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Q3 2023 Acme United Corp Earnings Call

Participants

Paul G. Driscoll; VP, CFO, Secretary & Treasurer; Acme United Corporation

Walter C. Johnsen; Chairman of the Board & CEO; Acme United Corporation

Joichi Sakai; Equity Research Analyst; Singular Research, LLC

Richard Dearnley

Timothy Colin Call; President & CIO; The Capital Management Corporation

Presentation

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 C. 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 G. 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. They 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 C. 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 and 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 continue 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 to 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 3 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 mass gloves and gallons to the Canadian government during COVID and it became over extended when the pandemic ended. We are reactivating the 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 G. 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 9 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 9 months ended September 30.
The 9-month sales for school and office products were impacted by customer reductions in inventory in the first half of 2023. Net sales for Europe decreased 1% in low currency for the quarter and 4% for the 9 months ended September 30. This 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 9 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 an improved gross margin and tight controlled 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. Net income for the first 9 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 and free cash flow, including an inventory reduction of $12 million. Net debt declined $17 million from December 31, 2022.

Walter C. Johnsen

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

Question and Answer Session

Operator

(Operator Instructions) And our first question is from the line of Richard Dearnley with Longport Partners.

Richard Dearnley

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

Walter C. Johnsen

Well, honestly, our industry is always price-sensitive, and this is not -- it's a tough business, and it's always price sensitive. I don't see any change. What I am seeing is a pickup 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?

Walter C. Johnsen

Yes. (inaudible).

Richard Dearnley

The inventory should be flat or reflecting whatever demand is in '24 from here?

Walter C. Johnsen

That's exactly right. Yes.

Richard Dearnley

Yes. And Paul, what was the sales mix, first aid and Westcott?

Paul G. Driscoll

It was 60% in the third quarter and for the 9 months for first aid.

Richard Dearnley

Right. And do you have last year's?

Paul G. Driscoll

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

Operator

The next question comes from the line of Chris Sakai with Singular Research.

Joichi Sakai

Walter, I had a question on the school and office products in the U.S. what drove the decline there in sales?

Walter C. 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 that 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 wasn't a new -- 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 booked prior year, and it's all it was.

Joichi Sakai

Okay. And then as far as the Israel conflict is concerned, is Acme exposed there at all?

Walter C. 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, half -- more than half of our business, 60% of it is in the 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.

Joichi Sakai

Okay. And then for your gross margin of 38.7%. How should we think of that in the next quarter -- or quarter or 2 going forward? Should it be about the same or improve even more?

Walter C. Johnsen

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

Operator

Our next question is from the line of Timothy Call with Capital Management Corporation.

Timothy Colin Call

Congratulations on a great quarter. All the hard work paying off. With the easier sourcing now and all the new customers and expanding our 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 C. 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 fast, 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 a 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 Colin Call

So interest expense should decline on a year-over-year basis?

Walter C. Johnsen

That, I don't know. Yes, 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'll see as a percent of our interest rate actually declined.

Timothy Colin 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 3 to 6 months?

Walter C. 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 Colin 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.

Walter C. Johnsen

It is. Thank you Tim. Thank you.

Operator

(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 C. 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.

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