ACME United Corp. (NYSEMKT:ACU)
Singular Research's Annual "Best of the Uncovereds" Conference Presentation
September 4, 2008 1:30 pm ET
Joe Lambert – Director of Marketing, Singular Research
Walter Johnsen – Chairman and CEO
Okay, at this time, I would like to move on. It is now approximately 1:10 pm. ACME United is scheduled at 1:30 profit margin and we’re going to go a little bit early with them. We’re not sure what happened to Paul Ryan of Acacia but we’ll go ahead and move on with this topic here.
I would like to just introduce ACME United by mentioning that our analyst, the description of ACME United. The ACME United Corporation is one of the largest worldwide suppliers of innovative cutting devices, measuring instruments and safety products for the school, home, office and industrial markets. The company has facilities in the US, Canada, England, Germany, Hong Kong, and China. Our analysts have a buy recommendation on ACME United and the 12-month price target is $22.00.
With that, I would like to introduce Walter Johnsen who is the Chairman and CEO of ACME United. Thank you. Walter?
Thank you very much. I’m Walter Johnsen, Chairman and CEO of ACME United Corporation. I’d like to thank Singular Research for this opportunity to present our company today.
ACME United has one of the leading market shares globally in the cutting, measuring, and safety channel. With our premier customer base and later we will go into those, when Trip Hawkins was talking about (inaudible) quite a little bit different. Our modes, our chain – chains like Staples in the United States, Office Depot, Wal-Mart and Target and different customer source. We grow our product lines in the cutting and measuring, simple items, but we do it through innovation. And about 30% of our revenues over a three-year period are from new products and (inaudible) definition of innovation rates. We have a three-year, at least, pipeline of new products and Edge [ph] will present later, a demonstrable and sustainable, we believe, growth pattern.
We’ve been recognized over the past several years by Business Week where last year we were in the Top 100 Best Small Companies. Fortune followed this up in 2005, 2006, and 2007 had us listed in the Top Fastest Growing Companies in the US. Forbes in 2005 and 2007 recognized ACME as among the Top 200 Best Companies. One that you may not have heard of but I was most humbled by was in 2005 when ACME was recognized by the Office Products International Organization as Vendor Of The Year. You sell school and office supplies and you get that award, you have competed against 3M, Brother, Hewlett Packard, Kodak and everybody else that's gold in the channel and that year I was up the stage.
We’ve also been recognized by our customers. And these are perhaps more important to us. On the far left, you can see the soft handled scissors that won a Teachers’ Choice Award. Well, if you sell school supplies and you get a Teachers’ Choice Award, that’s very meaningful, and we’ve managed to get one in each one of the last three years. On the far right, the real (inaudible) being Best Cutting Scissors. Well, if you sell scissors and you get an award for the one that cuts best, you did something well and we are proud of it. We’ve been recognized for some of the innovative products that we’ve introduced. The one on the left that we call the iPoint – the one on the right is the iPoint pencil sharpener. You load the pencil at the top, it automatically sharpens it. You can see that product today at Office Depot, Target, Wal-Mart, Walgreens and a number of other retailers. The product on the left is called SpeedPak and we introduced it this year. It’s a utility knife with a cartridge that handles five blades and it's currently at Staples and Fred Meyers and in catalogs such Grainger and MSC, the industrial channels. We hope to be making some major in roads in the (inaudible) channel in the coming year.
This is an example of the kind of growth we get under new products. The iPoint pencil sharpener, first year about $800,000 sales, second year $3.8 million, this year probably somewhere in the $5 million to $8 million range depending on how the rest of the year plays out. As we look at what attracts them to the other new products, that's an example is what we do in our products.
There are three major brands. The Clauss brand is the top brand that we have for high-performance industrial cutting products and I was mentioning earlier today that we bought that company, the oldest scissor company in the US, for about $400,000 a couple of years ago. We repositioned the brand. We use catalogs in the back of all the products that are in the Clauss family, and because we resourced the product from an inefficient manufacturing plant in Toledo, Ohio to our sourcing in Asia and elsewhere, we paid for the acquisition in two months.
Westcott is the traditional school, home and office brand. If you remember the old ruler made out of wood with the brass edge and a (inaudible), that was a Westcott ruler. Today we make them in wood and plastic, sealed, with magnifiers, aluminum. We sell 15 to 18 million Westcott rulers today. It's such a brand for us that we carried it over to our scissor and school lines. There are a lot of Staples in Manhattan, and I suggest, if you have some time, go visit Staples and buy some Westcott products.
PhysiciansCare is just the opposite. At one time, we had a whole lot of thin scissors and we started to sterilize them and put them in a package and that became a disposable medical instrument. We got no margin for it. And years ago, we sold that business but we still had gauze and some scissors and antiseptics. We put them on a first aid kit and today that’s about a $15 million business and growing for us.
Here's the growth rate over the past five years. We’ve been growing about 20% a year and so far this year, it’s ball park about the same as that. Up here in guidance is somewhere between $70 million and $73 million this year, in 2008. And so far, we are on track for that.
Customer concentration, we’ve defined that as the percent of our sales of customers who have over 10% of revenues. And the decline in customer concentration doesn’t mean we’ve lost one of the big ones but rather we've built on additional major customers and so in our view we have reduced the risk in our company.
The EBITDA is running somewhere in the 7 to 7.5 range. This year, it’ll be over 8, 8.5. Well, we’re not setting the world on fire in growth, 20% is okay, but it’s not what Trip Hawkins does with (inaudible) company. On the other hand, we count the cash and it comes in. We've felt (inaudible) of our growth since the company was founded. The net income last year was $4.8 million, I think $4 million we were forecasting and giving guidance for about $4.5 million this year. And that correlates to about $1.23 per share. I noticed that Singular thrust us a little bit and said, we’re going to be going $1.27 for this year. And we’re going to work hard to try to do that.
Here's the customers, number one customer this year for the first time is Wal-Mart. It has been one of the smaller ones a few years ago. They have a really deliberate strategy. We’re going to surround Wal-Mart. We’ve got office in Denver. We hired some great staff. We’ve made a lot of calls. We grew it to be the largest customer.
The second largest customer today is Staples and it continues to grow very nicely. The acquisition that Staples did in the US, but primarily in Europe with Corporate Express is a benefit to us. Others have sold the iPoint to Cosco [ph] was a great account. Rite Aid is another one that we do a lot of business with. United Stationers supplies many, many of the independent stationery stores throughout North America.
This is the Clauss line. These are professional accounts. MSC, Fastenal, Grainger. Factories buy their supplies from these professional accounts and we sell quite a bit to them. We believe that this is a very important aspect of our business because we think the professional quality products can get them honed and working well in the industrial units (inaudible) and then we commercialize them into the consumer markets. You will also notice that some of the accounts, for example Singer, is in the sewing area. Well, an example of the crossover is the reception of the selling items that are in the sewing area and brought them into Wal-Mart and became category castings in the sewing area.
Internationally, you will see some of the same names as we have domestically and then there are others that are more European, but all of the names on this page are major companies. As I mentioned, Staples is an important account to us domestically and with Corporate Express, it is far more important. Office Depot, we have sold our products for several years through Office Depot in 12 countries in Europe and are the primary scissor and ruler supplier there. Others like Tesco in the UK and Zellers in Canada are more regional but important accounts to us.
This area, the hardware and do-it-yourself opportunity is one that we’re excited about and we do very well with right now. But if we take our industrial accounts, bring them into the Home Depots, the Lowes, Ace Hardwares, and the Sears and the Hardware Departments, we’re opening a channel that we believe is very large, very appropriate for us and later we’ll show you some of the items that we are impending to bring into that channel. But I will caution you that sales in this area are very small for us now but we think they can be big in the future.
The reason things happen is because of the innovation that we bring to our products and we have the great base for sales. This is how we get the sales to grow. The iPoint razor, the pencil sharpener market is known for robust growth. It’s maybe $150 million in sales. Most school-age kids today are buying mechanical pencils. So we devised a pencil sharpener that you load the pencil in at the top. It automatically takes the pencil down, sharpens it and when it’s sharp, ejects the pencil. That first year, we had so much fun demonstrating that product and the best part where at the teacher shows where the teachers didn’t want one; they wanted five and we’d get them down to their schools and then the kids fell in love with them.
This product, the razor, is the lower prized $0.10 for the (inaudible). At $10 retail, this is targeted for the Wal-Marts of the world, Walgreens, and you’ll find them on the shelves today and they are doing quite well.
The iPoint Curve, you might notice some of the names, iPoint, the iCurve, even the calling of some of the Apple products, we take a pretty close look at designs when we are pooling our product families together. The iPoint Curves are being introduced right now as we speak. They are all battery operated. They are all high performance. They are all modestly priced and it’s already there. You’ll be seeing those at this time next year, back to school globally. The Microban kids products, this is another example of making very simple products. Up on the farther right corner, the Microban kids scissors. The Staples today, there are 3 billion [ph] of these scissors. The Microban is an ingredient that we put into the plastic when we are molding these items. It has an antimicrobial feature to it. So those are healthy products. What it's done for us is has cracked open in a big way this year Wal-Mart and Target, and we'll see lots of this on the shelves right now. We hope as we innovate (inaudible) that platform next year that we will continue to grow those accounts.
Here's the SpeedPak that I referred to earlier and now I will show you the workings of it. On the far right are cartridges and each cartridge has 10 blades. Get the cartridge, put it into the body of the SpeedPak, push the button on the top forward, the blade comes out, it retracts like a normal utility knife. When the blade is dull, you push the button on the side, pull the blade out, retract the top button, and it reloads another blade. We are giving (inaudible) sell-through at this point (inaudible). The big one was in the do-it-yourself and we are working hard to make that occur. If it occurs, it is in the millions of dollars, and it happens, it's beginning shortly. (inaudible).
Here is an example of another area. The Transfer of Power. This product has 40 layers of denim. It was developed for the car industry, the seats, and we commercialized it for the power industry product in the year and then when we (inaudible) it over into the sewing area, it was a wow. And today, you will find it in a quite a number of the specialty sewing shops as well as in Wal-Mart.
Simple Knives, but they are not simple knives. We have a number of utility patents on coating and what we did was we optimized the fitness of a coating, the composition of titanium and chromium, and found the possible level for maintaining hardness. And the product that you see here that has great angles with lead bottoms are being sold into the poultry processing areas. They stay sharp. They are sharp. They have antimicrobial handles. If you go to – if you buy a Tyson turkey, unfortunately you probably [ph] experienced this.
On the far right, we then commercialized it into the fishing market and (inaudible) outfitters is selling a line of the company to retailers such as Keble [ph] and (inaudible). There are a number of patents that we have got pending right now on other coatings that enhance the hardness to another layer, one in particular is the carbo-nitrites, which will take the performance level from the hardness of stainless steel 27 times higher and that will be initially applied into the Clauss line.
TigerSharp technology is a (inaudible) replaceable blade. These are very, very sharp knives. We bought the company a year ago with patents and – I can't remember exactly what we paid but it was a couple of hundred thousand dollars at most. We expect to be selling these to some of the retailers, particularly in the do-it-yourself market in the coming year and they are currently placed at light end [ph] of the Grainger channel.
The original first aid business continues to have some innovations. The (inaudible) in the packaging of First Aid and on the far right is one that is for offices. One on the bottom is for burns, bumps, and bruises and cuts. And there each module has a series of specialty items.
I'd like now to go into the growth drivers and this is what we spend our time on as we continue to look at how do we grow this business internally. In the first is we leverage the titanium technology across all cutting categories. Scissors, paper trimmers, pencil sharpeners, knives is the pattern here and each time we are enhancing the performance and we are then putting them into the channels that we know so well. There's Wal-Mart, we have Target, we have Grainger and Staples.
We are introducing next generation coatings right now. One that is being presented today it is a non-stick that we believe is going to be headwind that is as powerful as the titanium coatings and that non-stick will allow – it will allow our blades to be used in some very harsh environments with that kind of coating of titanium. For example in the floral area, the staff and the organic cutter used for cutting and trimming flowers and vines and bushes, there's a whole family of applications there. In the arts and crafts area, if you take for glues and for paste. For mailroom applications. We believe some of the non-stick coatings will eventually wind up in the medical area in fitness, hydrophobic. The ability to leverage that coating on the cutting areas, we think, is very, very exciting and the first family of these items are little easy present it today.
The professional cutting tool market of utility knives, the aviation fins, high-performance blades, not only does it fall into the Graingers and the MasterCard catalogs, but they are ideal for the do-it-yourself channels. We are broadening our distribution of our best-selling products globally and we're set up to do that properly. First, there are Asian operations which is based in Hong Kong is complete with a sophisticated sales room, full logistics capabilities, and so when buyers are coming in to say WalMart or the (inaudible) facilities, we're there to service them. We've got operations in both Manchester, England and as well as in Germany. We have full warehousing in Europe, so we got – you want to buy it in Asia, we can ship it direct. If you want us to warehouse it in Europe, we can do that. Put operations and channels across the US. Although we sell in 83 countries, the big ones are North America and Europe.
We're taking the Clauss professional line into the home improvement markets. We're bringing the First Aid product across every single one of our channels and for example, we don't sell any of our First Aid items into a Target and Wal-Mart, but there's absolutely no reason we can't. We are bringing the best selling ones into Europe and we are raising the performance standards in the stone and craft markets by taking the Clauss professional products and then bringing them into the retail environment with retail packages and ergonomics.
Here are some forward-looking items [ph]. We are expecting to do between $70 million to $72 million in 2008. We have run a little bit ahead of that for the six months but it's a tough environment and (inaudible) probably pretty good numbers to benchmark. It is about a 20% growth. New products will be about a third of our sales. Net income of $4.5 million and the earnings per share of $1.23, which will be up $1.19. Thank you very much.
At this time, we can entertain question and answers. And Walter, if you could just remember to repeat the question so the webcast people can hear.
(inaudible – microphone inaccessible)
The question was, the customers that we sell to are referred to be [ph] difficult on price and how do we maintain margins? First part of that -- the response to that is they are incredibly difficult and not only on price but on demanding performance. And that's the environment that we live in. We do it by innovating and driving the categories. In most of the – many of these customers, we're if not the leader in the categories, we're one of the leaders. And for example, one major retailer sat down with us only last week and we worked through the strategy of how do we grow that category for them for the next year back to school and I think we are very fortunate to be in relationships where they're looking to us for innovation. And of course, you have got a margin when you do that, but you are also driving their sales. And the other side to that is we buy more and produce more of our major products than almost anybody else in the world. And so if, an example, Wal-Mart wanted 4 million scissors, they get a good price. But may be we will produce 6 million to 8 million scissors and we (inaudible), so we compete at that low-end. But the question is a good one and we can’t ever suggest that the innovation is reason that they're for us. The next question? Yes.
(inaudible – microphone inaccessible)
The question was how do we protect our products when we have got patented items given that they might be easy to copy? In Asia, we get knocked off regularly. We see our products produced in packaging that looks like ours, but it isn’t ours. We see in some countries products that are knocked off and although we try to oppose that we are not always able to do it. In the developed countries and by that I would mean North America, Europe, Australia, New Zealand, Taiwan, and Japan, where we do have patent protection and an umbrella of enforcement, we protect our patents, and sometimes it's innocuous. We recently had a major New York Stock Exchange conference in the US for affordable products. It was sort of difficult to have the conversation. It is removed from the shelf now and you're subject to a number of penalties if you don't do it. Essentially we have to do it and we do it. Other questions?
Well again, thank you very – yes?
(inaudible – microphone inaccessible)
The question was, it appears that we increased our working capital in 2007 and is there a reason that has happened? And the answer to that it is was very deliberate. The delivery metrics that our customers demand are very high and we achieve – let me give you an example. If we are supplying Wal-Mart on a (inaudible), they expect delivery all the time. It really doesn't matter whether it is a box size or there has been hurricane. They have an empty shelf, it is a lost opportunity and it is something that is monitored weekly by store. We've got a very long supply chain. The supply chain might be from factories in Northern China, it might be from Pakistan, it might be from Italy. We've got (inaudible) delivered on this time all the time to these customers.
Then in part two, on-time delivery is understanding the forecasted demand. And unfortunately, it is not always so clear that our customers help each other, within their own organizations, and we’ve had instances where one of the largest chains did a huge promotion for (inaudible) mid summer and didn't tell our supply chain and there were millions of scissors that had to get delivered all at once. And when that happens, you ship that one direct to the customers that will look into (inaudible). We didn't make the mistake and so we had got more supply. The level of inventory that we have also was deliberately built for another reason and that's that our costs were going up. You could see that. Although we don't hedge the Chinese currency, in fact, we do in an indirect way because we take delivery of the goods. Until we're able to price the products going forward, we've got the goods and we're able to deliver with nominal costs. I wouldn't answer anticipate going forward that we'd use working capital in the same way and next year our free cash is $5 million to $7 million, which would be over $1 a share or probably more than that, $1.50 a share. That wouldn't be (inaudible) most of that is retained to pay down debt or acquire another company.
Other questions? Yes.
(inaudible – microphone inaccessible)
The question was do we have the opportunity to license our technologies for applications where we don't want to pursue them. We've looked at that but we really haven't done it and I think the answer is, yes, we probably could. It's a funny thing because, for example, a couple of years ago, we might not have sold [ph] the knife business and yet we're not only in the knife business now, probably we're finding that we have got quite a bit of growth in it. We might think about licensing into the military market. (inaudible) into that area. And I think a better opportunity (inaudible), we'll probably pursue it.
Other questions? Well, again, thank you very much.
Thank you, Walter. We appreciate your participation and obviously we maintain our buy recommendation on this stock. What we'd like to do is, on your schedule, the next presentation – the one that we had Acacia Research, Paul Ryan is here and we will start that presentation in five minutes. Right now, it's 1:42 pm. So we will start at 1:50 the Acacia presentation. And then after that, we'll be right back on schedule again with our published schedule.
What I'd like to mention is that Walter Johnsen and Paul Driscoll are going to be in the next room for one-on-one sessions with Acme United and so it is just right out the door. So if you would you like to go in more depth with them, they will be next door until 2:30 pm when the next presentation starts. Actually, Acacia will be starting in less than five minutes right now. Any other questions so far about the conference, we're little off schedule but we're going to get back on schedule at 2:30 pm, okay? We'll take only five minutes to load up the next presentation and we will start with Paul Ryan.
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