Acme United Corporation (AMEX:ACU) Q4 2023 Earnings Call Transcript

Acme United Corporation (AMEX:ACU) Q4 2023 Earnings Call Transcript March 1, 2024

Acme United Corporation misses on earnings expectations. Reported EPS is $0.4 EPS, expectations were $0.55. 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, welcome to the Acme United Corporation Fourth Quarter 2023 Earnings. At this time, I’d like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Walter Johnsen: Good morning. Welcome to the fourth quarter and year-end 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 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 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 Johnsen: Thank you, Paul. Sales in 2023 were $191.5 million, a 1% decrease from 2022. Gross margins were 37.7% versus 32.8% in 2022. Net income was $8.2 million compared to $3.6 million last year. Earnings per share were $2.23 compared to $0.82 in 2022. Highlights of 2023 included new retail distribution of our first aid kits, expansion of our Westcott ceramic cutters, and new craft planograms in the mass market. Our gross margins increased as we successfully implemented our productivity plans. The productivity improvements and reduction in SG&A expenses resulted in annual savings of approximately $6.5 million. We sold our hunting and fishing business for $19.8 million. We acquired Hawktree Solutions at a bankruptcy auction for $1 million, providing new customers in the Canadian market.

We decreased net debt from $55 million at year end 2022 to $19 million. As we entered 2024, we were optimistic. We have won new distribution of first aid kits in one of the largest drug chains in the United States and expanded our Spill Magic cleanup line to a major mass market retailer. We have innovative DMT Sharpeners in the kitchen category with significant incremental distribution and new planograms in the craft market. Our Canadian business is expanding from organic growth and the Hawktree acquisition. In Europe, we continue to secure new First Aid and Westcott business. We are investing in new products, facilities, and people. The company is developing the next generation of our Safety Hub digital requisition system for First Aid refills, and was recently awarded new patents for its design.

We have broadened our ceramic safety cutters to expand their personal and industrial uses. We are developing new alcohol and antiseptic wipes and lens cleaners for production at our Med-Nap facility for sale in the United States and Canada. We are upgrading our production and distribution facilities in Rocky Mountain, North Carolina and at Spill Magic in Smyrna, Georgia, and Santa Ana, California. Our growth plans over the next three years requires additional space. We are expanding our First Aid production in Vancouver, Washington, Dublin, our First Aid facility in Laval, Canada, and expanding our Med-Nap plant in Brooksville, Florida. In each case, we believe we have the business to make these acquisitions accretive — these expansions accretive.

We continue to build the entire organization. The company has talented new sales executives, logistics specialists, plant managers, distribution heads, and shift supervisors. We are promoting from within, and hiring from without, the team is the best we have ever had. I will now turn the call to Paul.

Paul Driscoll : Acme’s net sales for the fourth quarter were $41.9 million compared to $44.1 million in 2022, a decrease of 5%, excluding the impact of the Camillus included product line sold on November 1, 2023. Sales for the fourth quarter of 2023 declined 1% compared to 2022. Sales for the year ended December 31, 2023, were $192 million compared to $194 million in 2022. Net sales, excluding Camillus included in the U.S. segment declined 2% in the fourth quarter. Sales were constant for the year ended December 31. Sales of school and office products for the year were impacted by customer reductions of inventory in the first half of 2023. Sales of First Aid products were strong. Net sales for Europe decreased 13% in local currency for the quarter and 6% for the year ended December 31.

The sales decrease for both periods was mainly due to the economic recession in Canada. Net sales in local currency for Canada increased 12% in the quarter and 5% for the year due to growth in First Aid products. The gross margin was 39.1% in the fourth quarter of 2023 compared to 31.9% in 2022. The gross margin for the year was 37.7% compared to 32.8% 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 fourth quarter of 2023 were $14.3 million or 34% of sales compared to $14.1 million or 32% of sales for the same period of 2022. SG&A expenses for the 12 months of 2023 were $59 million or 31% of sales compared with $58 million or 30% of sales in 2022.

The Camillus and Cuda hunting and fishing product lines were sold to GSM Holdings on November 1, 2023, for $19.8 million. The sale resulted in a gain of $12.6 million. This was recorded in other income. The gain net of tax was approximately $9.6 million. Interest expense for the fourth quarter of 2023 was $500,000 compared to $940,000 in the fourth quarter of ’22. The decrease was due to lower average debt of approximately $32 million, partially offset by higher interest rates. Interest expense for the year went from $2.4 million in 2022 to $3 million in 2023. Average debt declined by $12 million. However, the weighted average interest rate went from 4% in 2022 and to 6.5% in 2023. Today, our average interest rate is approximately 5.6% due to the mortgage being fixed at 3.8%.

Net income for the fourth quarter, excluding the gain on the sale of the Camillus and Cuda product lines was $1.6 million or $0.40 per diluted share compared to a net loss of $600,000 for the same period of 2022. Including the gain, net income was $11.2 million. Net income, excluding the Camillus and Cuda sale, for the year ended December 31, 2023, was $8.1 million or $2.23 per diluted share compared to $3 million or $0.82 per diluted share last year, including the gain on the sale, net income was $17.8 million. The company’s bank debt less cash on December 31, 2023, was $19 million compared to $55 million on December 31, 2022. During the 12-month period, the company paid $2 million in dividends and generated $24 million in free cash flow, including an inventory reduction of $5 million.

Additionally, the $30 million of 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 for questions.

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Q&A Session

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

Jim Marrone: My question deals with what you anticipate going forward. Are you going to continue looking at making the business smaller by selling further product lines? Or are you looking at acquisitions? Just looking to get your thoughts on that.

Walter Johnsen: Well, Jim, we have growth plans that we see very clearly. And in my mind, I’m looking at over the next three years, somewhere around $100 million of growth. And we’re doing that from organic growth as well as acquisitions. The focusing of our business by selling our Camillus line for 100x our investment. Now all the shareholders benefited from that. As an example of, if we get an opportunistic sale, we’ll take it. But where we’re going is building. That’s why as we’re doing things like expanding in Canada, it’s because we did an acquisition and has a heck of a lot of business sitting behind that, and we need a bigger boat. Similarly at Spill Magic, we’re lending major new business that’s coming in this year, and we need facilities for it.

Med-Nap, we’re working big time on the expansions there because we use the products ourselves, we’re growing our top line in the First Aid area, and we’re gaining business from outside customers. So no, we are not shrinking the business. It’s an aggressive growth plan.

Jim Marrone: Okay. So then is it safe to say that you’re looking at more geographical expansion as opposed to adding product lines. Is that the focus going forward?

Walter Johnsen: No. No. There’s two ways. In the First Aid area, we’re looking at acquiring companies that are competitors in the space or half step away as well as vertically integrating the products that go into the first aid and safety markets. So it’s a horizontal expansion, mostly in the U.S. and Canada, as well as vertical integration.

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

Tim Call: Well, congratulations getting through a year of with many challenges. And hopefully, the upcoming years are much easier. But post-pandemic, Cuda and Camillus had negative sales growth. And we’re holding you back. And so you’ve sold them. Should we think now overall sales growth could accelerate with health care being the largest part of the company and replenishment sales in health care, possibly being the fastest-growing area of Acme?

Walter Johnsen : Tim, I think that’s a pretty perceptive question. The Cuda and Camillus business were about flat, maybe a little bit of decline after the very strong period with COVID. But really, the sale was because we got a good price and because we focus the business. And now we’ve got a much stronger balance sheet to be working on acquisitions, mostly in the first aid area. The organic growth in First Aid is substantially better than what Cuda and Camillus have been in the past couple of years. So your question holding us back in the top line, I guess it would have because it was flat for two years. The other piece of that is Westcott has gained this year new business in the cutting area and in planograms. And so we’re feeling pretty positive about growth there over and above what it normally has grown. So yes, I’m looking for meaningful growth. And frankly, orders are good right now in the first quarter.

Tim Call : And so the first half of ’23 saw softer sales as retailers and wholesalers cut inventory levels. You don’t see that repeating in 2024 necessarily?

Walter Johnsen: No. We believe we’re beyond that.

Tim Call: And then when we look at gross margins and profit margins, again, health care seems to have higher margins and replenishment sales in health care might even have higher margins. As your overall sales mix skews towards health care and toward replenishment sales, do we expect overall corporate faster sales growth and margin expansion?

Walter Johnsen: Well, the margin expansion, and let me just say on that. There’s also inflationary pressure, and we have a lot of uncertainty in the global world. And that generally means more cost, not like we’ve had in the past, but that’s sort of a headwind on some margin expansion from the levels we finished in the fourth quarter. But certainly, on the growth side, some of that, for example, the refills on first aid kits do have higher margins than some of the other products. And that is the fastest-growing part of our business. As we look to make acquisitions with competitors, we’re also expanding the base of refills. So that helps on margin improvement. So as we’re looking at it, I think, for sure, the First Aid emphasis and the growth there is faster than the rest of the business normally, and that’s pulling organic growth going forward. And on margins, I probably wouldn’t model much more over the fourth quarter. And if we do better, then that’s a pickup.

Tim Call: So organic sales growth, strong margins, probably much lower interest expense and possibility of accretive acquisitions.

Walter Johnsen: Yes.

Tim Call: Well, it sounds wonderful. Thank you for all your hard work in getting us to this point.

Walter Johnsen: Well, Tim, thank you and for everybody on the call, thank you for your support because we focus on growing and there’s a lot of people supporting us in the background.

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

Richard Dearnley: What’s the headcount at year-end versus last year’s headcount? Your comment about best-ever is interesting.

Walter Johnsen: Well, Paul, we’ll try to answer the numbers. But we have somewhere around 650 people today. And what I know is that our Rocky Mount leadership is much stronger than it’s ever been. Our leadership at Santa Ana in both plants are excelling. We’ve had some new people join us at Med-Nap and that’s helping us expand there. And we’ve started off very strong at Med-Nap, which I’m cheering about. We’re also strengthening some of the people in our accounting and in IT area. So those are the kinds of people that are really making a difference.