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Edited Transcript of ACU earnings conference call or presentation 25-Jul-17 4:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Acme United Corp Earnings Call

FAIRFIELD Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Acme United Corp earnings conference call or presentation Tuesday, July 25, 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 - VP, CFO, Secretary & Treasurer

* Walter C. Johnsen

Acme United Corporation - Chairman of the Board & CEO

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Conference Call Participants

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* Andrew Shuler Burns

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jeffrey L. Briggs

Singular Research, LLC - Research Analyst

* Michael Mork

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Presentation

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Operator [1]

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Good day, and welcome to the Acme United Corporation's Second Quarter 2017 Earnings Call. Today's conference is being recorded.

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 - Chairman of the Board & CEO [2]

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Good morning. Welcome to the second quarter 2017 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?

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Paul G. Driscoll, Acme United Corporation - VP, CFO, Secretary & 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 - Chairman of the Board & CEO [4]

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Thank you, Paul. Acme United had net sales of $38.8 million in the second quarter of 2017 compared to $41 million last year. Net income was $2.8 million compared to $3.3 million. And earnings per share was $0.75 versus $0.91 last year. As you know, our online sales have been growing very rapidly in recent years, and their order and fulfillment patterns are affecting the timing of our revenues.

In 2017, the level of our online sales was sufficient enough to impact our second quarter results. In past years, we shipped the majority of our back-to-school Westcott products from Asia to the distribution centers of major retailers in April and May. Retailers then received the containers in 3 to 4 weeks, and distributed them to their stores for sales in July and August.

With our online sales, we are receiving purchase orders that closely match the timing of actual purchases by end users, resulting in later purchases. In the U.S., most schools go back in session in August and early September, which pushes more of our sales into the third quarter.

In addition, we had a large promotion of Westcott products in the second quarter of last year that did not repeat in 2017. However, we have a variety of new promotions in the second half of this year, including new Camillus knives, Cuda fishing tools, Westcott glue guns and first aid kits. By their nature, promotions that vary each year, we expect the second half activities to be stronger this year than in 2016.

Turning to Europe. Second quarter 2017 sales increased 10% in local currency, with growth in e-commerce, Westcott office products, Cuda fishing tools and DMT Sharpeners. In Canada, sales for the second quarter were down 2%, local currency.

Our gross margins in the second quarter increased from 36% to 37%. We had favorable impacts on margins from sales of DMT Sharpeners, Spill Magic cleanup materials, and we sold less low-margin back-to-school items. The Spill Magic business acquired in February 2017 continues to perform well. We've integrated this product line into our first aid business, and are actively selling its products to our industrial, retail, food service and school accounts. Its performance has been above last year and our internal budget.

We continue to make progress with inventory reductions. There is a balance between reducing our inventory of high moving items and getting out of stock due to un-forecasted demand. However, we've reduced the stock from slower moving items and sold the remaining inventory of the discontinued Scotts and Miracle-Gro product families.

As we look into the second half of 2017, we see growth of over 20% compared to last year. We are reaffirming our guidance of $137 million in revenues, net income of $6.7 million and earnings per share of $1.76.

I'll now turn the call to Paul.

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

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Acme's net sales for the second quarter were $39 million compared to $41 million in 2016, a decrease of 5%. Sales for the 6-months ended June 30, 2017 were $67 million compared to $66 million in the same period in 2016.

Net sales in the U.S. segment decreased 6% in the quarter, and were constant for the six months ended June 30. Net sales in local currency for Canada decreased 2% in both the quarter and year-to-date. Net sales for Europe increased 10% in local currency for the quarter and 22% for the six months ended June 30.

The sales increase for both periods was primarily due to new customers in the office and sporting goods channels as well as sales of DMT sharpening products.

Gross margin was 37% in the second quarter of 2017 versus 36% in the second quarter of 2016. The year-to-date gross margin was 38% compared to 36% last year. The improvement was mainly due to lower costs in our Vancouver, Washington in the first aid facility. Also there was a better product mix mostly coming from our recent acquisitions.

SG&A expenses for the second quarter of 2017 were $10.6 million or 27% of sales compared with $10.1 million or 25% of sales for the same period of 2016. SG&A expenses for the first six months of 2017 were $20 million or 30% of sales compared with $18.3 million or 28% of sales in 2016. The SG&A increase for the 3- and 6-months was mostly due to the added Spill Magic business.

Net income for the second quarter of 2017 was $2.8 million or $0.75 per diluted share compared to a net income of $3.3 million or $0.91 per diluted share for the same period of 2016. Net income for the first 6-months ended June 30, 2017 was $3.5 million or $0.94 per diluted share compared to $3.8 million or $1.08 per diluted share on a comparable period last year.

Company's bank debt less cash on June 30, 2017 was $41.3 million compared to $38.7 million on June 30, 2016. During the 12-month period, Acme purchased the assets of Spill Magic for $7.2 million and paid $1.3 million in dividends. Additionally, the company generated $7.2 million in free cash flow.

We succeeded in reducing inventory on our existing business by $3.3 million or 9%. We expect to generate approximately $5 million to $6 million of free cash flow in 2017.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [6]

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Thank you, Paul. I will now 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 can go first to Andrew Burns. Please go ahead.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Just a question in terms of the magnitude of the two items you highlighted in terms of the revenue decline. Is the timing of shipments a much larger impact than the promotional cadence or they equally balanced? What was...

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [3]

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The online shipments are growing very rapidly. And we're keeping market share, which is -- we're probably gaining it, which is exciting as some of the stores close and loose share. But that's skewing in a much bigger way, our quarterly shipments. And it's just moving us closer to the customer. The Westcott business that we did not repeat was sizable, but it wasn't that big.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. And could you provide some color around online trends. What online represented as a percent of sales during the quarter or the gross trajectory?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [5]

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Well, we haven't done that. But in our presentations, we've shown that we've grown to online being over 14% of our sales last year. And they are growing, by far the fastest part of our business right now, and I don't know the number. But it might be something that I'll disclose in the next quarter, if it's relevant.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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And in terms of the promotional cadence, you mentioned not repeating the Westcott promotion from 2Q, 2016. But in the second half, it sounded like Camillus first aid, Cuda, some other brands were going to be emphasized from a promotional cadence. What's the change there, the underlying driver?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [7]

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Well, one of them is the glue guns. There's a promotion going on in the fourth quarter with the Westcott glue guns. The Cuda business is just -- is alive, and there's a lot of things going on. I just got back from the ICAST show in Orlando, and the retailers are very excited about it. In the case of Camillus, we picked up some private-label promotional business, one of the big retailers, that will be out in third and fourth quarter. And relative to first aid, Amazon has -- it's now one of the leading, probably the leading first aid kit, and that's getting promoted off and on, and when it shows up, it's big. So my guess is on Black Friday and so forth will be quite a number there.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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And then just on the modeling side. Are you still thinking $6 million is a good target for free cash flow for the year? And you talked about 20% growth in the back half. I'd imagine a lot of that would be weighted into 3Q, but there -- any color there would be helpful.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [9]

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The $3 million -- the $6 million of free cash. At this point, we're comfortable doing that. The third quarter will show substantial growth over last year. But the fourth quarter will be bigger. And in total, that'd be over 20% in the back half compared to last year.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [10]

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And bigger in terms of growth rate, not revenue?

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Paul G. Driscoll, Acme United Corporation - VP, CFO, Secretary & Treasurer [11]

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Growth rate. Yes.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [12]

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Growth rate.

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Operator [13]

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We'll go next to Jeffrey Briggs.

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Jeffrey L. Briggs, Singular Research, LLC - Research Analyst [14]

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Quick question regarding sort of cost of goods and exchange rate and things like that. In terms of where the dollar is and potentially the dollar coming down off its highs. What sort of impact do you see that having sort of on your cost of goods in dollar terms? I know sort of as the dollar increases, you're able to sort of extract some savings from some suppliers. How do you see that playing out if things go the other way a little bit.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [15]

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That's a very good question, Jeff. As the dollar has strengthened, we've been able to negotiate savings from all of our overseas source items. And my last trip was in May to China, and that was successful. The dollar RMB exchange since May has shown a weakening in the U.S. dollar by about 2%. But these kinds of fluctuations change pretty much. And so I don't see much increase in cost of sales, but I may not be able to negotiate further declines either in the -- I'm out there again in September.

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Jeffrey L. Briggs, Singular Research, LLC - Research Analyst [16]

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Okay. And it's not definitely -- probably not like a quarter-by-quarter thing. I'm thinking more of sort of long-term. But, okay, it sounds good. And then in regards to the first aid kit replenishment after you guys announced yesterday, is that more of a different way for people to order and just be more convenient? Or is there any affect there sort of going more direct to certain customers where they may have gone through a third-party to order the same supplies that -- at some other time?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [17]

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Well, let me explain the app a little bit. When you got an industrial first aid kit, and certain components are used because of an accident, the app allows you to scan the bar code on the boxes that contain bars to use. Those then get aggregated in the central supply at the company. And when it reaches the fulfillment level, it then places an automatic fulfillment order through either the distributor that sold it to them, or the distributors that they want it to go to, or us. The app also triggers to the safety manager that these components have been used, so that new components can be put in the first aid kit, so it's current. What that avoids is the alternative of a van-based system where people drive around in a truck, physically load each week these components, which have to be, by definition, very high-margins to support that delivery system. So we see about $1 billion of potential business, if we can use our app and online delivery as a way to avoid the higher cost van-based deliveries. And we're finding success with that.

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Operator [18]

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And we can go next to Michael Mork. Please go ahead.

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Michael Mork, [19]

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Question on Amazons, 14% of your business. To sum your categories, I mean, is that like 14% plus or minus a few points across the board? Or are there some of your products that are kind of completely Amazon and some that don't Amazon? And the ones that are the lower on the Amazon scale, can you boost those up since Amazon seems to be kind of taking over the world here.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [20]

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Well, Mike, first, the 14% online includes other online sellers. For example, jet.com is growing nicely with us now that's part of Walmart. Staples has an online component as well, which is not flat, not growing the way Amazon or jet are, but then there are other retailers that have smaller online presence. Regarding Amazon itself, certain products are just selling in a bigger way with them than we had before. For example, we make some first aid kits that from time-to-time will be at Home Depot, they'll be at some other retailer. But with Amazon, it just has volumes that, it took us a while to adjust to. We're also finding that some of our customers are bypassing distribution and buying directly online. And that's volumes that we never had online before, although, we more sold to a distributor. So this change is going on. The good news is, as we're grappling with these changes, we're gaining our position.

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Operator [21]

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And we can go next to (inaudible).

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Unidentified Analyst, [22]

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And Walter, given some of the changes in timing and selling on the online side, I was wondering if you had considered changing your marketing strategy and what the implications might be were you to do that from P&L perspective?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [23]

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Well, the changes that are occurring in the sales are occurring because we have changed our marketing strategy. And we've got a very strong, I think, team of people that are working on search optimization, content, video, all sorts of support and promotions for our online customers. And that's not at the expense of the retailers, but it's in addition to that. And then because we've been growing, that's just been part of that SG&A expense. I'll be at Amazon in about three weeks, and I'm sure we're rolling out some new plans for the rest of the year, and probably putting more money into it. But the strategy has generated the sales. So it's not as if we have to make the change in the marketing, the marketing has generated the sales.

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Unidentified Analyst, [24]

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Okay. Good to know. And what's the plan to expand presence beyond the involvement with Amazon?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [25]

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Well, our team is also working with jet.com as an example, which I think has a lot of potential, and because where Walmart is the parent and the ability to get a discount when you pick up an online delivery at a Walmart store is bringing because it avoids the cost of packaging, shipping and handling. And at the same time, people can buy groceries and other items. And I think that this will be an avenue that will expand substantially. And there are other retailers like Staples that may do that kind of model, although, I don't know that. So as this happens we'll be expanding the presence across the board. And in Europe, Amazon is growing nicely. And it's now become our largest customer there, which in part reflects the growth that we've had in the past year.

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Unidentified Analyst, [26]

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How does the online marketing effort in Europe differ than what you've done in the U.S?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [27]

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In Europe?

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Unidentified Analyst, [28]

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Yes.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [29]

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Well, we create a lot of the content here. Content being video, photos and so forth. In Europe, they're translating, but basically they're pulling it off the common drive here and using it in Europe. And they give some of their own creativity as well, but much of its done here and they leverage that, which is a real benefit because it keeps the cost scalable.

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Unidentified Analyst, [30]

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Has any of it been in conjunction with brick-and-mortar retailers effort?

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [31]

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Well, yes. I mean, we coordinate with the brick-and-mortar retailers in their promotions and the content that we supply them. But they read their programs. And that's a little bit different than say at Amazon, where in many cases, we're generating the initiative.

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Operator [32]

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(Operator Instructions) And it appears there are no further questions at this time.

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Walter C. Johnsen, Acme United Corporation - Chairman of the Board & CEO [33]

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Well, if there are no further questions, I would like to thank you for joining us. We look forward to speaking to you, again soon, and delivering good results. Thank you. Goodbye.

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Operator [34]

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Thank you. This does conclude your teleconference for today. We appreciate your participation. And you can disconnect at any time.