Acme United Corporation (AMEX:ACU) Q1 2024 Earnings Call Transcript

Acme United Corporation (AMEX:ACU) Q1 2024 Earnings Call Transcript April 19, 2024

Acme United Corporation beats earnings expectations. Reported EPS is $0.39, expectations were $0.36. ACU isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Acme United Corporation First Quarter Earnings Call. At this time, I would like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Walter Johnsen: Good morning. Welcome to the first quarter 2024 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 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. We’re 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 Johnsen: Thank you, Paul. Acme United had a good first quarter of 2024. Net sales were $45 million in 2024 compared to $45.8 million last year. Net income was $1.6 million, an increase of 65%, and earnings per share were $0.39 compared to $0.28 last year, an increase of 39%. Our net sales in the first quarter of 2024 were 2% lower than last year, reflecting the sale of our Camillus and Cuda hunting and fishing business in November 2023 for $19.6 million. As you may remember, this business had approximately $12 million in annual revenues. We reduced expenses to compensate for the lost contribution of the business and focused on the growth of the remaining businesses. We are making progress building the sales momentum of our first aid business as well as our cutting and sharpening tools.

This should become apparent in the coming quarters. We have just begun shipping new first aid kits to a major drug store chain in the United States, expanded our presence at a large hardware chain in the US and Canada and started shipping our Spill Magic products to a large mass market retailer in the United States. Also in the second quarter, our Westcott business has begun shipping new cutting tools to a major mass market retailer as well as new craft items to a prominent retailer in the hobby market. In addition, we’ve just started shipping new DMT sharpeners for the kitchen to a major mass market retailer. So, we believe we will begin seeing meaningful growth in the second quarter and beyond. Our gross margins in the first quarter of 2024 increased to 38.7% compared to 35.5% last year due to productivity improvements and improved shipping performance.

We have been making investments in new equipment and automation and driving our manufacturing and distribution costs lower. We also continue to be investing to bring more manufacturing in-house. We are adding new alcohol, BZK and hand sanitizer capabilities at our Med-Nap facility in Brooksville, Florida for use in our first aid kits, refills and sales to other customers. Later in this quarter, we will bring onstream a new clean room at the site and begin boxing automation for alcohol prep pads and other products. We expect savings from this work to begin in the third quarter of 2024. We are also installing high-density racking at our largest distribution center in Rocky Mountains, North Carolina. This is expected to increase our capacity and to lower our cost of distribution.

The work is expected to be completed by the fourth quarter of 2024. We are excited about continuing to drive both sales growth and profitability in the coming quarters. I will now turn the call to Paul.

Paul Driscoll: Acme’s net sales for the first quarter were $45 million compared to $45.8 million in 2023, a 2% decrease. Excluding the impact of the Camillus and Cuda hunting and fishing product line sold on November 1, 2023, sales for the first quarter of 2024 increased 1%. Net sales, excluding Camillus and Cuda in the US segment, increased 1% in the first quarter. Net sales, excluding Camillus and Cuda in Europe, for the first quarter of 2024 increased 7% in local currency and compared to the first quarter of 2023. Net sales, excluding Camillus and Cuda in Canada, for the first quarter of 2023 increased 1% in local currency. The gross margin was 38.7% in the first quarter of 2024 versus 35.5% in the first quarter of 2023. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022 and lower inbound freight costs.

We experienced the full impact of the productivity initiatives beginning in the second quarter of 2023. SG&A expenses for the first quarter of 2024 were $14.8 million or 33% of net sales compared with $14.1 million or 31% of net sales for the same period of 2023. Interest expense for the first quarter of 2024 was $440,000 compared to $900,000 in the first quarter of 2023. The decrease was due to lower average debt of approximately $28 million. Net income for the first quarter of 2024 was $1.6 million or $0.39 per diluted share compared to net income of $1 million or $0.28 per diluted share for the same period of 2023, an increase of 65% in net income and 39% in earnings per share. The company’s bank debt less cash on March 31, 2024 was $32 million compared to $48 million on March 31, 2023.

During the 12-month period, the company paid $2.1 million in dividends and generated $5.4 million in free cash flow. Additionally, the $13 million in net proceeds from the sale of the Camillus and Cuda product lines was used to reduce debt.

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

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Tim Call with Capital Management Corporation. Please proceed with your question.

Tim Call: Well congratulations on another quarter of strong earnings.

Walter Johnsen: Thank you, Tim.

Tim Call: It’s good to see expanding distribution of your products and the benefits from streamlining operations. The first quarter can sometimes be the weakest quarter of the year. Could that be the case this year?

Walter Johnsen: I believe it will be, Tim. And there was some carryover of first quarter sales that are going into the second quarter, maybe about $2 million. So, it was a weaker-ish quarter. But looking at what the book of business we have going forward, we’re pretty optimistic about some great performance in sales.

Tim Call: As your strong cash flows pay down debt, interest expense fell 48%. Is the current quarter’s $476,000 of interest expense a good run rate to model going forward, absent acquisitions?

Walter Johnsen: Paul, why don’t you cover that one?

Paul Driscoll: Well, the mortgage that we have is about $11 million, so that’s at 3.8%. And the bank debt is at 7%. So, that’s what we’re expecting going forward unless interest rates come down, which we’re talking about later in the year.

Walter Johnsen: What about the balance, Paul, of debt, that’s probably going to build a little bit as we grow.

Paul Driscoll: Right. It will grow during the second quarter, and then it will come down in the third and fourth quarter. We’ll probably end the year about $15 million in bank debt, which — with another $10 million or $11 million in the mortgage.

Walter Johnsen: Is that helpful, Tim?

Tim Call: Yes. Thank you. And with — I noticed the diluted share count rose as old stock options went into the money. When employees want to cash out those options and have to pay tax on it and whatnot, could Acme purchase some of those shares or make it so that there’s no share creep?

Walter Johnsen: Yes, that’s a very good question. We had an unusual situation where last year, the stock was below the option price of — strike price of most of the options. And of course, most of them — all of them are in the money now. So, there was extra dilution. The intention of the company is to purchase many of the options that employees decide when they have to exercise so that we’ll reduce the share count of options, and try to hold it at the level we’re at or decline.

Tim Call: Well, congratulations again on a great quarter. I know it’s a lot of hard work. And greatly appreciate it.

Walter Johnsen: Thank you for your help, Tim.

Operator: Thank you. [Operator Instructions] There are — excuse me. Our next question comes from the line of Jim Marrone with Singular Research. Please proceed with your question.

Jim Marrone: Thank you. Good quarter, gentlemen. My question is in regards to productivity initiatives. Can you just expand a little bit exactly what those productivity initiatives are and how that will impact the business going forward in 2024? And as well, specifically on the Canadian market, what do you foresee with that particular geographic region? Why it seems to be outperforming the way it is? Thank you.

Walter Johnsen: Sure. On the productivity, one area that we’ve been working on is automation of the boxing of lens wipes and alcohol prep pads. And that’s a custom piece of machinery that we in part designed internally as well as with experts. And it was about an $850,000 to $1 million investment, which has been done. It comes online — it’s actually installed in the third week of May, and it should be operational, we believe, by July. The estimate for that is somewhere in excess of $400,000 to $500,000 annually of savings. And that particular item has another benefit, which is, because it drops our cost of production, it may allow us to gain additional customers in the global market, because frankly, our manufacturing costs have dropped.

Another productivity — product is in the first aid assembly business, and it automatically stuffs first aid components in the box of the first aid kits. And to our knowledge, nobody else does that in the industry. It could be, if it proves to be accurate, something that’s a game changer. We will be taking delivery of that in — around November. And again, the amount of money we save starts with one machine and moves forward. But the cost is somewhere around $700,000, and the savings are at least that much annually. So, it’s a — and that has been half paid for already. Another machine is expanding production in our Med-Nap facility, and cost is about $850,000. It is to take on the packets of semi-solid solutions. And those are items that we can sell both into the open market as new business as well as our internal usage in our first aid kits.

And these things are typically hand sanitizers, AAA antibiotic wipes and so forth. There’s not only a savings there, but it’s an actual increase in our capability internally. There’s another new business — I mean, another productivity improvement in our Spill Magic area that is currently operating and saving. I believe it’s over $800,000 annually and we’re getting the benefits of that. And that’s for the automatic packaging of the material that goes into the Spill Magic products in our Smyrna, Tennessee plant, which is our major plant for Spill Magic. So, those are examples. There are others in the warehouse. We’re looking at some automated packing — I mean picking equipment, and that will be at the end of the year. I can’t give you specifics on it because I just don’t remember them, but it’s another productivity program that’s fairly impactful.