Acme United Corporation (AMEX:ACU) Q3 2023 Earnings Call Transcript

Acme United Corporation (AMEX:ACU) Q3 2023 Earnings Call Transcript October 23, 2023

Acme United Corporation misses on earnings expectations. Reported EPS is $0.58 EPS, expectations were $0.7.

Operator: Good day, and welcome to the Acme United Corporation's Third Quarter 2023 Earnings Call. At this time, I would like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Walter Johnsen: Good morning. Welcome to the third quarter 2023 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: Forward-looking statements in this conference call, including, without limitation, statements related to the company's plans, strategies, objectives, expectations, intentions, and adequacy of capital and other 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, among others, those arising as a result of a challenging global macroeconomic environment characterized by continued high inflation and high interest rates. In addition, we have experienced supply chain disruptions, and we may experience these disruptions in the future. We are also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission and in our current earnings release.

Walter Johnsen: Thank you, Paul. Acme United made significant progress during the third quarter of 2023. Our sales were $50.4 million, which was approximately 1% above that in the third quarter of 2022. Operating net income was $3.7 million during the quarter compared to $955,000 last year. Net income was $2.2 million compared to $64,000 in the third quarter of 2022. Earnings per share were $0.58 compared to $0.02 last year. The company's sales growth of 1% in the third quarter of 2023 reflects improvement from the prior quarter where revenues were 6% below last year. There continued to be inventory reductions by our Westcott cutting tool customers. However, we believe our customers are nearing the end of that process, and comparisons going forward will reflect true demand.

The first aid and medical business offset the weakness in Westcott sales and it continues to be strong. Our gross margins in the third quarter were 38.7% compared to 32% in 2022. This reflects shipping costs returning to normal levels and the impact of the productivity program that we initiated about a year ago. As you may recall, we incurred about $4.6 million in unusual shipping expenses last year due to container costs and port congestion. Our planned productivity program totaled $5 million in annual savings. We're currently projecting to exceed the plan by about $1 million annually. We are demonstrating the results in our improved gross margins. The company has been actively reducing its inventory after increasing it purposefully during the pandemic.

Our inventory during the past three quarters has declined $9 million. We directed most of the cash flow from the inventory reductions and earnings during the past year to pay down debt. As a result, our balance sheet has improved substantially, and our net debt at the end of the third quarter in 2023 was $38 million compared to $64 million at the same time last year. That's over a 41% decrease in debt. During the third quarter of 2023, we acquired some of the assets of Hawktree Solutions in Canada for approximately $1 million in a bankruptcy auction. Hawktree sells first aid and medical products and is the exclusive licensee of the Canadian Red Cross for many of the supplies used in their training programs and relief efforts. The company also supplied masks, gloves and gowns to the Canadian government during COVID, and it became over extended when the pandemic ended.

A technician installing hardware in a modern server room, highlighting the company's focus on on-premise environments. Editorial photo for a financial news article. 8k. --ar 16:9

We are reactivating their website, moving inventory to our Laval Canada location and filling back orders as we speak. Our fourth quarter of 2023 has started strongly. We are winning new business for 2024 in our Westcott and first aid businesses, as well as DMT sharpeners, and we continue to look at new acquisition opportunities. I'll now turn the call to Paul.

Paul Driscoll: Acme's net sales for the third quarter were $50.4 million compared to $49.7 million in 2022, an increase of 1%. Sales for the nine months ended September 30, 2023 were $150 million compared to $150 million in the same period in 2022. Net sales in the U.S. segment increased 2% in the third quarter. Sales of first aid products were strong, however, demand was softer for school and office products. Sales were constant for the nine months ended December 30. The nine month sales for school and office products were impacted by customer reductions of inventory in the first half of 2023. Net sales for Europe decreased 1% in local currency for the quarter and 4% for the nine months ended September 30. The sales decrease for both periods was mainly due to the economic recession in Europe.

However, the trend is improving. Net sales in local currency for Canada decreased 7% in the quarter, but increased 3% for the year-to-date due to growth in first aid products. The gross margin was 38.7% in the third quarter of 2023 compared to 32% in 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022, as well as lower inbound transportation costs. SG&A expenses for the third quarter of 2023 were $15.8 million, or 31% of sales, compared with $15 million, or 30% of sales, for the same period of 2022. SG&A expenses for the first nine months of 2023 were $44.7 million, or 30% of sales, compared with $43.2 million, or 29% of sales, in 2022. Operating profit in the third quarter increased 280% due to improved gross margin and tight control of SG&A spending.

Interest expense for the third quarter of 2023 was $820,000 compared to $720,000 in the third quarter of 2022. The increase was entirely due to higher interest rates. In fact, average debt declined by $20 million in the quarter compared to Q3 last year. Our overall average interest rate in the third quarter of 2023 was 6.25% compared to 3.9% for the third quarter of 2022. Net income for the third quarter of 2023 was $2.2 million or $0.58 per diluted share compared to net income of $64,000 or $0.02 per diluted share for the same period of 2022. Income for the first nine months ended September 30, 2023 was $6.6 million or $1.83 per diluted share compared to $3.6 million or $0.96 per diluted share in the comparable period last year, increases of 82% and 91%.

The company's bank debt less cash on September 30, 2023 was $38 million compared to $64 million on September 30, 2022. During the 12-month period, the company paid $2 million in dividends and generated approximately $27 million in free cash flow, including an inventory reduction of $12 million. Net debt declined $17 million from December 31, 2022.

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

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Q&A Session

Operator: Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] And our first question is from the line of Richard Dearnley with Longport Partners. Please proceed with your question.

Richard Dearnley: Good morning.

Walter Johnsen: Good morning, there.

Richard Dearnley: Would you talk about pricing and price resistance? You hadn't been seeing any, but given the economy and so on, are people -- folks getting more sensitive?

Walter Johnsen: Well, honestly, our industry is always price sensitive.

Richard Dearnley: Right.

Walter Johnsen: And this is not a -- it's a tough business, and it's always price sensitive. I don't see any change. What I am seeing is a pick-up in new business for next year. And it seems like we're now lapping the inventory reductions in the fourth quarter. So, while I don't see price resistance, I do see some pretty good demand.

Richard Dearnley: Good. And would it be a safe guess that inventories are about where they should be given that outlook?

Paul Driscoll: Yeah.

Walter Johnsen: Our inventory is...

Richard Dearnley: Yeah, inventory should be flat or reflecting whatever demand is in 2024 from here?

Walter Johnsen: That's exactly right.

Paul Driscoll: Yes.

Richard Dearnley: And Paul, what was the sales mix of First Aid and Westcott?

Paul Driscoll: It was 60% in the third quarter and for the nine months in First Aid.

Walter Johnsen: First Aid.

Richard Dearnley: Right. And do you have last year's?

Paul Driscoll: Last year was approximately 54% in the third quarter and the year-to-date.

Richard Dearnley: Good. Thank you very much. Well done. Good quarter.

Walter Johnsen: Thank you.

Operator: Thank you. [Operator Instructions] The next question comes from the line of Chris Sakai with Singular Research. Please proceed with your questions.

Chris Sakai: Hi, Walter. Had a question on the school and office products in the U.S. What drove the decline there in sales?

Walter Johnsen: During the past year, many of our Westcott customers overpurchased and they did that because of the port congestion and the difficulty of getting products out of China. And it was understandable. So, as you may remember, we also had a war start in the Ukraine in March of 2022. So, it all disrupted shipping. We paid for it, of course, with just unusual expenses. But our customers were scrambling for products in 2022 and they got them. In the case of the back-to-school, they had excess product and we knew that going into this year. So, it was not unexpected. But the actual demand underlying it was pretty consistent with prior years. But for us, there was a workout of some of the inventory that they bought the prior year. And that's all it was.

Chris Sakai: Okay, thanks for that. And then, as far as the Israel conflict is concerned, is Acme exposed there at all?

Walter Johnsen: I think the whole world is exposed there, and it's a very, very sad situation. In some areas, we will benefit. For example, more than half our business, 60% of it is in first aid products, and then we've got the Med-Nap business, which is making alcohol wipes and prep pads and so forth, those areas probably may get some additional volume, and I even hate to think of it like that. But in general, this is not good news.

Chris Sakai: Okay. And then for your gross margin of 38.7%, how should we think of that in the next quarter or two going forward? Should it be about the same or improve even more?

Walter Johnsen: We continue to be generating productivity improvements, and it may not have picked up, but what we had been laying out as the $5 million productivity plan is now -- annually is now $6 million. So, we've gotten additional productivity improvements. And I honestly think we'll be able to not only keep the margin we're at, but expand it in the coming year. So, I'm quite optimistic about that.

Chris Sakai: Okay, great. Thanks for your answers.

Operator: Our next question is from the line of Timothy Call with Capital Management Corporation. Please proceed with your questions.

Timothy Call: Congratulations on a great quarter.

Walter Johnsen: Thank you, Tim.

Timothy Call: All the hard work paying off.

Walter Johnsen: Yeah.

Timothy Call: With the easier sourcing now and all the new customers and expanding relationships you mentioned, along with the accretive acquisition you just made, and retailer inventory corrections being completed, it sounds like we should expect strong revenue growth looking forward.

Walter Johnsen: That's my expectation as well. And as you know, the First Aid business is now 60% of our revenues and that's been growing faster than the company in total for a number of years. And so, it's not only gaining its influence, but now we've got the Westcott piece lapping performance, which reflected inventory corrections. And I think I'm fairly accurate in saying that is going to continue. So, you're right. I mean, we should be seeing growth on the top-line, margins continuing to move in the favorable direction, and the productivity improvements continuing. Also with the debt reduction, there's perhaps a little bit more to go. And so, that's all positive.

Timothy Call: So, interest expense should decline on a year-over-year basis?

Walter Johnsen: That I don't know. Yeah, it should, but they keep raising rates, and for reasons that are appropriate. But we certainly have less debt that's impacted. And as you may recall, our debt structure had $11 million of fixed debt, and I think it was 3.8%, and those are mortgages on our properties. So, as we drop our debt, we're dropping the variable piece of it. So, we will see as a percent of our interest rate actually decline.

Timothy Call: Well, with those smart moves and all of your hard work paying off, do you think management will ask the Board for a dividend increase over the next three to six months?

Walter Johnsen: We generally look at cash flow and the projections, and based on the cash flow that we've just generated and what I'm seeing on earnings, I think that's something we should consider.

Timothy Call: Well, congratulations again on a strong quarter, and it's great to see revenue growth, margin expansion, lower debt, and all the good moves you made. So, it's paying off. Thank you.

Walter Johnsen: Thank you, Tim. Thank you.

Operator: Thank you. [Operator Instructions] We've reached the end of the question-and-answer session. I'll now turn the call over to Mr. Johnsen for his closing remarks.

Walter Johnsen: Thank you. If there are no further questions, then this call is completed. I'd like to thank you for joining us and we look forward to updating you soon. Goodbye.

Operator: This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.