Acme United Corporation (ACU) CEO Walter Johnsen on Q1 2019 Results - Earnings Call Transcript

Acme United Corporation (NYSE:ACU) Q1 2019 Earnings Conference Call April 18, 2019 12:00 PM ET

Company Participants

Walter Johnsen - Chairman & Chief Executive Officer

Paul Driscoll - Chief Financial Officer

Conference Call Participants

Michael Kawamoto - D.A. Davidson

Ryan Ruggaard - Bard Associates

Mike Mork - Mork Capital Management

Jim Marrone - Singular Research

Jeffrey Matthews - RAM Partners

Operator

Good day, and welcome to the Acme United Corporation's First Quarter 2019 Earnings Conference Call.

At this time, I would like to turn the conference over to Mr. Walter Johnsen, Chairman and Chief Executive Officer. Sir, please go ahead.

Walter Johnsen

Good morning. Welcome to the first quarter 2019 earnings conference call for Acme United Corporation. I'm 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, strategy, 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 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 2019. Sales of $31.4 million were 1% below last year's very high level as expected, due to the shipment in Q1 2018, the large initial order of first aid kits to a major foodservice distributor. We did not anniversary this, but we had excellent refill orders during the quarter.

During the first quarter of 2019, we shipped Westcott Glue Guns and our new Westcott Adjustable Scissors, which use Glide technologies for initial placement to a large mass market retailer in the U.S. As I mentioned in our year-end call, we expanded our Camillus product offering to a large scouting organization and continued to gain market share of hunting and fishing knives.

Sales of first aid products to a major industrial distributor continued to grow. Our European and Asian sales increased. We benefited during the first quarter of 2019 from the cost reductions and productivity improvements, we implemented during the latter part of last year. These initiatives are now in full force and savings will total over $2 million. We continue to implement new software and production equipment to generate additional savings. We reduced inventory by $1.3 million from March 31, 2018 to March 31, 2019 despite projected sales growth in 2019.

Our net debt has declined by $2.9 million to $40.9 million. As you may recall, our bank facility is $50 million at LIBOR plus 1.75%. We are focused on reducing debt further in preparation for potential acquisitions, dividend increases, and share repurchases. The coming quarters of 2019 look strong. We see growth in new online programs in first aid and Westcott cutting tools.

We're expanding production capacity again at our DMT diamond sharpening plant to meet additional demand this year as customers particularly in Europe increasingly recognize that we have the best hand tools for sharpening in the industry. We also have new Camillus knife initiatives that will be on the shelves at mass market retailers in the third and fourth quarters. We are reiterating our guidance for 2019 for $140 million to $143 million in revenues, $5 million to $5.3 million in net income, and earnings per share of $1.41 to $1.50.

I will now turn the call to Paul.

Paul Driscoll

Acme's net sales for the first quarter were $31.4 million compared to $31.7 million in 2018, a 1% decrease or constant in local currency. As Walter mentioned, net sales for the first quarter in the U.S. segment decreased 1% due to the initial order of first aid products to a major distributor to the food service industry in 2019.

Net sales in Europe for the first quarter of 2019 increased 14% in local currency compared to the first quarter of 2018 mainly due to new customers in the office products channel and continued growth of DMT sharpening products. Net sales in Canada for the first quarter of 2019 decreased 5% in local currency compared to the same period in 2018 due to large order from a new customer in the first quarter of 2018 that did not repeat in the first quarter of 2019. We expect sales in Canada to increase in 2019.

Gross margin was 37.6% in the first quarter of 2019 versus 38.2% in the first quarter of 2018. The lower gross margin this first quarter was primarily due to a better product mix last year. We expect future quarters in 2019 to show improved gross margins versus comparable periods in 2018.

SG&A expenses for the first quarter of 2019 were $10.3 million or 33% of net sales, compared with $10.8 million or 34% of net sales for the same period of 2018. Operating profit in the first quarter of 2019 increased 12% compared to the first quarter of 2018. The improved operating profit was primarily due to the cost-savings initiatives we implemented in late 2018.

Net income from the first quarter of 2019 was $807,000, or $0.24 per diluted share compared to net income of $764,000, or $0.21 per diluted share for the same period of 2018, 6% increase in net income and 14% in the EPS.

The company's bank debt less cash on March 31, 2019 was $40.9 million compared to $43.7 million on March 31, 2018. During the 12-month period, we paid $1.5 million in dividends, $0.4 million on stock buybacks and generated $5.5 million in free cash flow. We expect to end 2019 with approximately $36 million of net debt and to generate $45 million in free cash flow.

Walter Johnsen

Thank you Paul. We'll now open the call to questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will open the floor for questions. [Operator Instructions] Our first question comes from Michael Kawamoto with D.A. Davidson & Co.

Michael Kawamoto

Hey Walter. How are you doing?

Walter Johnsen

Good. Thank you, Michael.

Michael Kawamoto

Yes. Just so first off so it sounds like first aid would have been up, if we back out that large industrial order that didn't repeat last year. Is that fair to say?

Walter Johnsen

Absolutely.

Michael Kawamoto

Okay. Awesome. And then can we get an update on just how the Amazon business is doing? Has that picked up at all or are you seeing signs that it's going to pick-up?

Walter Johnsen

Well, we have a number of programs working with Amazon right now which will lead to growth we believe over and above our current levels. And our current levels are ahead of last year. Well, they are right now.

Michael Kawamoto

Got it.

Walter Johnsen

So, Amazon is doing--

Michael Kawamoto

Go ahead.

Walter Johnsen

Sorry, I said Amazon is doing fine. The new programs will -- are kicking-in in this quarter or next quarter and we're doing fine compared to last year. So, it's good.

Michael Kawamoto

Got it. And then I saw on Amazon for Westcott scissors. You guys have like a sponsored banner when you search for scissors. Could you see yourself doing some like that for maybe on the first aid side to help cut through some of the noise there?

Walter Johnsen

Well, I don't want to get too specific on the strategies. But banner ads, sponsorship, private label, third-party sales, these are all things that we can do. And it's a bigger mix than just highlighting a single product. So, the initiative that's going on as we speak is pretty exciting to us.

Michael Kawamoto

Got it. And then just lastly when I look at the guidance, what share count are you assuming for the full year?

Walter Johnsen

Paul?

Paul Driscoll

The diluted share count?

Michael Kawamoto

Yes.

Paul Driscoll

I believe it's 3.5 million.

Michael Kawamoto

Okay, that makes sense. All right. Thank you so much. Best of luck the rest of the year.

Walter Johnsen

Thank you.

Operator

Thank you. Our next question comes from Ryan Ruggaard with Bard Associates.

Ryan Ruggaard

Hi Walter, how are you doing?

Walter Johnsen

Good Ryan.

Ryan Ruggaard

So, my question is on the gross margin side of it. You guys kind of made some comments that the product mix drove some of the gross margin declines. Could you talk a little bit about why you are confident on the improvements kind of in Q2 and Q4 going forward? And then I kind of have a follow-up question once you answer that one.

Walter Johnsen

Well, the large shipment that we made in first aid was first aid and they have higher margins than our normal business. So, it skewed it a little bit upward. Going forward through the other quarters that will be at a normal level and with normal refills. So, it won't be skewing the margins.

And then when you're comparing comparable mixes for the rest of the year we're expecting the comparable mixes to be better than last year.

Ryan Ruggaard

Got you. That makes sense. And then you've historically at least last year you started breaking out the cutting versus first aid business in terms of the revenue lines. Do you have the Q1 numbers on those?

Walter Johnsen

Paul?

Paul Driscoll

Well, it's approximately -- I don't have the exact numbers now, but it's approximately 40% first aid.

Ryan Ruggaard

Okay. Thank you guys.

Walter Johnsen

Thanks Ryan.

Operator

Thank you. Our next question will come from Mike Mork with Mork Capital Management.

Mike Mork

Walter two questions. One on the acquisition front, do you see a lot of things on the front burner or are they more on the middle burner and back burner right now?

Walter Johnsen

Well, we're seeing a fair amount of activity Mike, but there's nothing that I can tell you in the short-term we're going to be doing something with. And you never know, because you're talking to potential candidates and sometimes it flushes out that the due diligence is good, but often it isn't. So I would just tell you that it's an active strategy for us and we're looking very hard. But there's nothing in the forefront.

Mike Mork

Okay. And then the second question is just in general inflation is coming in less than most economists had forecast this year. And defend as you know is trying to get up to 2%. To me that seems silly. But anyway that's the real world. How do you look at your various businesses now? Are they very price competitive about as price competitive as they usually are? Or is it more price competitive?

Walter Johnsen

Well all of our businesses are really price competitive, but it hasn't changed from six months ago.

Mike Mork

Okay.

Walter Johnsen

We did push through some price increases in the first of the year and they were accepted. We have pricing power, but you can't be overly aggressive on that.

Mike Mork

Okay. So are you -- would you say, you're kind of in line with the 1% to 2% inflation that we're seeing overall in the economy?

Walter Johnsen

Absolutely.

Mike Mork

Okay. That's fine. Thank you and great quarter. Thank you.

Walter Johnsen

Thank you, Mike.

Operator

Thank you. [Operator Instructions] And our next question comes from Jim Marrone with Singular Research.

Jim Marrone

Yes, just a follow-up to the acquisition question. In regards to the acquisitions that are in the pipeline, are you looking to do more of a geographical diversification or product diversification? Is there any kind of priority in regards to potential acquisitions? And just share your comment on that? Thank you.

Walter Johnsen

Well Jim the lowest risk deals are the ones that are current businesses that we're just bringing right into the current business competitor. So we're obviously looking actively in consolidating some of the segments. And you may know that the Camillus hunting and fishing area has lot of nice companies. You may know that first aid is somewhat fragmented. And those areas again we have the management, we have the purchasing power, we have the sourcing and you can add value pretty quickly.

As you start to look at half step aways, the kinds of products that we can bring in through multiple channels of distribution have a lot of appeal to us. An example of that would be the DMT acquisition, which was the diamond-based sharpeners. So those could be sold to sharpen the hunting and fishing area. It could be industrial segment. It could go through our Amazon products. It could go into Europe. And in fact, it did all of that. So there were a lot of vectors that could add value.

Spill Magic was similar where we could bring it into the first aid and safety area, we could bring it into our retail customers, bring it to our initial distributors in Amazon and Europe and we did that. So when we're looking at a half step away there's got to be value with creation. Looking at geographic distribution is an interesting area, but I would put that at a lower priority, but it's something in Canada and we don't have first aid business in Canada. That probably could manage. But I wouldn't say that is higher priority as directly simulating products into our domestic operations.

Jim Marrone

Excellent. Thank you so much.

Walter Johnsen

Thank you.

Operator

Thank you. Our next question comes from Jeffrey Matthews with our RAM Partners.

Jeffrey Matthews

Hi, Walter. How are you?

Walter Johnsen

Good, Jeff.

Jeffrey Matthews

On the $2 million of savings that you referenced from the initiative -- from the good initiatives that you took, how much of that might you be reinvesting in the business in other ways?

Walter Johnsen

None of it.

Jeffrey Matthews

Okay.

Walter Johnsen

I don't -- this money is -- that's going to the bottom line. There are other productivity steps that we're reinvesting in it but our goal is with this money, it's going to the earnings.

Jeffrey Matthews

Got it. Okay, that’s great. Thanks very much.

Walter Johnsen

Thank you.

Operator

Thank you. Our next question comes from Michael Kawamoto with D.A. Davidson.

Michael Kawamoto

Yeah, hey, thank you. Just a quick follow-up. When I look at the model, is 3Q still the big quarter for you guys and what's driving that? I know you talked about a large I think outdoor retailer getting to new business there, but are there any other key drivers to 3Q growth?

Walter Johnsen

Paul you want to address that?

Paul Driscoll

I think the biggest growth is yes it's probably the third quarter. And, yeah, a lot of that's happening from the outdoor market as you referenced and as well as some of the continued growth in the new products with the glide, Westcott glide and glue guns.

Walter Johnsen

And there is a shift of some back-to-school that's in the third quarter that we're seeing. But I -- we're anticipating a very, very good second quarter as well.

Michael Kawamoto

Awesome. Good to hear. Thanks, guys.

Walter Johnsen

Thank you.

Operator

Thank you. [Operator Instructions] All right speakers, and at this time there are no further questions in the queue.

Walter Johnsen

Okay. If there's no further questions this call is complete. I want to remind you that our annual meeting will be at the Cornell Club in New York on Monday April, 22nd at 11:00 a.m. and we would welcome you to attend. We'll be showing some of our new products, giving management presentation, and of course our board will be there as well. Thank you for joining us. Goodbye.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference and you may now disconnect. Please enjoy the rest of your day.