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Edited Transcript of ACU earnings conference call or presentation 20-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Acme United Corp Earnings Call

FAIRFIELD Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Acme United Corp earnings conference call or presentation Thursday, April 20, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Paul G. Driscoll

Acme United Corporation - CFO, VP, Secretary and Treasurer

* Walter C. Johnsen

Acme United Corporation - Executive Chairman and CEO

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Conference Call Participants

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* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

* Michael Mork

* Richard Dearnley

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Acme United Corporation's First Quarter 2017 Earnings Call. (Operator Instructions)

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

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [2]

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Good morning. Welcome to the First Quarter 2017 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 the safe harbor statement.

Paul?

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Paul G. Driscoll, Acme United Corporation - CFO, VP, Secretary and Treasurer [3]

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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, including, without limitation to the following: one, the company's plans, strategies, objectives, expectations and intentions are subject to change at 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.

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [4]

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Thank you, Paul. Acme United had a solid first quarter of 2017. Our net sales increased 10% over last year and net income increased 17%. Earnings per share were $0.18 compared to $0.16 in the first quarter last year, an increase of 13%.

During the quarter, we began shipping a very innovative line of Westcott glue guns and glue sticks to retailers in the U.S. These products have nonstick internal parts, heat sensitive tips that glow when they are hot and patent-pending designs. We believe this product line has the potential to impact sales significantly later in the year as additional retailers begin to carry these items.

We increased distribution of Cuda fishing tools and rolled out our new freshwater fishing items. The Camillus knife business gained market share in the hunting as well as camping departments of major retailers.

We discontinued the licensed Scotts and Miracle-Gro garden tools and did not repeat a promotion at a large retailer during this quarter. However, we will be replacing these items with new products under our Clauss brand in the future.

The first aid and safety business had strong growth due to market share gains with our SmartCompliance kits and robust sales of first aid refills to online customers.

We installed our refill app at a chain of 40 franchised restaurants and are beginning to do the same with other customers. The app aggregates use of first aid components at the site of an injury and provides for automatic replenishment.

The European team performed well with 38% growth due to new office customers and success selling our Camillus, Cuda and DMT product lines. Our Canadian business was even with last year.

During the quarter, we purchased Spill Magic for $7.2 million. This company provides spill cleanup materials and supplies to the many major mass-market retailers and its products complement our first aid and safety efforts. The company had revenues of $6.3 million in 2016 with EBITDA of $1.4 million. We're excited about integrating the Spill Magic family into our broad distribution of industrial, safety, and office wholesalers and we are expanding sales of spill cleanup kits and blood-borne pathogen kits.

We increased our gross margins for the quarter from 36% to 38% due to improved efficiencies at our first aid manufacturing facilities, greater sales of higher-margin products and improved costs of imported items. Our operating income increased 25%, reflecting leverage of our facilities over a larger revenue base and improved gross margins.

We've been actively working to reduce inventory by narrowing the product families, lowering our order quantities and trying to more carefully align stocks to forecasts. This work is difficult to accomplish given the uncertainties of unforecast customer requirements, but we're making progress. Our inventory at the end of March 2017 was $37.3 million compared to $37.6 million a year ago, despite our growth and the Spill Magic acquisition. As we look to the remainder of 2017, we are reiterating our guidance of $137 million in net sales and $6.7 million of net income. This translates to $1.76 earnings per share.

I'll now turn the call to Paul. Paul?

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Paul G. Driscoll, Acme United Corporation - CFO, VP, Secretary and Treasurer [5]

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Acme's net sales for the first quarter were $27.7 million compared to $25.3 million in 2016, a 10% increase. Net sales for the first quarter in the U.S. segment increased 9%. Excluding the newly acquired Spill Magic product, sales increased 4% in the U.S. segment.

Net sales in Canada were constant in U.S. dollars and declined 3% in local currency. Net sales in Europe increased 38% in both U.S. dollars and local currency due to market share gains in the office product channel and increased distribution of DMT products.

Gross margin was 38% in the first quarter of 2017 versus 36% in the first quarter of 2016. The improvement was mainly due to lower costs in our Vancouver, Washington first aid facility. Also, there was a better product mix mostly coming from our recent acquisitions.

SG&A expenses for the first quarter of 2017 were $9.4 million or 34% of net sales compared with $8.2 million or 33% of net sales for the same period of 2016. The SG&A increase was due to higher variable selling costs as a result of higher sales, the added Spill Magic business and the addition of sales marketing and IT personnel.

Net income for the first quarter of 2017 was $659,000 or $0.18 per diluted share compared to net income of $565,000 or $0.16 per diluted share for the same period of 2016, a 17% increase in net income and 13% in EPS.

The company's bank debt less cash on March 31, 2017, was $38 million compared to $34 million on March 31, 2016. During the 12-month period, we purchased Spill Magic for $7 million and paid $1.3 million in dividends. Additionally, we generated $6.3 million in free cash flow. We expect to generate approximately $6 million in free cash flow in 2017.

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Michael Kawamoto with D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [2]

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This is Michael on for Andrew. On the Spill Magic acquisition, can you just give us an update on the integration there and are you start -- seeing some of those cross-selling opportunities materialize?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [3]

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Sure, Michael. The first thing is there's a lot of work to be done with this company, and our vision is to be able to take its products into a very broad distribution that we currently have. So we've, of course, done a lot of brochures and price lists and collateral material. We've trained our sales organization both in the safety and first aid area as well as our office and industrial channels. We've shipped samples over to Europe to begin the process of being certified in the EU. We've made many, many presentations to our customers. I can tell you that we now are getting distribution placed for next year in the office channel, and we hope to be doing that very shortly both online and with industrial accounts. We're making one-on-one customer presentations to the Spill Magic customers with some of our first aid items and, of course, it's the same buyer in many cases that we would like to sell to so -- or we are. So we're making, on the sales side, a lot of very forward progress. The system is still the current system that they had. Our first objective was make our current customers happy, begin to work on the sales effort and now we're working on the back office. So it's ahead of plan on the sales side. On the integration of the system, that will probably be done sometime around August, which is about on plan.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [4]

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Awesome. And then a really great quarter in Europe. Can you just elaborate a little bit more on what you're seeing there, was there a big acceleration in the online sales?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [5]

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I'm sorry, I didn't catch the question.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [6]

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Sorry. Really great quarter in Europe there. Can you just elaborate a little more on what you're seeing, was it a big acceleration in online sales?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [7]

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Well, in Europe, we're doing very well on a number of fronts. First, we continue to be gaining market share with the Westcott product family to the office customers. And that was the single biggest growth. The online sales are growing at a very high percentage rate and are now big enough that they are -- for this year will be impacting the overall European sales. DMT, which we acquired in February of 2016, had a European customer base, but they were being serviced out of Massachusetts. They are now being serviced -- the European customers are now being serviced locally through our German operation and the products are being sold in euro. That has led to good growth. And one of the things about DMT is it had sporting goods customers who started to buy Camillus products in Europe. So that is reinforced. We're very happy because the margins in Europe are also increasing at the same time. So they've done a good job.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [8]

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Awesome. And then just one for clarification. I think on the EPS guidance last time you said, $1.78 for the year and now you're saying $1.76. Is that just a product of a slightly higher share count?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [9]

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That's exactly what it is. And frankly, we're forecasting the share count. So that may be a lower number, in which case we're back at $1.78, but we're running the business on the P&L and that number hasn't changed.

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Operator [10]

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We will take our next question from Mike Mork with Mork Capital.

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Michael Mork, [11]

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Yes. I had just a couple questions. One is the -- when do you think you'll be ready for another acquisition of the size of Spill Magic or whatever from a balance sheet standpoint? And just operationally, you don't want to get stretched too thin. Just wondered if something came along, would you have the wherewithal to go ahead and make another acquisition?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [12]

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Mike, that's a very good question. And we are preparing ourselves in a number of ways. One of those ways is by working on the inventory and managing it carefully and the SKUs because it will be generating cash if we do our job right. And the second is there is some real growth opportunities with the acquisitions we've done. Whether that be in the first aid area with First Aid Only, which is doing very, very well, or DMT. We're putting money and resources behind the glue gun business at Westcott and now the Spill Magic business we're integrating. So the question to that is we've had our hands full with quite a number of things and we're strengthening the balance sheet from the last transaction. However, our goal is to build this business smartly and I want to be prepared and we're driving our team to be prepared should something come sooner than might be expected.

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Michael Mork, [13]

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Okay, great. And then what percent of your business now is going through Amazon?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [14]

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Well, we don't break that out. But what I can tell you is that Amazon 5 years ago was not a very large customer and it's becoming one of our -- it is one of our top 5 now, and it's growing faster than any of our other larger companies. So I wouldn't be surprised if by year-end it would be maybe our second or third largest customer.

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Michael Mork, [15]

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Okay, great. And then just -- that's interesting. And then one last thing. You talked about the glue gun. What is different about this product? And you said you expect significant growth possibly later this year. Would that be because of more acceptance or going into more retailers or what exactly is that?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [16]

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Yes, so the -- what we did with the glue gun is we utilized first, some of our nonstick technology, which is ceramic-based and it's heat resistant. And we put that within the barrel of the glue gun so that the glue didn't stick there when it hardened at the tip. When you press the glue gun handle it heats up and the tip turns red. And when it's red, you know it's ready to dispense the glue and in addition to that you know not to touch the tip. Finally, it's a very lightweight glue gun and that the family -- at a price point that retailers are saying, "Wow." So you can find it currently at Michaels stores, and it will be getting other major distribution in around the fourth quarter. So that's the beginning of what we think will be a family. And as we lay out what we do for next year, you can picture a lot of differentiation of the types of glues that you put in the glue sticks. You could possibly figure that there might be some that are proprietary and you probably can see some that are more industrial. So it's a beachhead for a product family that has legs, we hope.

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Operator [17]

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(Operator Instructions) We can go next to Richard Dearnley with Longport Partners.

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Richard Dearnley, [18]

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Was there a promotion in Europe that didn't happen in the fourth quarter that did happen in the first?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [19]

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No, no.

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Richard Dearnley, [20]

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No?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [21]

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Most of this growth was organic, normal, everyday growth.

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Richard Dearnley, [22]

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That's nice. Then the comment on your slides about expanding the first aid compliance kits into larger solutions. Is the larger solution just a bigger, more comprehensive kit or is that a factory kind of kit as opposed to little section kit or what does that talk about?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [23]

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What that's addressing is the SmartCompliance kits were 3 shelves and they were identified and originally spec-ed for a number of locations of medium-size manufacturers. And we've since broadened the distribution of first aid kits and SmartCompliance kits into major industrial sites where you needed 4 and 5 shelves of components and some of them are more industrial and because we have the demand for that we developed them and introduced them and they're currently going through distribution at places like Grainger and Fastenal.

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Richard Dearnley, [24]

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So that's just starting now?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [25]

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Well, we've been working at it for quite some time and shipments are starting now.

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Richard Dearnley, [26]

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Right, great. And then did you say that in the discussion about discontinuing the Scotts branded garden tools and things, that you're replacing those with Clauss?

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [27]

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Yes. In other words what we thought we would get from the Scotts and Miracle-Gro brands was broader distribution than we were able to achieve. And rather than pay a royalty to continue that, we have shifted the product line over to our brand Clauss, which has a very high market share anyway in the professional florist market.

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Operator [28]

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And it does appear we have no further questions. I will return the floor to our presenters for any additional or closing remarks.

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Walter C. Johnsen, Acme United Corporation - Executive Chairman and CEO [29]

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If there are no further questions, then this call is complete. As you can see, we are off to a good start. We'll look forward to updating you on our progress in July, and I'd like to thank you for joining us. Goodbye.

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Operator [30]

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And this will conclude today's program. Thanks for your participation. You may now disconnect.