Acme United Corporation (ACU) Earnings Call Transcript & Summary

Good day, and welcome to the Acme United Corporation Second Quarter 2023 Earnings. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the second quarter 2023 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?

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 challenging global macroeconomic environment characterized by continued high inflation and high interest rates. In addition, we have experienced supply chain disruptions, including those resulting from the COVID-19 pandemic, and we may experience supply chain disruptions in the future. We're also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission in our current earnings release.

Thank you, Paul. Acme United had an excellent second quarter of 2023, with net income increasing 26% and earnings per share increasing 35%. Our net sales were $53.3 million, a decrease of 6%, which was anticipated due to inventory reductions of several of our large customers. Net income was $3.4 million compared to $2.7 million in the second quarter of 2022. Earnings per share were $0.96 compared to $0.71 in the second quarter last year. In 2022, the cost of shipping a container from Shanghai to Long Beach, California, increased to as high as $19,000 versus our budget of $12,500. This resulted in additional expenses in 2022 of approximately $4 million. The company did not raise prices to adjust for these costs, but they obviously reduced profitability in 2022 by approximately $4 million. In 2023, container costs have declined to about $5,000 each. We implemented a $5 million cost savings plan in September of 2022, and we are on track to accomplishing our goal. We hired an experienced Director of Distribution to improve training, increased wages and began new automation projects in our North Carolina facility. We have also substantially lowered staff turnover. As you may know, we improved the working conditions and now our 345,000 square foot facility in North Carolina by installing massive air conditioning units during 2021 and 2022. About 9 months ago, it appeared that the worst of the supply chain problems were easing. The company began to reduce its inventory, being careful not to impact unexpected customer requirements would it be unprepared for another interruption. The result has been a $9.1 million reduction in inventory since June 30, 2022. We've used the cash flow to pay down debt and are positioned to fund another acquisition will take advantage of a new growth opportunity. We have not provided guidance for 2023, but we anticipate performance during the year, far exceeding that of 2022. We expect sales to be impacted by global supply chain reductions, but we have new programs in all our segments that will also drive us forward. I'll now turn the call to Paul Driscoll.

Acme's net sales for the second quarter were $53.3 million compared to $56.8 million in 2022, a decrease of 6%. Sales for the 6 months ended June 30, 2023, were $99.2 million compared to $100.1 million in the same period in 2022, a decrease of 1%. Net sales in the U.S. segment decreased 8% in the second quarter due to customer inventory reductions of school and office products that were heavily purchased in the second quarter of 2022. Sales decreased 1% for the 6 months ended June 30. Net sales for Europe decreased 7% in local currency for the quarter and 5% for the 6 months ended June 30. The sales decrease for both periods was mainly due to the economic recession in Europe. Net sales in local currency for Canada increased 21% in the quarter and 8% for the year-to-date due to growth in first aid products. The gross margin was 37.5% in the second quarter of 2023 compared to 32.7% in 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022 as well as lower transportation costs. SG&A expenses for the second quarter of 2023 were $14.8 million or 28% of sales compared with $14.6 million or 26% of sales for the same period of 2022. SG&A expenses for the first 6 months of 2023 were $29 million or 29% of sales compared with $28 million or 28% of sales in 2022. Operating profit in the second quarter increased 32% due to an improved gross margin and tight control of SG&A spending. Interest expense for the second quarter of 2023, was $830,000 compared to $420,000 in the second quarter of '22. The increase was entirely due to higher interest rates. In fact, average debt declined by $8 million in the second quarter of 2023 compared to Q2 of last year. Our overall average interest rate in the second quarter of 2023 was 6.4% compared to 2.9% for the second quarter of 2022. Net income for the second quarter of 2023 was $3.4 million or $0.96 per diluted share compared to net income of $2.7 million or $0.71 per diluted share for the same period of 2022, an increase of 26% in net income and 35% in earnings per share. Net income for the first 6 months ended June 30, 2023, was $4.4 million or $1.25 per diluted share compared to $3.6 million or $0.93 per diluted share in the comparable period last year, increases of 24% and 34%. The company's bank debt less cash on June 30, 2023 was $47 million compared to $60 million on June 30, 2022. During the 12-month period, the company paid $2 million in dividends and generated approximately $14 million in free cash flow, including an inventory reduction of $9 million. Net debt declined $8 million from December 31, 2022.

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

[Operator Instructions] Our first question comes from the line of Jim Marrone with Singular Research.

I guess my question deals with what you anticipate going forward? It seems like you got past the headwinds of supply side and the higher costs associated with it. But going forward, a lot of economists are talking about recession. And just curious on what your thoughts on, how Acme will be insulated if they are at all insulated to any upcoming recession? Can you anticipate lower volumes? Or what do you plan on doing to mitigate any of the negative effects of recession?

Good question, Jim. First, Acme is not insulated for Medical. We have faced every bit of the challenges of any other company. And if there's supply chain problems, we face that, we faced inflation just like everybody else. And if we go into a recession, we face a demand issue, and that's pretty clear. The first aid side, where we're now the second largest in North America, has a recurring revenue stream from our refill business as kits are used the components either through an accident or it disappears or is obsolete. Those kits have to be refilled and they are regularly. So there's a very strong recurring revenue stream that may be somewhat insulated. Relative to new first aid installations, we've got a number of programs going on with major companies in North America. And we've got increasing growth in Canada. We're using First Aid Central and our multinational companies that operate there, throughout every field, including mining, oil and gas, transportation and general retail. On the first aid side, we also have a number of new products that are going into retail accounts in the United States and Canada. So those are the things that offset some of the headwinds if we go into a recession. With the Westcott business, the cost of our products, which are primarily scissors and cutting tools, those are not expensive items. Most of them are under $25, many are under $10. And while there may be migration from one product to another product within different price points, it's not the same as a capital goods. It's not a refrigerator or a house or a car. So in past recessions, we've seen some backing off of Westcott, but certainly not the same as if it was a capital good. Relative to the inventory reductions, it depends on the retailer and it's uneven within departments. But obviously, the heavy purchasing they did a year ago is gradually being worked off. In the case of back-to-school, it was probably more opportune in the second quarter, when back-to-school actually is an area the way you can sell product for that segment. But my belief is that by year-end, maybe sooner, most retailers will have been completely out of the inventory that they bought a year ago. And in many cases, that's occurred already. And we're seeing, as we speak, increased demand from them. I hope that helps, Jim. That was a good question.

No, very good. That was great insight.

Our next question comes from the line of Bill Holobowski with Sidoti.

I have 2 questions. The first is again on the supply chain. I believe earlier in the commentary, you mentioned what sounded like customers may be stocking up last year, which perhaps a difficult comparison for this period. Can you give -- shed any light on your expectations for the second half of the year if we may see similar? And then my second question, if I may, is since you mentioned recession, is it your belief that, that would occur? And if it does, do you feel that you're positioned well based on points that you mentioned that as you said, are more affordable and not like buying huge appliances and so forth? Any light you can shed on this.

Okay. Well, first on supply chain. Customers in the second quarter last year did purchase and place orders from multiple sources in order to get product, particularly for back-to-school, but for other items as well. Those just happen to be in our segment. But you can imagine where you have a seasonal demand, which would be back-to-school. And your shelves have to be filled then if you're online, you have to have product because the window, while it is throughout the year, is predominantly in the June through September range. And so early in this time last year, the second quarter, retailers were just buying whatever they could. You may remember that the ports were plugged up in the East Coast, the West Coast, Rotterdam, it really didn't matter. And there were massive problems getting products out of China, and a lot of peaking and demand requirements for trucks and ships and containers. So that scrambled reinforced the need to get stock from our retailers a year ago. Well, that's pretty much changed. And while there was some sell-off in the second quarter, and we anticipated it because we knew what they had and when it was shipped, that's been worked out pretty much now. If you're looking at the second half, the retailers had a year for working out inventory really actually since maybe September when it lightened up a lot. But it's not the same kind of issue they had in the past 9 months, it's far better. And so you're getting closer to the actual demand from customers. We're seeing, as we speak, pretty good growth, but it's early in the quarter. And I think that in the back half of the year, we should with the programs we've got in place right now, see continued revenue growth. On the earnings side, it will be substantially improved because we don't have the cost of shipping, which capitalized as product cost and work through in the third and fourth quarter, those are pretty much normalized now. And so the margins will continue to improve, we believe, in the back half of the year. So we're looking for a very strong back half. Now regarding inflation, I mean, recession, I have to believe that if you keep increasing interest rates, you eventually cause a recession, and may be led by housing and it may be led by the auto industry and capital goods, but these are things that are interest rate sensitive. And while earnings are increasing for many people, and we've had good increases to our employees, still you pay tax on your increases and the spending is after tax. And it's very hard to match up. So I think we will have a recession. And I think that the Fed in order to break interest rate or break inflation will continue to raise rates and they really don't know the unintended consequences for moving that fast. We saw some of that with the Banking segment. And there'll be others because things do not operate independently. However, I think as relative to Acme, as I outlined earlier, our first aid side with the high refill rates and the programs we've got in place should be pretty strong. And maybe there'll be some weakness in Westcott cutting tools because that is a consumer product. But I don't see it to be major. I hope that helped.

Our next question comes from the line of Richard Dearnley with Longport Partners.

I guess one for Paul. You're on average inventory rather than the LIFO or FIFO as I remember, has the -- does that mean that the high-cost inventory has largely flown through the P&L at this point?

Yes. Yes.

Yes. Okay. And then last quarter, you were estimating that inventories would be down $5 million for the year, which would get you to something like $58 million, and you're $50 million now, so is there a new goal on the inventory? Or is this inventory, is that right?

I think the current inventory is about where we will end the year, maybe it's $1 million more.

Okay. That's great. And what was the sales mix in the quarter between first aid and Westcott or first aid and...?

Okay. So the first aid was 59% in the quarter and year-to-date. So for the 3 months and the 6 months, it was both 59%.

Right. And what -- how did you get invited to that conference in Qatar? That was quite something.

Well, for those that don't know, I was presenting at the Bloomberg Conference in Qatar. And it related to supply chain, which we live regularly. And it's not the first time we've spoken -- I've spoken about supply chain actually with Bloomberg, it's probably the fourth time. And we know what we're talking about when we're talking about what's going on in China and what's happening with containers. We live it daily. And our calls with Asia are weekly and -- for me, it's weekly and then, of course, I'm in China often. So it was a pretty natural invitation, I felt.

Great. It was intriguing to hear that. Then the expansion -- the square footage expansion in Canada to supply both Canada and multinationals. Why does it open markets being in Canada as opposed to the U.S.?

When we bought First Aid Only -- I mean, First Aid Central in Canada. It gave us Canadian manufacturing of first aid. And while the borders are open, the provinces have very, very different requirements. It would be similar to many regions in the United States, all having different requirements for what goes into a kit. And it was very difficult as a non-Canadian supplier prior to First Aid Central to be able to be effectively supplying. But once we bought First Aid Central, we were able to access first incredible purchasing power of our combined businesses. So we were able to give them very competitive product costs. Second, we now had the full sales team for North America and Europe, working together with multinationals in Canada that we're looking for products that we had developed in one of the other regions that they weren't available in Canada, and we were able to produce them in our facility outside of Montreal. What we've been successful with that so much so that right now, even though we doubled the space, we still need more space, and it's very exciting.

Great. Paul, do you have the -- what last year's second quarter mix on first aid cutting was?

Okay. The second quarter last year was 51%.

Great. Okay.

Our next question comes from the line of Norman Sarafian with RBC Wealth Management.