Acme United Corp (NYSE:ACU) Q3 2021 Earnings Conference Call October 26, 2021 2:30 PM ET
Company Participants
Walter Johnsen - Chairman & CEO
Paul Driscoll - VP, CFO, Secretary & Treasurer
Conference Call Participants
Jim Marrone - Singular Research
Michael Mork - Mork Capital
Richard Dearnley - Longport Partners
Jeffrey Matthews - RAM Partners
Operator
Good day, and welcome to the Acme United Corporation's hosted Third Quarter 2021 Earnings Conference Call.
At this time, I'd like to turn the conference over to Walter Johnsen. Please go ahead, sir.
Walter Johnsen
Good afternoon. Welcome to the third quarter 2021 earnings conference call for Acme United Corporation. I am Walter 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, 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 and in our current earnings release.
Walter Johnsen
Thank you, Paul. Acme United had a very good third quarter of 2021. Our net sales were $47.9 million, an increase of 11% over last year at this time. Our net income for the quarter was $2 million, an increase of 30%. Earnings per share were $0.50 compared to $0.46 last year. Net sales were strong at all of our subsidiaries.
In the U.S., our revenues increased 12%. We benefited from excellent back-to-school sales, strong demand for Westcott cutting tools as people return to their offices and excellent sell-through of our craft products. The First Aid and Safety business had increased demand throughout its distribution base. E-commerce sales were strong.
Our Canadian business benefited from growth at First Aid Central, which has successfully added new multinational customers since its acquisition last year. Its organic e-commerce sales were excellent.
In Europe, revenues for the quarter were even with last year due to timing of some large shipments. Acme United has had many cost pressures, and we have been increasing our selling prices regularly. We have had supply chain shortages, increased labor costs, extraordinarily high shipping costs, increased energy costs and inflation nearly across the board. In addition, we have had many positions unfilled at most of our locations despite increasing wages. It was and is a very challenging time.
We do not believe the increased costs are temporary. In fact, we are already seeing new levels of cost increases for 2022, and we are instituting new price increases. As you may recall, we installed a new warehouse management system in April 2021 in our Rocky Mount, North Carolina distribution facility. We've made substantial progress with the new software and are now shipping normally. Although there are many areas still to improve, the system is now positioned to increase our efficiencies to ship small parcels, track shipments more thoroughly and strengthen our operational control.
Acme United began building its global inventory about 30% starting in June of 2020. We did this because we feared supply chain disruptions from COVID-19 when workers in China left for their homes during Chinese New Year. However, we did not anticipate the tsunami of orders to the Chinese factories caused by pent-up COVID spending and the U.S. stimulus packages, but they overwhelmed the Chinese capacity to produce and ship right in the middle of the back-to-school and summer product surge. The extra inventory provided a substantial cushion to meet customer requirements despite the external shipping chaos. We have extended the projected lead times from order to delivery and are managing our supply chain with the expectation of continued delays. We anticipate these issues in 2022 and are prepared.
We're converging on another successful year and anticipate record sales and earnings in 2021. Our sales of Westcott cutting tools continue to grow, and demand for our First Aid products is strong. We are optimistic about 2022.
I will now turn the call to Paul.
Paul Driscoll
Acme's net sales for the third quarter were $47.9 million compared to $43.3 million in 2020, an increase of 11%. Sales for the 9 months ended September 30, 2021, were $136 million compared to $123 million in the same period in 2020, an increase of 11%. Net sales in the U.S. segment increased 12% in the third quarter and 8% for the 9 months ended September 30. The sales increase for both periods was mainly due to market share gains in First Aid and Safety products. Net sales for Europe were constant in local currency for the quarter due to some large shipments last year.
Sales in the third quarter of 2020 increased 32% compared to the previous year. Sales for the 9 months ended September 30, 2021, grew 15%, mainly due to growth in e-commerce and market share gains in Westcott, school and office products. Net sales in local currency for Canada were constant in the quarter. Higher sales of First Aid products offset a decline in sales of school and office products.
Due to COVID-19 lockdowns in 2020, back-to-school shipments temporarily shifted from the second to the third quarter. Sales were up 49% in Q2 of this year compared to Q2 of last year. Net sales in local currency for the 9 months ended September 30, 2021, grew 23%, mainly due to higher sales of First Aid products.
The gross margin was 35.5% in the third quarter of 2021 compared to 34.5% in 2020. Selling price increases offset higher material, labor and transportation costs. The year-to-date gross margin was 36% for both 2021 and 2020.
SG&A expenses for the third quarter of 2021 were $14 million or 29.3% of sales compared with $12.8 million or 29.6% of sales for the same period of 2020. SG&A expenses for the first 9 months of 2021 were $39 million or 28.6% of sales compared with $36 million or 29.3% of sales in 2020. Net income for the third quarter of 2021 was $2 million or $0.50 per diluted share compared to a net income of $1.6 million or $0.46 per diluted share for the same period of 2020, an increase 30% in net income and 9% in earnings per share. Net income, excluding the impact of the PPP loan forgiveness for the first 9 months ended September 30, 2021, was $7.8 million or $1.97 per diluted share compared to $6.1 million or $1.75 per diluted share in the comparable period last year, increases of 29% and 13%.
The company's debt less cash on September 30, 2021, was $38.1 million compared to $34.4 million on September 30, 2020. During the 12-month period, we paid $9.3 million for the Med-Nap acquisition, spent $1.7 million on dividends, received full forgiveness on the $3.5 million PPP loan and generated approximately $2 million in free cash flow.
Walter Johnsen
Thank you, Paul. I'll now open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And we will go to our first question from Jim Marrone of Singular Research.
Jim Marrone
Congratulations on a decent quarter. I guess my first question is in regards to -- just provide some color in regards to the logistics and the supply chain. Just trying to get a sense of this backlog of container shipments and the backlog of ports on how it's affecting your business, what you foresee in the near future in regards to that. And then I have a follow-up question after that.
Walter Johnsen
Well, in general, it's a mess. The supply chain could have been managed much differently than it has been, but it's being run cluelessly. I can tell you that the shortages of containers are aspirated because they're stuck in places like our ports and then we don't have truck drivers. That's not going to change quickly.
We've got production that's going on in China for delivery now next summer. And we figure sometime between now and next summer, we'll get deliveries. That's ridiculous. It's completely ridiculous.
The fact that we added 30% extra inventory allows us to plan for this kind of chaos, and we are. But it's crazy for us to be looking at deliveries almost 9 months or a year away, and we are doing that. I don't see a near-term solution, nor do I believe that people understand this is a lot more than toys for Christmas, and the popular commentary talks about a weak holiday.
They're missing the fact that the U.S. economy, if it doesn't get critical parts, grinds to a halt. And this is serious. So while we feel we're prepared, we don't see enough activity going on, on a macro level and within our own government.
Jim Marrone
Okay. Great. So you mentioned that you've mitigated those higher costs with effective inventory management. I think you also made the comment, though, in the prepared comments that they were also -- those higher costs were offset by increased selling prices. So I'm just kind of curious, can you confirm that statement? And as well, if this is the case, how well can you pass these higher selling prices to consumers? Like how much appetite do consumers have with increased selling prices? And if indeed it's increased selling prices and effective inventory management, is that the drivers to that increased profit of 30% when you only have top line that's growing at 10%?
Walter Johnsen
Well, first on the ability to price. We try very hard to deliver value to our customers. I mean that's obvious. But when your costs go up, you pass your costs on. And there are a lot of costs. And when you can't identify all the costs, but they keep coming in everywhere, well, you increase your prices to cover that. And we've continually done that throughout the year and anticipate continuing to do it because we don't see a letdown whatsoever.
Relative to the gross margin increase in the quarter, I think that is representative of product mix, but it does represent that we have pricing power.
Jim Marrone
Right. And in regards to passing on those higher selling prices to consumers, at what point -- do you have an idea which point that your volumes are going to hurt as a result of the -- passing on those higher increased prices?
Walter Johnsen
Well, I don't think, really, our products are the ones which will have much resistance because the average selling prices are well under $25 for most of our Westcott items and Camillus knives. With the First Aid kits in the industrial market, they're higher. But there, it's a whole different market dynamic.
I think a bigger thing is the collective drag on the U.S. economy from inflation that's coming in from every front, and that may slow demand across the board.
I can see already the major capital equipment slowing in part because they can't get parts. But the factories don't operate when they don't get parts. And so I think there's a cycle here that is very concerning.
Operator
[Operator Instructions]. We'll go next to Alan Kaplan [ph], a Private Investor.
Unidentified Analyst
Yes. I was wondering, do a significant number of your options get awarded to employees who are not classified as insiders?
Walter Johnsen
No. The options only go to employees. And they've been a very important part of maintaining this talent pool that we have, probably more so than any single thing. But they all go to employees.
Unidentified Analyst
No. What I was asking was, are a number of them granted to employees not classified as insiders, and therefore, not filing Form 4s?
Walter Johnsen
Oh, sure. There's a lot of those that don't file Form 4s that are employees.
Unidentified Analyst
Okay. Because, I mean, you did -- just since your last earnings release, there was a big jump in basic number of shares. And the only thing I can figure out is that some of those employees were exercising their options. Is that correct?
Walter Johnsen
Yes. I think that would be the accurate, Alan...
Operator
And we'll move to our next question from Michael Mork of Mork Capital Management.
Michael Mork
Two questions. A couple of years ago, Amazon was growing exponentially with your company, and then it kind of flattened out. Can you give us any update on what's going on there?
Walter Johnsen
Yes, Mike. Amazon has been growing rapidly both in the U.S. and in Europe for us. And amazingly, it should be by now our biggest customer, but Walmart has also been growing very rapidly, and they've sort of been neck and neck. But Amazon is doing terrifically well for us.
Michael Mork
Okay. So your Amazon business has started to increase. It plateaued. You weren't quite sure why and then -- so it starts going up again then.
Walter Johnsen
Yes.
Michael Mork
Okay. And then the second question I had was -- you talked quite a bit in your comments from the other gentlemen about inflation. Can you give us a number? Are we talking your prices going up 3%, 5%, 10%? Can you give us some rough idea on how much inflation we are seeing there?
Walter Johnsen
Well, we are seeing inflation at the factories. In China, these aren't ours. This is across the board in China of around 9.5% to 10%. And I don't know that, that's being publicly reported, but that's what China is facing right now. So the broad production that's being exported. So when we get those kinds of increases, we match them. So it's higher numbers than you might think.
Michael Mork
So do you think your products are 9%, 10% higher at the retail than they were, say, a year or two ago?
Walter Johnsen
I really can't answer that because I haven't actually done that analysis. But I can tell you, Mike, that if we get a 9% price increase, we're going to pass on a pretty hefty price increase as well. And those are the kinds of numbers we're looking at. We're not looking at 3% or 4%.
Operator
And we'll move to our next question from Richard Dearnley of Longport Partners.
Richard Dearnley
Could you give an approximate headcount for the North Carolina distribution center?
Walter Johnsen
Paul, do you have an approximate headcount?
Paul Driscoll
I think it's about 150 now.
Walter Johnsen
And then you have the temporary workers as well.
Paul Driscoll
Yes. There's probably another 50 temporary workers.
Richard Dearnley
And I take it finding people is a mess.
Paul Driscoll
Finding and retaining people.
Walter Johnsen
Yes. Finding and retaining people.
Richard Dearnley
And retain, yes.
Walter Johnsen
Well, there's something going on, and it depends on, of course, where you live. But the unemployment in certain areas matches the living standard. At which point, there appears to be not so much incentive to show up. And the game we see again and again and again is come in, work a day or 2, leave. And then you've got another 6 months of unemployment. And people are smart, and they figured the game out.
Richard Dearnley
You get unemployment if you just work a day or a week?
Walter Johnsen
You have to be looking for employment. You get employment enough to stay long. You can be off. [Indiscernible] that cycle.
Richard Dearnley
I got it. Okay. Last quarter, you said you had a $5 million or so of orders that you couldn't ship because of the warehouse. Did that clear in this quarter? And is there any carryover from warehouse difficulties this quarter?
Walter Johnsen
Well, most of the back order from -- at the end of June that was in our warehouse has cleared. However, there's a substantial amount of products waiting to be shipped up in China at freight consolidators. So it's not booked as sales. It's built against the purchase order. But these -- our major customers can't get containers to pick them up, and they've run 3 and 4 months late now. So they're valid purchase orders, they will get picked up probably in this quarter. But they carried over from June, July, August, and they just can't get containers to put the goods in.
Richard Dearnley
Yes. There was an article on Twitter about some investor who rented a boat and toured the LA harbor and then all through the DUCs and went and talked to people and he said, "If you can find a container, you can't find a place to put it." It was just grid luck. It was a total mess.
Walter Johnsen
No. It's chaos. It's chaos. And it is so much more than what's being reported about, God, there won't be toys for Christmas. It's just not getting how serious this is.
Operator
And we'll go to our next question from Jeffrey Matthews of RAM Partners.
Jeffrey Matthews
I got a few questions. First, on China, why -- two related questions on China. Why is the inflation so high there? Is it raw materials? Or is it a labor shortage, which is something you've been talking about for many years as far as the birth rate declining there?
Walter Johnsen
Well, first on raw materials. Everything that's related to oil is based on the market, and oil prices have gone up on the global market. I'm really not quite sure, but I think it's probably somewhere around 50%, 60% in the past year. So plastics, fuel, big problem there. Steel, there's a shortage of coal. And coking coal is what you use to make steel. There's a shortage of electricity. The factories are running anywhere between 3 days and 4 days down out of a week because we're so overwhelmed, that economy, that they can't produce enough electricity. And then you add on top of that the shipping -- the container shortages within China and then the labor shortages, that's where they get their 10%.
Jeffrey Matthews
Right. And does that -- does what's happening in China at all further inform your thoughts about your own supply chain going forward? Or is this just something you're going to have to deal with for a long time to come?
Walter Johnsen
Over the last 6 years, the acquisitions that we've made have all been U.S. and one Canadian factory. So whether that was Spill Magic or DMT or First Aid Only or Pac-Kit or First Aid Central. These were all U.S. manufacturers. And so we've diversified our base so that today, about half of our products are sourced outside of the United States, but that's very different than it was 5 years ago. And another example is DMT -- I mean, Med-Nap, which we bought in December, making critical alcohol prep pads and wipes for our First Aid kits. That's, of course, in Florida.
The sourcing outside of China continues as we look at places in Northern Africa and in Eastern Europe as well as Southeast Asia and the Philippines. But the domestic manufacturing has been a focus of ours, and we are working it carefully. I wouldn't be surprised to see that the next acquisition also is in the U.S. because, again, we're building much more of a domestic sourcing base.
Jeffrey Matthews
Okay. And that leads into a question -- another question I wanted to ask, which is in this difficult environment -- this difficult operating environment, are you seeing more opportunities potentially for acquisitions? Or is it still the same kind of flow?
Walter Johnsen
Well, we have plenty of activity looking at acquisitions. And as you can imagine, we've got quite a database that we've developed over the years and we're constantly calling and checking in. And a lot of times, when you follow up, you might be surprised, but now is the time, and then you follow up with an actual transaction.
I know the private equity market is very, very strong, and that impacts some of the pricing that we'd see for sure. But really, we're not in that market. We're looking at companies a half step away from what we're doing with these relationships, and they tend not to be marketed, although we do pay fair prices for them.
Jeffrey Matthews
Sure. And final question, your comments on the critical shortages, supply dislocations in the economy speak to some very significant problems out there. Is there 1 or 2 -- are there 1 or 2 particular examples that you can give that kind of blow your mind that you're seeing out there? Because you're talking about not just Acme-related issues, but you're talking about capital equipment and supply chain issues. What -- is there 1 or 2 examples that is sort of causing this extra anxiety for you?
Walter Johnsen
Well, I have conference calls every week on Tuesday mornings with Asia, and I see what's going on. And it is a very serious supply chain calls with our team. And what I say is we can anticipate these things, but many, many companies did not add 30% to their inventory 18 months ago. And they're stuck. And it's terrifying.
I read that one of the F-150 Ford truck plants has thousands of trucks right now finished, except for components. I read that a drone manufacturer in Connecticut laid off half its staff because it couldn't get parts for military drones. I worry about getting critical medicines when you can't get them on containers. I read that a major running shoe company, which shifted its production from China to Vietnam, can't get the boats to pick up those shoes, and they were airfreighting them. These are just some examples. I see it everywhere.
Operator
And with no further questions in the queue, I'd now like to turn the conference back to our presenters for any additional or closing remarks.
Walter Johnsen
Well, if there are no further questions, then this call is complete. We look forward to providing year-end results in early 2022, and thank you for joining us. Goodbye.
Operator
And so this concludes today's call. We thank you for your participation. You may now disconnect.
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