Q3 2020 Acme United Corp Earnings Call
Yes.
Good day and welcome to the Acme, United Corporation's third quarter 2020, <unk> earnings Conference call. At this time I would like to turn the call over to Mr. Walter Johnsen. Please go ahead.
Good morning.
Welcome to the third quarter 2020 earnings conference call for Acme United Corporation.
I am Walter C., Johnsen, Chairman and CEO with me.
With me is Paul Driscoll, our Chief Financial Officer.
First read a safe Harbor statement Paul.
Forward looking statements in this conference call, including without limitation statements relating to the company's plans strategies objectives expectations intentions and adequacy of resources are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 90 to 95.
Investors are cautioned that such forward looking statements involve risks and uncertainties such as among others. Those rising as a result of the effects of the COVID-19 pandemic, including the ongoing economic downturn and the other risks and uncertainties described in our periodic filings with the Securities and Exchange Commission.
And in our current earnings release.
Thank you Paul.
Acme United had a strong third quarter of 2020.
Net sales were $43.3 million, a 17% increase over this time last year.
Our net income for the quarter was $1.6 million or 49% increase.
Our earnings per share were 46 cents.
Compared to 30 cents in the third quarter last year, a 53% increase.
Revenue of our first aid and safety business was strong in the third quarter of 2020 with sales of $20 million, representing an increase of 15%.
This growth includes not only items such as personal protection kits.
He traces to the pandemic, but also gains in retail and mass market accounts.
Sales of our west talked cutting tools were approximately even with last year due to record sales to the mass market and the E commerce markets offset by weak industrial and office revenues.
We were particularly strong growth in our west Cogs performance due to new placement in the mass market.
Our sales of Camillus knives, DMT sharpening tools and kudos fishing products were excellent.
In Canada.
We had revenues of $2.2 million in the third quarter of 2020 in our historical business, an increase of 25% over last year at the same time.
Sales.
Increased in the quarter due to a shift in school office openings in the second to third quarter, a new sales offices began to open. In addition, our first aid central business had revenues in the third quarter of $1.1 billion.
As you May recall the acquisition. The first is central in January 2020 gave US a platform in Canada.
So many of our first aid and safety products.
Our existing and global customers.
As well as to benefit from their continued growth.
Sales in Europe were $3.3 million, an increase of 35% over the third quarter last year, our revenues and York reflected the reopening of offices and schools and increased E Commerce sales.
The challenging conditions, we faced in the third quarter with similar to those we described in the SEC second quarter 2020 earnings call.
Many of our office customers were closed Rusty.
Restaurants hotels, and foodservice accounts were impacted by closures were limited access.
Well the sales to these types of customers with severely impact.
Impacted there was uncertainty with school openings and our sales of back to school items.
Right over a longer time than usual.
The safety of our associates continues to be our primary concern.
We're a message that our manufacturing distribution sides and close.
We closed our facilities if someone to do in schools to COVID-19, followed by contact tracing and testing.
We restart when safe and move forward.
We continue to incur many expenses as a result until 19, including payment of extra compensation to employees at or production and distribution facilities, we have.
<unk> cost for additional cleaning and maintenance and we have downtime he did.
The additional expenses of operating in incurred in the current environment reflected in our gross margins, which were 34.5% compared to 35.5% in the third quarter last year.
We expect to continue to operate with higher costs for at least the coming year.
We are also concerned about potential customer bankruptcies due to the large scale of office and restaurant closures. This could.
This could become a serious risk if the COVID-19 epidemic continues for a long period.
Although we believe we have prudently credit policies.
We've increased inventory by $9 million to buffer potential supply disruptions during the next six months and.
And to support growth.
There were increasing COVID-19 infections in countries, where we source will distribute our products.
Including China, France, Germany, Canada, and the United States.
We're hopeful that they will be controlled if not we prepared with inventory on hand.
To address problems of delivery on a more.
On a more optimistic note, we expect to sell the extra inventory.
During 2021 to normal cells, if they are not major supply disruptions.
We are aggressively seeking new business.
Managing new and continuing problems related to the pandemic.
And executing our growth plans.
As always we are looking for opportunistic acquisitions, well now turn the call to pool.
I can use net sales for the third quarter were 40 $43.4 million compared to $37 million in 2019 and.
An increase of 17% sales for the nine months ended September Thirtyth 2000.
2020.
Well $123.1 million compared to $108.6 million in the same period in 2019 and incur.
An increase of 13% net sales in the U.S. segment increased 12% in the quarter and 11 and 11% for the nine months ended September Thirtyth. The sales increase mainly came from first aid and safety products, primarily in market share gains and to a lesser extent gains from COVID-19 related surge demand.
Net sales for your.
For Europe increased 32% in local currency for the quarter and 17% for the nine months ended September Thirtyth.
The sales increase for both periods was primarily due to increased sales of Westcott Camillus product in the ecommerce channel as well as higher sales of DMT sharpening products.
Net sales in local currency for Canada, excluding first aid central increased 25% in the in the quarter due to easing of COVID-19, lockdown restrictions and a shift in back to school from the second quarter to the third quarter.
However year to date sales were impacted by the earlier office and store closings.
Year to date sales declined 10% in local currency, including first aid central sales increased 53% year to date.
Gross margin was 34.5% in the quarter of 2020 compared to.
35.5% in 2019.
Year to date gross margin was 36.2% or 2020 and 36.6% for 2019, the major contributor to the to the declining gross margin as a percentage of sales was cold related expenses.
S teenage expenses for the quarter of 2020 were $12.8 million or 30% of sales compared with $11.4 million or 31% of sales for the same period 2019, plus teenage expenses for the first nine months of 2020 were $36 million.
29% of sales compared with 32.
$32.7 million or 30% of sales in 2019.
Net income for the third quarter of 2020 was $1.6 million or 46 cents per diluted share compared to net income of 1.1 million or 30 cents per diluted share for the same period of 2019 and increase of 49% and then income and 53% in earnings.
Per share net income for the first nine months ended September Thirtyth 2020 was $6.1 million.
<unk> dollar 75 per diluted share compared to $4.5 million or $1.32 per diluted share in the comparable period last year, an increase of 33% for both net income and earnings per share the company.
Debt less cash on September Thirtyth, 2020 was 34.4 million compared to $35.9 million on September Thirtyth 2019 dirt.
During the 12 month period, we paid $2.1 million for the first state central acquisition spend $1.6 million on dividends and generated $6.5 million in free cash flow.
Thank you Paul I will now open the call to questions.
[noise]. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question we will pause for just a moment to allow everyone an.
Opportunity to signal.
We will take our first question from Jim Moroney with singular research. Please go ahead.
Yes, good morning, gentlemen.
So I have two questions both related to revenue.
One in regards to the thinking and first aid and the other one is related to the cutting tools.
So personally with <unk> Wainwright.
Thanks to the safety and.
And Christine.
Yeah nice revenue increase.
He said it was attributable to market share or is that.
Is that a result of the expansion in Canada.
And if so can you kind of parse out what.
What how much of that is really a attributed to organic growth rather than just the expansion in Canada.
And I think that the bottom in after that.
Okay. Let me address that one expansion in Canada is separate from what we've talked about in the growth of for state.
What occurred was we gained major share at a very large home improvement chain in North America.
As well as the very large.
Uh huh.
Wholesale club in North America, and both of those were multi millions of dollars.
So that was new business.
In Canada, Yes, we added several million dollars from a first aid central the acquisition, but that was broken out separately.
Okay excellent. Thank you and in regards to the cutting tools and the Sharpeners. So.
You mentioned I guess it was attributed mostly to office closures, but I'm trying to get a sense on you know how much oh.
Growth or if there was any growth in regards to.
People are opening up home offices and was there any pent up demand as a result of that or do you have any sense. So.
Oh, well, we love them.
We have very good sense and I think that was a very good question.
The school business was spread over a longer period.
As you May remember schools were closed.
By May and people were educating children at home then we saw substantial school sell in May June online then it was a little bit slow and then it picked up a lot in August and into September and partly into October as the schools.
We opened up as people.
Educated that children.
Remember this 3.8 million kids born a year these tend to move in lockstep, each year and they all need to be properly equipped so in aggregate well there was a slight decline perhaps in the overall school cells, who.
It was pretty much consistent with prior years.
Relative to office closures as well.
The company's like those that are dealers and do direct deliveries to office as well.
We're very very much impacted because the offices were closed.
Those that sold at retail.
Some of the office superstores, what also were severely impacted on their business to business portion because the businesses were closed on the other hand.
Sales to the large chains, the mass market chains and the online accounts.
Truly truly compensated for that.
It was we net out for the third call.
Third quarter.
The Westcott business was about flat and it was flat because of the Stewart the office closures.
On the <unk>, but the.
E Commerce the mass market.
We're very very strong so people shopped in different places the watered or products.
And the net of it all was about flat sales for Wesco.
Right. Okay. Thank you that gives me a better sense of the trend.
Right.
Thank you before moving to our next caller as a reminder, you may ask your question by pressing star one.
Our next question comes from Timothy call, what the capital Management Corporation. Please go ahead.
Congratulations on another strong quarter.
Thank you Tim.
Oh without the installations of lower margin first day at hub systems.
How do you see that as a proportion of sales did that hinder overall margins and what indications do you have that.
Those installations will be followed with.
Higher margin recurring.
Replenishment sales of a health care products.
The.
What you're referring to is there a safety hub, which allows automatic replenishment for.
For first two components in large corporate accounts.
And as you can imagine the the gross margins on.
The.
The component refills are well above our average and they're they're very good what we saw was that.
That business was solid margins were about normal and very good.
Were brought down by.
Incentive pay.
To keep the or factories and distribution centers operating as well as buying components on the open market and these would be things that go into first aid kits like alcohol prep pads and Oh.
Alcohol wipes D.C.K. wipes glugs masks and sanitizer in the open market, where we were buying many of these items. It was a lot of price competition and although we past price increases through it also impacted gross margin because the price increases tend to lag the.
The actual sale.
Nevertheless, the safety hub business.
There is one that we're continuing to aggressively drive and to the customer the saving money over the van based delivery systems, where people drive and physically stock the locations, where as we do the replenishment online, but those margins are actually quite good.
Right.
When you look at shipping costs or gas prices are down, but the fees for transporting goods can be up do you see that on your inbound or outbound and are you able to eventually recoup those costs.
Those cost increases as well.
Well again, the supply chains or.
Little bit impacted across the board both on reliability as well as cost and you're right about gas prices being down but for example containers containerships right now have increased by about 15% over the last month and.
And it's because demand is picking up.
Mostly from China, So the shipments out of China picking up with the capacity that was laid off has followed behind it and it's not at the same levels. So the prices have gone up.
Relative to a degree.
Demand for trucks and drivers that is also had a price increase.
It's again because of demand the huge shift a shift into online sales isn't that the demand for delivery drivers and.
And trucks, obviously increased faster than the supply. So this again.
Some price increases there.
We are passing through and have been passing through a price increases to our customers. Unfortunately.
Our market position permits us to be able to do that and we've consistently done it to be about at the same levels. We are so we're not taking advantage of excessive price increases, but we are trying to be consistent with margins that historically we have.
And went when there's finally, a vaccine that gets distributed to your employees.
How much do you think of it related expenses would decline next year.
I think that some of the the expenses that were paying the incentive pay or very is very hard to take away from employees that have now had that for six months, each week and that tends to be for us $2 an hour per person.
And I would guess that that will probably stay in place.
I would guess also that the.
The supply chain would stabilize and be not only more reliable.
But that the cost would stabilize if the supply chain is more normalized will be very quick to reduce the 9 million of inventory that we built.
And let me just the verge for a second my fear.
Is that increase.
In countries, maybe we're not thinking about like India, where there is.
Billion three people in 70 million cases, and it's spreading out of control right now.
They are placing big waters into.
In China.
Or masks Glugs sanitizer, all the things you need antibiotics and its second production into India.
Trying to get sick.
Which they've just had their national day, and that's a national and Golden week, and that's a week of.
The country gathering together.
Fireworks and grade parties and then there is training.
Chinese new year, word's largest migration of cute mankind in the world every year for three weeks that kind of mix and could cause some serious problems.
Hope it doesn't happen, but that's why with the inventories that were built well.
We're going to be ready.
I do see with a vaccine that cost will become a more stabilized and margins will probably recovered to the levels that we're at sort of more work to do that with pricing.
But I also think that right now we're still facing some very serious disruptions.
Well, you're you're managing up quite well through that thank you for the hard work.
Thank you Tim.
Our next question is coming from Richard Dearnley with Longport partners. Please go ahead.
Hi, good morning.
Intrigued by your comment about we're aggressively seeking new business.
Oh, it's been pretty good about marketing and capturing new business, but it is [noise].
Or is it the same or what changed.
Well were you already we have never let me.
Let me address it to we have not laid a single person off.
For other than for cause since the pandemic started in fact.
In fact, we've added people.
And.
Weve told all of them all of our associates.
We need to be hustling, and we need to be focused on new business and we're going to be open others aren't.
And we're going to be getting more content online.
Just.
We're going to put money into search and.
And we're going to go after with new products.
Those accounts, where people are shopping at.
And you know, it's really simple you sell what people want where they shop.
Just don't understand where that's so hard of a concept and that's why when we migrated so quickly.
Online and mass market and places that's old food we.
We thrived.
And there are other competitors, who are wondering why ourselves down they're cutting back on advertising that cutting back new product development and firing people.
We're not.
Well when I say aggressive.
I mean it.
Great good answer thanks.
Thank you, we'll move to our next caller, Kevin Didi with HCW. Please go ahead with your question.
[noise] Hi, Walter I apologize in advance for what might seem like a and M. Bush.
But I just wanted to King Qinyuan, where the discussion we had.
Maybe 12 months ago, what the last L.D. conference.
My I'm curious to see how you view the upcoming election, how you hedge yourself and should be incumbent administration remain in place. What do you think happened this with U.S., China relations and how acmes position.
Oh those are [laughter].
Central questions and Doug Kevin Thank you.
The coming election to me.
To me is already factored in with whatever is happening.
I mean, it's clearly is the corporate tax rates, where do increase.
Substantially and I don't think that's really what will ever happen, but if it did we would tend to be again.
Again, the way, we previously had begin to accumulate more cash in our international operations, and we would not bring that back into the U.S. and pay higher taxes, but on the other hand, there are plenty of acquisition.
Opportunities in places like Canada.
And in Germany, we will we would deploy that capital.
So I really don't see that as a.
Other than maybe in a sense of wanting to bring more money into the U.S.
That would hinder that but it wouldn't hindered the growth of the company well.
Relative to the.
The taxes for individuals and corporate tax rates.
Tax rates.
We've got a very big deficit and we will have to wont be paying more to help.
Well bring that down over time, and I would guess that that would also be reasonable.
Relative to the.
The U.S. and China relations.
That's kind of more complicated and part of it is because the press.
President Sherri, who came into office in 2000.
Oh hi.
Husband.
Taking a more aggressive approach on not only expansion through the Belton road initiatives, which as you know had been high speed trains and ports are going into the neighboring countries and some neighboring isn't so close you might be abboud you in Africa.
Oh or it may be a port in in Pakistan.
But what it is doing is it's is an expansionary.
Leadership in China, and there will be clashes, but I also think that.
It's in both countries interest to be doing smart trade.
And I think that will continue.
With with whichever administration, we have.
Regarding our sourcing it acne during the past five years, we purchased a number of manufacturing companies in the United States are those included DMT. The Diamond machining company in multiple mass or Sharpener company first aid only in Vancouver, Washington spill magic to flat.
One in Smyrna, Georgia, I mean, Smyrna, Tennessee, and one in Santa Ana, California, We expanded our production in the Rocky Mountain North Carolina, we bought.
Pac kit.
Which was first aid in in Connecticut, and then merged that later, so we have been aggressively bringing production into the United States.
And that trend and probably will continue with China will continue I think to be a very important partner going forward and with it with either administration I think the ultimate is we need each other and there is a a an expansionary leadership in China.
And they'll be questions from time to time.
Okay, well. Thank you for sharing your perspectives Walter I I really appreciate it I think the experience to bring.
[noise] helps me sort I get my own perspective in line. So thank you for sharing I really appreciate it and again apologies for the heavy handed question congrats on the quarter.
Thank you Kevin.
Thank you and Mr. Johnson there are no further questions at this time I will turn the conference back to you for any closing remarks.
There are no further questions. Then this call is complete we will.
We look forward to updating you after the fourth quarter and thank you for your support good bye.
Goodbye.
Thank you. This concludes today's call. Thank you for your vacation season, you may now disconnect.
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