Acme United Corporation (ACU) CEO Walter Johnsen on Q4 2020 Results - Earnings Call Transcript

Acme United Corporation (NYSE:ACU) Q4 2020 Earnings Conference Call March 3, 2021 12:00 PM ET

Company Participants

Walter Johnsen - Chief Executive Officer

Paul Driscoll - Chief Financial Officer

Conference Call Participants

Tim Call - Capital Management Corporation

Peter Mork - Mork Capital Management

Operator

Good day and welcome to the Acme United Corporation's Fourth Quarter 2020 Earnings Conference Call. At this time, I'd like to hand the conference over to Walter Johnsen. Please go ahead.

Walter Johnsen

Good morning. Welcome to the fourth quarter and year end 2020 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 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, such as among others, those arising as a result of the effects of the COVID-19 pandemic, including the ongoing economic downturn, and the other risks and uncertainties described in our periodic filings with the Securities and Exchange Commission in our current earnings release.

Walter Johnsen

Thank you, Paul. Acme United had a record fourth quarter and year in 2020. Our net sales in the fourth quarter were $40.9 million, an increase of 21% over 2019. Our net income for the fourth quarter was $2 million, an increase of 109%. We had similar strong performance for the entire year. Net sales for 2020 were $164 million, an increase a 15% over last year, and net income increased 47%. Our earnings per share for 2020 were $2.31 compared to $1.60 last year, an increase of 44%.

We have been investing in our e-commerce teams and platforms for many years and by 2019, online sales represented 16% of revenues. We've also been actively building our mass market presence with retailers such as Walmart, Home Depot and Costco. And we have made acquisitions of Pac-Kit, First Aid Only, DMT. Spill Magic, First Aid Central and Med-Nap, all US and Canadian-based manufacturers.

When the COVID-19 epidemic occurred, we were positioned to quickly shift our sales focus to e-commerce and mass market retailers that we believed would be heavily shopped. We use our sourcing team in Asia to procure large quantities of [retail] [ph] masks, full of nitrile, gloves, and disposable personal protection gowns to be used in our first aid kits bodily fluid kits and personal protection kits.

We built large quantities of Westcott craft scissors, and tools, and those hunting knives and crude efficient tools, not knowing whether the supply chains would operate smoothly or what demand would be. We kept our entire team focused on growing our new business, selling our products and responding to market shifts.

As you may recall, we increased our inventory by approximately $10 million starting in July. This proved to be a good move, as it helped us respond to supply chain disruptions and customer demand well in excess of forecasts. The results of these actions are apparent. We had outstanding performance in every one of our subsidiaries and business units during 2020.

Behind the scenes, of course, we were trying the best we could to operate remotely with operations in Europe, Canada, the US, China and Hong Kong. Our supply chains were damaged with COVID creating shortages of workers at the factories, barriers to movement of goods to the ports, port congestion, container shortages and shipping delays in the US. We closed our warehouses in US factories for deep cleaning multiple times. At overtime, hazard and weekend pay and incurred many other inefficiencies related to the pandemic.

We made two acquisitions during 2020. In January 2020, we purchased First Aid Central in Laval, Canada. During the year, we succeeded in increasing their e-commerce first aid sales. We began selling Health Canada registered first aid products to our traditional mass market, industrial and office products customers and expanded sales to current multinational customers in Canada. The team at First Aid Central has done an outstanding job, and we are accomplishing the growth we planned.

In December 2020, we completed the acquisition of Med-Nap LLC, which is a US-based supplier of alcohol wipes, alcohol prep pads, BZK wipes and other items that are used in our first aid kits and in healthcare. These products also have broad use of disinfecting wipes in homes, restaurants, offices and factories.

Med-Nap had revenues of approximately $4.8 million in 2020, with EBITDA of $1 million. We plan to purchase $2.6 million of additional equipment to increase production in 2021 and look forward to substantial expansion in the coming years. At year end, we terminated our Defined Benefit Pension Plan. The plan had been frozen to employees since 1996 and its participants and obligations have gradually declined over the years.

We had about 25 retirees in the plan at closure, with all the costs, audits, paperwork and oversights that are required. The charge to close the plan, which was mostly non-cash, was approximately $750,000 resulting from the recognition of accumulated losses, which normally would have been amortized over the remaining years. Our past employees now have annuities from a major insurance company while Acme United has transferred the pension risk, and will save approximately $75,000 annually.

We leased a new headquarters in January 2021, in Shelton, Connecticut to accommodate growth and provide social distancing. The office has 35,000 square feet, which is approximately double our current base with numerous offices, meeting rooms and cubicles. Our associates will each have individual workspaces in a large modern facility as we return to the office with a flexible work schedule. The cost is comparable for our former space.

We continue to see strength in sales and earnings growth so far in the first quarter of 2021. Our businesses continue to gain market share, and we have new production capacity coming on stream at DMT and Med-Nap. We will not be providing guidance at this time. But we are very optimistic about another strong year.

I will now turn the call to Paul.

Paul Driscoll

Acme's net sales for the fourth quarter were $40.9 million, compared to $33.9 million in 2019, an increase of 21% sales for the year ended December 31st, 2020, were $164 million compared to 142.5 million in 2019, an increase of 15%.

Net sales in the US segment increased 14% in the quarter and 12% for the year on December 31st. The sales increase mainly came from first aid and safety products, primarily in market share gains, and to a lesser extent gains from COVID-19 related service demand.

Net sales for Europe increased 55% of local currency for the quarter, and 25% for the year ended December 31st. The sales increase for both periods was primarily due to an increased sales of Westcott and Camillus products in the e-commerce channel, as well as higher sales of DMT sharpening products.

Net sales in local currency for Canada, excluding First Aid Central, increased 23% in the quarter to the growth in Camillus and Cuda products year-to-date sales declined 3% in local currency, mainly due to COVID-19 related office and store closings earlier in the year, including First Aid Central, sales increased 56% for the year.

The gross margin was 36.7% in the fourth quarter of 2020 compared to 36.3% in 2019. The gross margin for the year ended December 31st, 2020 was 36.3% compared to 36.5% for 2019. The major contributor to the decline in gross margin percentage was COVID related expenses.

SG&A expenses for the fourth quarter of 2020 were $12.2 million or 30% of sales, compared with $10.9 million or 32% of sales for the same period of 2019. SG&A expenses for the year ended December 31st, 2020 were $48.2 million or 29% of sales compared to $43.6 million or 31% of sales in 2019.

Net income for the fourth quarter of 2020 was $2 million or $0.54 per share, compared to a net income of $1 million or $0.28 per diluted share for the same period of 2019, an increase of 109% of net income and 93% in earnings per share.

Net income for the year ended December 31, 2020 was $8.1 million or $2.31 per diluted share, compared to $5.5 million of net income or $1.60 per diluted share in the comparable period last year, an increase of 47% of net income and 44% in earnings per share.

The company's bank debt less cash on December 31, 2020 was $41.3 million, compared to $30 million on December 31, 2019. During the 12-month period, we paid $11.4 million for the First Aid Central and Med-Nap acquisitions and $1.6 million in dividends and generated $3.2 million in free cash flow.

Walter Johnsen

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

Question-and-Answer Session

Operator

Absolutely. [Operator Instructions] And it does look like we've had a question come on the line from Tim Call with Capital Management Corporation. Please go ahead.

Tim Call

Congratulations with another strong quarter and a strong year. All that hard work -

Walter Johnsen

Thank you very much, Tim. Yeah, thank you.

Tim Call

You have this industrial cutting tool business and scissor business and industries were closed and schools were closed and offices were closed and keep picking up new distribution and winning new accounts. When America reopens, are you going to be able to supply enough cutting tool inventory to your standard distribution? Because it looks -

Walter Johnsen

Tim, that's a very good question. And it's hard to forecast demand. But we have a good quantity of inventory in the US right now, specifically focused for when things reopened. And we are seeing strength with some of the office superstores and the distributors as we speak. And of course, that's in addition to the mass market, which has been strong. So, I would anticipate that we will have a strong demand as people go back into the office, we'll see but we feel we are prepared.

Tim Call

As sales rebound there and we have ongoing growth in healthcare. Do you think as Acme grows, because of economies of scale, margins might expand over time?

Walter Johnsen

Well, I don't think it will come from growth, margins have been impacted, because we've been very inefficient with our production either COVID and the cost of shipping and extra handling, and it's an extra people and social distancing and working weekends, all these things are going into unplanned closures. That's all showing up in our cost of sales. And despite that, during the gross margins for the year got comparable with last year. When these strings are removed, it's possible that we'd see some improvement in margins based on no longer having these kinds of costs.

Tim Call

Well, congratulations again on such a strong year and all your hard work and [new accounting] [ph] as mentioned, that's all great news.

Walter Johnsen

Well. Tim, thank you for your support.

Operator

[Operator Instructions] We'll take our next question from Peter Mork with Mork Capital Management. Please go ahead.

Peter Mork

Hey, Walter. Yeah, just first off, obviously, great year, what I mean - great job navigating a really difficult year and just outstanding results. You know, just kind of a quick follow-up on the inventory. And you know, you talked about in your comments, it's, you know, this past July, it's about, you know, $10 million above where it would normally be, you know, as we look at the year-end number of $50 million, is that, you know, still reflective of the buildup that you preemptively did, you know anticipating some of these supply chain disruptions or is this a new level just with the sales and acquisitions, you know, how should we think about that? Is there some working capital that can be freed up there?

Walter Johnsen

I believe there is, in our internal models, we're assuming that the inventory holds and hopefully we grow. But as we speak, if it was a static inventory, I mean static sales, it certainly works off some of that inventory. There was a question earlier from Tim Call about people returning back to work, and will that stimulate demand? We think it will. And we think we're prepared to supply into that growth. If we wind up growing at the pace that I hope we do, then, we'll have less inventory reduction and more that will be into working capital, but if it was just static in revenues, would clearly be driving down the bulk of that $10 million.

Peter Mork

All right, sounds good. And then yeah just kind of like higher level question on the - you also mentioned the capacity expansion, both to the Med-Nap and then the DMT. How in terms of the DMT where are you at just in terms of being supplied constraint there and you know, any additional color you could give on that product, it would be appreciated.

Walter Johnsen

Yeah, so what's the DMC product line? We have been capacity constrained for the past couple of years and every time we seem to get more capacity, we sell it, which is a terrific thing. Which is a terrific so the time margin. And is getting better and better utilization in the plant. So we went through another expansion starting around September of last year of 2020. And that is mostly installed now. And we're seeing benefits from increased production, we're going to be doing some the layouts of the facility, so that we'd like to be able to increase capacity by about 50%. But what we're finding is, our customers want more and more. And it's a good problem.

In the case of Med-Nap, it's a little bit different. Because there's a lot of potential volume that we could generate through Acme's sales efforts, so Acme is a customer and a reasonably important customer to Med-Nap. But we can be a far bigger customer by opening up our industrial distribution, our distributions into retail and into the mass market and into Amazon. And there, we've added three machines that, in time, generate about $2 million or more in revenues each. So they'll be coming on stream between now and of August. And I really don't know what we're going to do after that we'll probably be evaluating the sales levels or possibly investing again at year end, we continue to grow.

Peter Mork

That's great. Well, congrats again on a great year and of selecting 2021.

Walter Johnsen

Thank you so much, Peter.

Operator

[Operator Instructions] And it would appear at this time there are no further questions on the phone lines.

Walter Johnsen

While with no further questions, this call is complete. I would like to thank you for joining us and we look forward to sharing our first quarter results in April. Good bye.

Operator

And that concludes today's call. Thank you for your participation. You may now disconnect.