may very well exercise that ability to purchase shares, but at the current point, we are building the business and we are paying attention to paying down some debt.

Jim Collins - Portfolio Guru

Okay. And do you think that when you look at the internal budgeting, which obviously you have gone out through 2015, should we expect that the ratio of capital expenditure to sales will increase or is that just sort of a steady ratio on obviously a much higher base of revenues themselves?

Walter Johnsen

We are expecting some operating improvements as we continue to grow. There are some things that we are doing right now that will cost some money, for example, installing our computer systems at First Aid Only shifting some production among our different plants, but in general, we will be expecting operating margins to increase.

Jim Collins - Portfolio Guru

Okay, that’s great. Thanks, Walter. Thanks for answering my questions.

Walter Johnsen

Thank you.

Operator

Your next question will come from Tim McCall with Capital Management. Please go ahead.

Tim McCall - Capital Management

Hi, congratulations on a great quarter and great acquisition.

Walter Johnsen

Thank you.

Tim McCall - Capital Management

When we look at this quarter, earnings per share grew at 6%, but share count, diluted share count grew at 8%. So, that infers if the diluted share count was flat, earnings per share would have grown closer to 15%. Is there – are there any steps you are going to take to moderate the growth of diluted share count going forward? Was stock option issuance above average in the last two years and would that moderate going forward?

Walter Johnsen

Well, the stock option grants are pretty much consistent. What has happened though is because we had some shares that were – options that were under water for a number of years, they were not dilutive, but as we perform, those have now become in the money and they are counted in the share calculations. By and large at this point, there are no shares that are under water. And I am really delighted with that. Going forward, I would anticipate the same level of share awards, but you will have that overhang of undervalued options that then came into the money.

Tim McCall - Capital Management

That will be terrific when earnings per share grows closer to what net income is growing at…?

Walter Johnsen

Absolutely.

Tim McCall - Capital Management

And you are doing a good job there. Thank you.

Walter Johnsen

Thank you.

Operator

Your next question will come from Jeffrey Matthews with Ram Partners. Please go ahead.

Jeffrey Matthews – Ram Partners

Hi Walter.

Walter Johnsen

Hi, Jeff.

Jeffrey Matthews – Ram Partners

I apologize if you addressed these in the script, I got on late. But my first observation is that your inventories were almost flat year-over-year, which looks like spectacular inventory management given the sales increase and the acquisitions, could you talk to that at all?

Walter Johnsen

Yes. It’s been a very concerted effort to refine our inventories. And there is more to be done. But among the steps we have taken is a reduction in SKU, some SKUs across the product lines, in other words SKU rationalization. Of course, when you do that you concentrate your revenues on a fewer number and therefore you generate cash. Second, we took back down our safety stock about a year ago by one week. And that may not seem like much, but over time you are refilling with one less worth of weeks of inventory and that generates cash. We are continuing to work on both of those steps. We have also added some more sophistication to our forecasting. And the difficulty of course is that our good customers sometimes don’t give you accurate forecasts. So the information that goes in, no matter what’s in the computer system, it’s only as good as the data that goes in initially. So we have to be careful about that because of course that’s the world we are in. We have the customers who don’t always forecast well. Taking all that aside, our intention is to manage that inventory closely. And I think it will be really terrific if we could wind up a year from now at kind of the same level that’s going to take a lot of work.

Jeffrey Matthews – Ram Partners

Sure. And speaking of computer systems, I heard some mention of it on the script, are you doing something new there or is it that just tying acquisitions in?

Walter Johnsen

Yes. What we are doing is we are taking First Aid Only which has a good computer system but not ours, and replacing it and that will – with our system, and that will happen over the next six months or so after a lot of training and care and planning, but the leverage of having one system throughout our operations is very powerful because you can quickly interchange data and manage remotely. So it’s an important first step.

Jeffrey Matthews – Ram Partners

Sure, one really goofy minor question, The Wall Street Journal had an article today about how Staples had a strange program where they in order to win business from state governments they offered to sell certain products for a penny and I don’t know if you saw it but people ended up buying trailer truck loads worth of Kleenex and stuff, did that have any impact any Acme products for any reason at all?

Walter Johnsen

Well, I haven’t heard that. Overall we did get from another major super store chain a lot of extra orders of scissors because they did promotion of very cheap price for kid’s scissors. Now sometimes these things are not planned and among the retailers and certainly if one does it, the other responds. In this case in this quarter, we will get an extra bump in scissor sales to one chain. I wouldn’t be surprised if Staples had that in their program. We are going to be busy shipping to them too, again.

Jeffrey Matthews – Ram Partners

Okay. And speaking of large customers, a very large customer has just replaced their U.S. President and they had a lot of inventory issues and they are sort of grappling with growth in their footprint and stocking shelves and things and they have affected other companies who sell to them, have you seen any – have you had any big disruptions in any big customers based on internal issues?

Walter Johnsen

I think you are talking about Office Depot which…

Jeffrey Matthews – Ram Partners

Actually Wal-Mart.

Walter Johnsen

Wal-Mart. Well, whether you’re talking about Office Depot or Wal-Mart or even Staples if they are reducing inventory then we get less orders, but eventually they repurchase because they are trying to keep their revenue stream. We haven’t really – we are seeing some impact from each of the chains in various items as they reduced inventory from stores. But the net of our back-to-school is a record and it’s coming from the Wal-Marts and Targets and Staples and Office Depots of the world. So, in general, it’s not affected us.

Jeffrey Matthews - Ram Partners

Okay, great. And then finally, just on the production side, the manufacturing side, what’s your thinking? You were one of the first CEOs I heard to talk about the rising costs in China and that was many years ago. What do you see out there today and how does that affect your plans for the next five years?

Walter Johnsen

Well, I just got back from Asia and spent probably three weeks in China. The costs are moderating. The labor is continuing to increase 10% to 12% annually, but the factories are very effectively automating. In fact, in some of the factories, it’s surprising how automated they are. The U.S. dollar has strengthened against the RMB during the last six months. So, the normal currency problems that we endured, where the dollar kept falling in value and therefore our costs were increasing have stabilized. So, we are seeing very moderate upward pressure in costs. And that’s really excellent, because it gives us a chance to build our book of business with the higher margin items and have some assurance that they keep their margins.

Jeffrey Matthews - Ram Partners

Great, thanks. Sorry to take so much of the time on the call, but I appreciate it.

Walter Johnsen

Thank you.

Operator

(Operator Instructions) Your next question will come from Richard Dearnley with Longport Partners. Please go ahead.

Richard Dearnley - Longport Partners

Good morning, everyone.

Walter Johnsen

Good morning.

Richard Dearnley - Longport Partners

This is the first call you haven’t singled out Camillus sales as being strong. Also, this quarter garden didn’t get mentioned. Was the garden sell-through initial stocking all done in the first quarter?

Walter Johnsen

Well, let me address Camillus first. In the second quarter last year, we had a big pipeline sale at one of the major chains. And now we have repeat business, but it wasn’t a big growth sector. Although in the third quarter, we have got a lot of new items being shipped to that same chain from Camillus. So, I think Camillus continues to be building and building nicely. Regarding the Scotts and Miracle-Gro garden items, a big chunk of those shipments were in the first quarter and they sold out very nicely in the remaining weeks afterward. And there are some refills now going on. And we are actually very excited, because we exceeded our expectations in the garden area.

Richard Dearnley - Longport Partners

Well, good. And in the comment about your total first aid business will be in the $40 million range this year, how much of that have you – how much of that is the first aid acquisition that you just did?

Walter Johnsen

First Aid Only is about $17 million of that and the remaining $23 million is our first aid kits and some of the medications that go along with them.

Richard Dearnley - Longport Partners

Right, I see. And then Paul, you mentioned in SG&A, was it $200,000 of acquisition-related professional fees or I missed that number?

Paul Driscoll

That was $100,000.

Richard Dearnley - Longport Partners

$100,000, okay.

Walter Johnsen

And Dick, we just expensed it.

Richard Dearnley - Longport Partners

Yes, right. Okay. Thank you. Sounds good.

Walter Johnsen

Thanks very much.

Operator

And Mr. Johnsen, we seem to have no further questions at this time.

Walter Johnsen - Chairman and Chief Executive Officer

Well, if there are no further questions, this call is complete. Thank you for joining us. Goodbye.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.

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