Acme United - Q1 2023

Transcript

Operator (participant)

Good day. Welcome to the Acme United Corporation first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anybody needs operator assistance, you may press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Mr. Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Walter C. Johnsen (Chairman and CEO)

Good morning. Welcome to the Acme United first quarter 2023 earnings conference call. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a safe harbor statement. Paul?

Paul G. Driscoll (VP and CFO)

Forward-looking statements in this conference call, including without limitation, statements relating 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, 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 and our current earnings release.

Walter C. Johnsen (Chairman and CEO)

Thank you, Paul. Acme United made progress in the first quarter of 2023. Our net sales were $45.8 million compared to $43.3 million last year, an increase of 6%. Net income was $990,000 versus $830,000 in 2022, an increase of 19%. Earnings per share were $0.28 versus $0.22 or a 27% increase. The first quarter results mark an important improvement in Acme United's performance. Net sales increased despite ongoing reductions in inventory by our customers. Our gross margins benefited from productivity improvements. The expense reductions in SG&A that we began in 2022 are becoming evident. With sales up, gross margins up, and SG&A down, our operating income increased 60% in the first quarter.

We believe that our customers are making progress with their inventory reduction programs and that some are now right-sized, others are understocked, and some are reducing depending on the item. We anticipate these kinds of customer actions to continue, particularly with back-to-school items. However, we also believe that our customers will have essentially completed their inventory reduction efforts by the third quarter. Acme United has also been reducing inventory. We reduced our stock levels by approximately $5 million from December 31, 2022 to March 31, 2023, and anticipate further reductions during 2023. We're being careful not to reduce too quickly to be in a position to meet customer demand that is not forecast. We are seeing improvements in productivity, particularly at our major warehouse in Rocky Mount, North Carolina.

As you may recall, we installed new warehouse management software in 2021, we had difficulties with implementation. It took 2 years, we are now seeing efficiencies. We also have less turnover of our workforce due to higher wages, an air-conditioned environment, and new leadership. We believe we will continue to see improvements due to improved workforce stability, experience, and automation. The cost of shipping containers from China spiked last year. In the first quarter of 2022, the ports of Shenzhen and Shanghai closed due to COVID. The war in Ukraine began, the ports of Los Angeles, Long Beach, and Rotterdam were overwhelmed and clogged. We incurred over $4 million in abnormal expenses in 2022 and $500,000 in the first quarter of 2023. These expenses are largely behind us.

At the end of March 2023, we had approximately $41 million in variable debt at 7% interest. We also had mortgages of approximately $11 million on our Rocky Mount, North Carolina, and Vancouver, Washington, properties at fixed rates of 3.8%. We are addressing the impact of rising interest rates by lowering debt through inventory reduction efforts, scaled-back capital spending, and earnings. We are not providing guidance at this time, but we look forward to stronger performance in 2023 than last year, and we continue to look for potential acquisitions. I will now turn the call to Paul.

Paul G. Driscoll (VP and CFO)

Acme's net sales for the first quarter were $45.8 million compared to $43.3 million in 2022. Net sales in the U.S. segment increased 9% in the quarter, mainly due to higher sales of first aid and medical products. Net sales in Europe for the first quarter of 2023 declined 2% in local currency compared to the first quarter of 2022. Net sales in Canada for the first quarter of 2023 declined 5% in local currency, mainly due to customer inventory reductions. The gross margin was 35.5% in the first quarter of 2023 versus 34.5% in the first quarter of 2022. The higher gross margin was mainly due to the product-productivity improvement initiatives that began in Q4 of 2022.

SG&A expenses for the first quarter of 2023 were $14.1 million, or 30.7% of net sales, compared with $13.6 million or 31.4% of net sales for the same period of 2022. Operating profit in the first quarter increased 60% due to higher sales and improved gross margin and lower SG&A spending as a percentage of sales. Interest expense for the first quarter of 2023 was $900,000 compared to $300,000 in the first quarter of 2022. The increase was almost entirely due to higher interest rates. Our overall average interest rate in the first quarter of 2023 was 6.4% compared to 2.4% for the first quarter of 2022.

Net income for the first quarter of 2023 was $990,000 or $0.28 per diluted share, compared to net income of $830,000 or $0.22 per diluted share for the same period of 2022, an increase of 19% in net income and 27% in earnings per share. Company's bank debt less cash on March 31, 2023 was $48 million compared to $46 million on March 31, 2022. During the 12-month period, we paid approximately $11 million for the acquisition of the assets of Safety Made, paid $1.9 million in dividends and generated $11 million in free cash flow, including an inventory reduction of $3 million. Net debt declined $6.5 million from December 31, 2022.

Walter C. Johnsen (Chairman and CEO)

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

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jim Marrone with Singular Research. Please proceed with your question.

Jim Marrone (Analyst)

Great. Thank you for taking my call. very nice quarter. I have a couple of questions. I suppose the first one that I'd like to ask is with regards to what you're hearing from clients. You said there's a little bit of an uptick with regards to the back-to-school space. I'm just curious about your thoughts with regards to back to office, because it seems like, you know, that space is under pressure. A lot of the commercial REITs are actually finding themselves in trouble, and I think it's just a result of, you know, the back to office. If you could just perhaps provide a little bit of color on that, and then I'll ask my second question after that.

Walter C. Johnsen (Chairman and CEO)

Sure. Well, the office channel in the first quarter was reasonably good, and for us. We are a little concerned about some overstocking with our retail customers with back-to-school products that they bought in very heavy supplies in the second quarter of last year. We'll see what happens. In general, the back to school tends to be a pretty stable business because the number of births is more or less 3.8 million children in North America a year. The actual going back to the office, where maybe it's two days a week and working at home the rest, is still requiring supplies, and it may be purchased at different places. You know, we may get more Amazon sales because individuals are buying.

For us at least, the office channel has been reasonably good. Where we're seeing some softness is some retailers would have just overstocked a year ago, and they haven't quite worked through all their inventory to normal levels. I see that coming to an end sometime fairly shortly.

Jim Marrone (Analyst)

Great. Thank you for that commentary. My second question is with regards to acquisitions. You mentioned that you're looking to do an acquisition sometime in the near future. Are we looking at it in terms of 2023 or beyond? What type of acquisition are you looking to make? Is it something that is to expand product lines, or is it a geographical footprint? If, if it is a product line, is it gonna be within the first aid kit, or will it be cutting tools and scissors or something completely different? If you could just give a little bit of color to that would be great.

Walter C. Johnsen (Chairman and CEO)

Sure. Well, in general, buying competitors that are already in the same space as you, tends to be a pretty good way to gain market share, and perhaps some capacity to produce product or warehousing space. Those are good acquisitions. Now, in the first aid area, which is more than half our business now, we might also be looking at vertically integrating first aid kits. That might be similar to our Med-Nap acquisition, where we bought a company that made alcohol wipes and prep pads, which go in the kits and which then give us the capability to more vertically integrate. We might be looking that way. You may remember that we bought Safety Made about a year ago. In that case, it wasn't a direct competitor, but it was in the personalization of first aid, and medical items.

That was a half step away, but within our knowledge base of the products. I think you would normally see that, and that would be what I would expect. Relative to geographic distribution, I mean, just geographic acquisitions, we might buy something in Canada where we already have a space, but that wouldn't be a transformative acquisition by any means. We have a pretty steady flow of new possibilities. My guess is sometime in the back half of the year, at least, the work we're doing integrating our past acquisitions last year, getting the systems in place, looking for new space where they've been growing out of their existing space, a lot of those things will start to have been completed. We would be in a position to take on another transaction. Of course, it's very opportunistic.

Jim Marrone (Analyst)

Great. Thank you. Is there a particular target price you are looking at or a range? You know, are you looking at something under 10 times EV to EBITDA or 10 to 15 or 15 to 20? Is there any particular number that you look at or a range in order to, you know, find that.

Walter C. Johnsen (Chairman and CEO)

No, we really don't. No, we really don't look at it that way. We look at it as how we're adding value to our shareholder base. In some cases, there's synergies where you truly are adding value quickly. In some cases, they're very accretive. Really, we pay market prices. Whether it's in the medical area, the first aid area, or in the office channel, in each case, they have different multiples, but we would be very competitive.

Jim Marrone (Analyst)

Great. Thank you, gentlemen.

Walter C. Johnsen (Chairman and CEO)

Thank you.

Operator (participant)

As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Richard Dearnley with Longport Partners. Please proceed with your question.

Richard Dearnley (Research Analyst)

Good morning. What was the mix of first aid and, you know, Westcott, Clauss, et cetera?

Paul G. Driscoll (VP and CFO)

I think it was.

Richard Dearnley (Research Analyst)

Paul.

Paul G. Driscoll (VP and CFO)

59% was first aid in the first quarter.

Richard Dearnley (Research Analyst)

Okay. Do you have what that was last year?

Paul G. Driscoll (VP and CFO)

It was approximately I think it was 50, 55%.

Richard Dearnley (Research Analyst)

That sounds about right. Could you, that was a good discussion of, you know, Westcott and back to school and back to office inventory. How is What's the over inventory situation in first aid?

Paul G. Driscoll (VP and CFO)

Well, there've also been some customers that have purchased more inventory than they needed. One big online retailer a year ago purchased a great deal of first aid kits that took some time to work through. They tend to be similar. The difference, of course, is with first aid kits, there are expiration dates. If they overstock, they're taking some product risk that they probably wouldn't wanna do. They tend to keep it lower than Westcott, where our product family is, just doesn't have much obsolescence.

Richard Dearnley (Research Analyst)

No, no expiration-

Paul G. Driscoll (VP and CFO)

Yeah. You're right.

Richard Dearnley (Research Analyst)

... 'cause it looks as though, medical usage is, you know, Hospital Corp had good sales and usage and so on. That channel looks pretty strong.

Paul G. Driscoll (VP and CFO)

I think it is.

Richard Dearnley (Research Analyst)

Yeah. Good. Thank you very much.

Paul G. Driscoll (VP and CFO)

Thanks. You're welcome.

Operator (participant)

Our next question comes from the line of Michael Wasserman with Moors & Cabot. Please proceed with your question.

Michael Wasserman (Investment Adviser)

Yeah. Hi, Walter. How would the company react if interest rates headed north rather than south from here?

Walter C. Johnsen (Chairman and CEO)

Well, Mike, we've certainly seen in the past year, as Paul pointed out, the interest rates that we paid went from about 2.5% to 6.5%. You pay more interest. It may very well go up higher. We're working quickly, as quickly as we can to drive debt down. I mean, you could double the debt and we're still profitable. Double the interest rate.

Michael Wasserman (Investment Adviser)

Okay. You're not overly concerned then about possible additional interest-

Walter C. Johnsen (Chairman and CEO)

Well, I'm concerned. I'm concerned because I think we're seeing stresses in the financial system globally. This is not a free trade. There are trade-offs across the board relative to how businesses operate, how banks operate, and how the consumer responds. I think for us, the level of debt and the kinds of margin improvement that we've had have more than offset each other right now.

Michael Wasserman (Investment Adviser)

Okay. Thank you.

Walter C. Johnsen (Chairman and CEO)

Thank you.

Operator (participant)

There are no further questions in the queue. I'd like to hand the call back over to Mr. Johnsen for closing remarks.

Walter C. Johnsen (Chairman and CEO)

Well, if no further questions, this call is complete. We look forward to speaking with you after the second quarter, and thank you very much for joining us. Goodbye.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.