Acme United Corporation ($ACU)

Good day, and welcome to the Acme United First Quarter 2026 Financial Results Call. At this time, I'd like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the First Quarter 2026 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?

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, high interest rates and the imposition of new tariffs or changes in existing tariff rates. In addition, we have experienced supply chain disruptions in the past, 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.

Thank you, Paul. Acme United had a difficult first quarter of 2026. While our net sales increased 14% to $52.3 million, our net income was $985,000 compared to $1.6 million last year, and earnings per share were $0.24 compared to $0.41 last year. . As you may remember, we purchased mimetic for $18.6 million during the first quarter of 2026. The company sells directly to consumers and is cyclical with most of the profits generated in the fourth quarter of the year. It also generates high gross margins, which it spends on advertising, promotions, new product development and customer support. Our sales increase of 14% in the first quarter of 2026 includes approximately 8% from Mimetic which was at breakeven in P&L. Revenues, excluding [indiscernible], increased 6%. The company's gross margins in the first quarter of 2026 were 39.7% compared to 39% last year. When the impact of the high gross margins at my Medic are removed, the core gross margins declined due to higher costs and tariffs. We turn our inventory about twice per year. So the cost reflected in the first quarter were from products made and purchased when the tariffs were at their peak. We expect to run through these items during the second quarter with a return to normal levels in the third quarter. Shortly after the war in Iran began, we started purchasing higher-than-normal quantities of raw materials and finished goods inventory. So far, we have purchased approximately $10 million of incremental inventory. While we hope for a quick end to the war, we are planning and acting to be prepared for increasing costs and shortages. Operationally, we're working to increase the revenues of [ MiMedx ] by expanding its retail distribution and building a strong core of nonseasonal business. Our teams are integrating product lines, leveraging our purchasing strengths and reducing duplicate expenses with the goal of generating significant profits throughout the year. The project is well underway. We are completing the move into our new Spill Magic facility in Mt. Pleasant Tennessee. Production has begun there, even as additional equipment is being installed. Orders for the business are strong and we are experiencing record growth. In Europe, sales increased 19% in local currency to EUR 4 million. Our growth there includes the acquisition last November of [ Smedeglut, ] a small direct-to-consumer company, which is exceeding expectations. Our first aid business in Europe and record performance, and we continue to expand its product line and sales team. The Westcott cutting go business overcame market headwinds and increased 10% in Europe. In Canada, First Aid Central had a strong quarter, and the cutting segment also grew. Overall, our Canadian business increased 16% compared to the first quarter of 2025. I will now turn the call to Paul.

Acme's net sales for the first quarter of 2026 were $52.3 million compared to $46 million in 2025, a 14% increase. Excluding [ MiMedx ] sales increased 6%. Net sales in the U.S. segment increased 12% and in the quarter, driven by higher sales of first aid and medical products, including mimetic products. Net sales in Europe for the first quarter of 2026 increased 19% in local currency compared to the first quarter of 2025 due mainly to the new line of cutting and sharpening tools. The base business had a good performance with a sales increase of 12%. Net sales in Canada for the first quarter of 2026 increased 11% in local currency due to higher sales of first aid products. The gross margin was 39.7% in the first quarter of 2026 versus 39% in the first quarter of 2025. The favorable mix from higher-margin direct-to-consumer mimetic products was mostly offset by the impact of increased tariffs. SG&A expenses for the first quarter of 2026 were $19 million or 36% of net sales compared with $15.5 million or 34% of net sales for the same period of 2025. The higher SG&A was primarily due to the addition of the mimetic business. the higher percentage of sales was due to the higher amount of advertising needed for the direct-to-consumer mimetic business. Net income for the first quarter of 2026 was $1 million or $0.24 per diluted share compared to net income of $1.7 million or $0.41 per diluted share for the same period of 2025, a decrease of 40% in net income. The decline in net income was primarily due to the higher tariff and Med NAP costs we experienced in the first quarter of this year, the higher tariff spending commenced in July of 2025. However, the costs were capitalized into inventory and we started to realize the full impact to earnings as the high-cost products were sold in the first quarter of 2026. We expect the tariff impact to gradually lessen over the next 3 quarters as the tariff rate declined in November 2025 and again in February 2026. Additionally, the incremental cost to enhance the quality assurance protocols at the Mednet facility will not repeat in the second quarter of 2026. Now to the balance sheet. Net debt increased from $27.2 million at March 31, 2025, to $38.6 million at March 31, 2026. During the 12-month period ended March 31, 2026, we paid million for the acquisition of the assets of MiMedx distributed approximately $2.4 million in dividends and purchased a cutting and sharpening line of products in Germany for $1.6 million. Additionally, we generated approximately $14.2 million in free cash flow before the purchase of a new $6 million manufacturing and distribution facility in Tennessee in July 2025 to expand our Spill Magic business.

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

[Operator Instructions] Our first question comes from the line of Richard Dearnley with Longport Partners.

Could you put a dollar amount or a rough dollar amount on what the quality assurance protocols are involving?

Sure. So just some background on that. Last March, the FDA inspected our facility in Brooksville, Florida, and we make alcohol prep pads and BCK wipes and lens webs there. And they found a number of deficiencies in mostly our documentation of good manufacturing practices, documentation of some of the equipment being qualified. And it's a lot of work to get it to be the state needs to be to address the U.S. hospital market, and that is our goal. So we hired a consulting firm to work with us to upgrade in response to the FDA audit, which was very helpful to upgrade the entire facility. So last year, Paul, it was at about $1.5 million . About $1 million we spent last year in consulting, and that's in addition to some equipment that were purchased. For example, we've upgraded a microbiology lab that we really didn't have before. And we're upgraded the chemical laboratory for testing. But it was about $1 million in consulting. In the first quarter of this year, it was about $250,000? About $300,000. So Dick, it was about $300,000. So far, we've done -- I think in total, it's about $1.250 million or $1.3 million.

Correct.

Right. And that's all aimed at qualifying the MedNet products for hospital use.

Well, it's -- Yes. Well, it's not getting approval. We could sell them now, but you wanted to have it done right. In fact, our products do get sold into hospitals now. But when we get done with the project, and we're about 3 quarters done we'll have a facility that we'll be very proud to take major distributors in the United States to visit and do their own audits, and we'll have confidence that we've really done the best job we can for the quality of the products that will go out. So we're 3 quarters through and I think it's all expensed, but we've been doing it, and I view it as an investment.

Right. Yes. And the -- your comment on the tax on to the comment about investing in automation in everywhere or whatever the phrase was. Could you size the other investments? And last year, you were talking about $2 million. And I believe the year before it was $2 million. Is that current run rate because those investments tend to have large productivity payoffs.

Yes. You're addressing something that is important to us. The automation that we've been doing over the past few years has been with robotics. And one of the big projects is taking the bulk product, for example, bulk BK wipes that we produce at Med NAP and putting them automatically in packages, but then go into the refills in our first aid kits. . And as you know, the refill business is an important part of our company. And by automating it, we're reducing cost on a product line that is very consistent and growing. Some of the projects we're doing right now relate to automating the in the Spill Magic facility, automating the packaging the skill Magic powder and putting them into different sized packages. And that has a pretty big payback. Honestly, I don't remember the number that we put in there, but it's maybe it's $0.5 million but it's an important one because we've got business that will keep that machine going. Another area is in Rocky Mount facility. And I wouldn't call this automation, but we've reconfigured the entire process flow so that we have less people well, we have some small automation that we just put in. For example, there's drones that are doing daily cycle counts and so you can imagine when we're doing our numbers, we tend to have high confidence that back the cycle counts hold. And when we do physical audits at the end of the year, it speeds up to the time we're down while we're doing them. So that's some automation that just went in. There's other things. You may have seen robotics that can vacuum your floor in a home there are industrial ones like that, that scrub the floor in our 370,000 -- 340,000 square foot facility in Rocky Mount, so that it is a production site and it's a very clean warehouse handling a lot of medical items. So it's very clean. It's now done with some robots. Those are some examples of them, Dick. The there's another robot machine that we're working on in Brooksville, Florida that's already been purchased. And we've got some business that is for lens wipes. And there, the repetitive loading into the boxes can be done with robotics, with site sensors, and that's being worked on and should be online by June. Those are some examples. .

Yes. That's good. And the [ MiMedx ] DTC business, does any of their expertise in DTC translate over into either your first aid or Westcott business somehow?

So our last 2 acquisitions, the small [indiscernible] acquisition in Germany and [indiscernible] are both direct to consumer. And so as you may know, that means you're using social media as a selling tool and you're putting ads in places like Twitter, Facebook, LinkedIn, of course, is Google Search. And there's a consistent pattern of video that are delivered on to the site. And the purchases are coming directly off the website. In the case of MiMedx, that's our first step in the United States to do direct-to-consumer. And it lends itself to selling things like craft items, again, because you can demonstrate there's a lot of differentiation in the product. And when we do new product introductions, you have a ready platform of potential customers who are following you. The benefit of [ MiMedx ] is we're not establishing social media base, we have 0.5 million social media followers today. And we put out videos every 2 days. Sometimes, it's how to use first aid kits, sometimes it's success stories and lifesaving stories on what the use of bleed control kit did and how it saves somebody's life. In other cases, it's for training or new products. So the answer is as we get experience with it, I hope that we do broaden the amount that we bring on our other product lines. And I think in the Westcott line, that would be in the craft area.

Our next question comes from the line of Tim Call with Capital Management Corporation.

Congratulations on so many accomplishments within just 2 quarters.

Well, Tim, you try so hard to have your accomplishments. And then when you get a setback because of a tariff changes that you aren't priced for, it's frustrating. But you're right at the best you can. And as I hope we laid out, as we're looking through the coming quarters, the impact of the tariffs will be less, and we're hedging by buying $10 million of inventory for potential shortages or price increases out in the -- as a result of the war in Iran. Hopefully, that is just extra inventory and we sell it over due course. But we're looking at and preparing ourselves in case this is an extended conflict.

You can handle the short-term volatility in the long term, you've completed 2 complementary acquisitions. You've consolidated facilities. You've expanded capacity. Allowed for future capacity expansion and immediately expensed upgrades in technology and automation. Do you see all of these achievements made within the last 6 months, adding to your long-term sales, margins and earnings growth over many years?

Tim, yes, we certainly do. As an example, we spent $6 million to buy the facility in Mt Pleasant Tennessee for SpillMagic. And still Magic now has room to grow. And for those that may need a refresher, the products that we sell there are used to clean up oil spills, bodily fluids and blood. And the opportunity to create some new products and hit them in scale and do it in that facility is exciting. We are out of the [indiscernible] facility at the end of this month, that's [indiscernible] Tennessee so Spill Magic will be fully operational, and it's basically there now in Mount Pleasant. As I mentioned earlier, the automation that we're putting in -- it's expensive, it's heavy, and you want to do it once. And then we have a home to be able to place it properly. I wouldn't say this is a trend, but we've been having very, very good success with Spill Magic since we purchased the property. It's almost like it's willed itself to say, Hey, we've got room to grow. So let's do it, but it is. And this quarter, this past quarter, it was up, I think, over -- was it over 30%, Paul?

Yes.

Yes. So it's a good quarter. It's making progress.

With these new acquisitions. Your past acquisitions have benefited from cross-selling and your wider geographic footprint. They're getting new retail channels and distribution networks. How long could it take these 2 recent acquisitions to experience sales growth from these different avenues?

Well, I was just on the phone with First Aid Central, our Canadian subsidiary literally an hour ago. And we were talking about mimetic and its product line. would produce them in Canada, meeting Health Canada specifications. But we're very excited about launching that way sooner than we expected. But the reason is because the name recognition is actually carrying over into a and we had no idea. So you've got a name recognition, you've got 0.5 million followers. And when we put the products into production in Canada, we're expecting some growth, and that would be happening this year. As an inside our having spoken to our Canadian team literally today, we're about to add another 30% capacity to our operation in Laval outside of Montreal and it's because of growth.

Well, thank you for all your hard work and success. Looking forward to the long-term growth of the company.

Our next question comes from the line of Georgy Vashchenko with Freedom Broker.

My question is about cutting and sharpening segment. it was under pressure in 2025. What was the revenue trends in Q1. Did they recover?

Yes. So the cutting and sharpening area last year was impacted when the tariffs were instituted in April. You may remember it was called Liberation Day, and it was April 2, which is a day I remember. And at that point, the tariffs stopped, a lot of things that would have been going forward as promotions because you couldn't price product when they were cost as high as 145% in tariffs. The retailers couldn't price. So the promotional activity for things in the summer and the fall, the winter were basically stalled. And that was one of the reasons that Westcott in particular, was not able to -- had a decline. And Paul, what was the decline last year. It was about 13%?

10%.

10%. So I mean Westcott was down about 10%, and that was the promotional activity. So in the first quarter, you're going up against comparables without the tariffs having been put in place. And Westcott was down, what, about 8% or 10%.

This first quarter. No, I think it was fairly a couple of points, maybe 1% .

Westcott was down 2%. So it's coming back, but the big part coming back is really second, third, fourth quarters where last year, we had no promotions this year unless something happens dramatically with the war. We're expecting good promotional activity. And in fact, we're actively quoting. So that's roundabout way of saying, I think we have easy comparisons coming in, in the second, third and fourth quarter for the cutting and to measuring area, and we should be showing growth. It was a good question. .

[Operator Instructions] Our next question comes from the line of Jake Patterson with Talanta Investment Group.

Just a couple of quick ones, most of them got answered already, but the SG&A number, I know you said there was like $300,000 of onetime expenses in there. So call it, what, like 18.7%. Is that kind of a fair run rate to look at for the rest of fiscal '20? I know that you had some savings you could pull out of [ MiMedx, ] but just curious on that.

You're referring to a number of 18.7%, it's more like a 30...

19 minus 300,000 of consulting ship a lot...

In terms of percentage, it's probably like 33%. .

For the full year, that's like the target 3% of revenue?

Yes.

Okay. Got you. And then I know you said the gross margin in the legacy business was down. Is there any way you can give a number for that? Or is that?

Well, I think we can give you a number. Probably 2?

I would say it's about 200 basis points. That's really driven by tariffs. .

Okay. tariffs.

And then CapEx for 2016. I know you mentioned some automation investments, Canada expansion. I'm just kind of curious if you guys had any range for CapEx expectations.

I think we're looking at probably $7 million.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Johnsen for any final comments.

I'd like to thank the audience for asking some very probing questions. Having hopefully, given some very thoughtful answers. This call is complete, and I'd like to thank you for joining us. Goodbye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.