Q3 2021 Acme United Corp Earnings Call

Good day and welcome to the Acme United Corporation hosted third quarter 2021 earnings conference call at this time I'd like to turn the conference over to Walter Johnsen. Please go ahead Sir.

Yeah.

Good afternoon, welcome to the third quarter 2021 earnings conference call for Acme, United Corporation, I Am Walter C Johnsen, Chairman and CEO.

With me is Paul Driscoll, our Chief Financial Officer.

First read our 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 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 such as among others. Those are rising as a result of the effects of the COVID-19 pandemic include.

Including the ongoing economic downturn and the other risks and uncertainties described in our periodic filings with the Securities and Exchange Commission.

Our current earnings release.

Thank you Paul.

Acme United had a very good third quarter of 2021.

Our net sales were $47 $9 million, an increase of 11% over last year at this time.

Our net income for the quarter was $2 million an increase of 30%.

Earnings per share were 50 cents.

3rd% to 46% last year.

Net sales was strong at all of our subsidiaries.

In the U S. Our revenues increased 12%.

We benefited from excellent back to school sales.

Strong demand for Westcott cutting tools as people return to their offices.

An excellent sell through of our craft products.

The first aid and safety business had increased demand throughout its distribution base.

E Commerce sales were strong.

Our Canadian business.

Benefited from growth at first aid Central which has successfully added new multinational customers since its acquisition last year.

It's organic e-commerce sales were excellent.

In Europe revenues for the quarter were even with last year due to the timing of some large shipments.

Acme United has had many cost structures and we have been increasing our selling prices regularly.

We have had supply chain shortages increased labor costs.

Extraordinarily high shipping costs increased energy costs and inflation nearly across the board.

In addition, we have had many positions unfilled that most of our locations despite increasing wages.

It was and is a very challenging time.

We do not believe the increased costs are temporary.

In fact, we are already seeing new levels.

Cost increases for 2022, and we are instituting new price increases.

As you May recall, we installed a new warehouse management system in April 2021.

Our Rocky Mount North Carolina distribution facility.

We've made substantial progress with the new software and are now shipping normally although there are many areas still to improve the <unk>.

System is now positioned to increase our efficiencies to ship small parcels track shipments more thoroughly and strengthen our operational control.

Acme United began building a global inventory about 30% starting in June of 2020.

We did this because we feared supply chain disruptions from COVID-19, when workers in China left this spring for their homes during Chinese new year.

However, we did not anticipate the tsunami of waters to the Chinese factories caused by pent up COVID-19 spending and the U S stimulus packages, but they overwhelmed the Chinese capacity to produce and ship right in the middle of the back to school and summer product search.

The extra inventory provided a substantial cushion to meet customer requirements. Despite the external shipping chaos.

We've extended the <unk>.

Projected lead times from order to delivery and are managing our supply chain with the expectation of continued delays. We anticipate these issues in 2022 and are prepared.

We're converging on another successful year and anticipate record sales and earnings in 2021, our sales of Westcott cutting tools continue to grow and demand for our first aid products is strong we are optimistic about 2022.

I'll now turn the call to Paul.

Acme's net sales for the third quarter were 47 $9 million compared to $43.3 million in 2020, an increase of 11% sales for the nine months ended September 32021 were $136 million compared to $123 million in the same period in two.

<unk> thousand 20.

An increase of 11% net sales in the U S segment increased 12% in the third quarter and 8% for the nine months ended September 30th two.

<unk> increase for both periods was mainly due to market share gains in first aid and safety products net sales for Europe were constant in local currency for the quarter due to some large shipments last year sales in our core in the third quarter of 2020 increased 32% compared to the previous year sales.

Sales for the nine months ended September 32021 grew 15%, mainly due to growth in e-commerce and market share gains and Westcott School and office products.

Net sales in local currency for Canada were constant in the quarter higher sales of first aid products offset a decline in sales of school and office products.

Due to COVID-19, Lockdowns in 2020 back to school shipments temporarily shifted from the second to the third quarter.

Sales were up 49% in Q2 of this year compared to Q2 of last year net.

Net sales in local currency for the nine months ended September 30th 2021 grew 23% mainly due to higher sales of first aid products. The gross margin was 35, 5% in the third quarter.

Of 2021 compared to 34, 5% in 2020, selling price increases offset higher material labor.

And transportation costs.

The year to date gross margin was 36% for both 2021 and 2020.

SG&A expenses for the third quarter of 2021 were $14 million or 29, 3% of sales compared with $12 $8 million or 29, 6% of sales for the same period of 2020 SG&A expenses for the first nine months of 2021.

$39 million or 28, 6% of sales compared with $36 million or 29 three.

3% of sales in 2020.

Net income for the third quarter of 2021 was $2 million or <unk> 50 per diluted share compared to a net income of $1 $6 million or <unk> 46 cents per diluted share for the same period of 2020, an increase of 30% and net income of 9% and earnings per share.

Net income excluding the impact of the PPP loan forgiveness for the first nine months ended September 30th 2021 was $7 $8 million or $1 97.

<unk> per diluted share compared to $6 $1 million or $1 75 per diluted share in the comparable period last year increases of 29% and 13% the company's debt less cash on September 30th two.

'twenty, one was $38 $1 million compared to $34 $4 million on September 30 of 2020.

During the 12 month period, we paid $9.3 million for the Mednet acquisition spent $1 $7 million on dividends.

See full forgiveness on the $3.5 million PPP loan and generated approximately $2 million in free cash flow.

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

Thank you if you would like to ask a question. Please press star one on your telephone keypad and if you're on speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment again that is star one to ask a question and well pause for just a moment to allow everyone an opportunity to signal for questions.

And we will go to our first question from Jim Marrone with singular research.

Yes, great. Thank you for taking my call.

Rationalizations on a decent quarter.

I guess my first question is in regards to just provide some color in regards to the logistics and the supply chain.

Just trying to get a sense of you know.

This backlog of container shipments.

And the backlog up reports on how it's affecting your business.

What you foresee in the near future in regards to that.

And then I have a follow up question after that.

Well in general.

On that.

The the supply chain could have been managed much differently than it has been.

Got it.

It's being run flawlessly.

I can tell you that.

Shortages of containers.

Our act that's prorated.

They're stuck in places like our fourth and then you don't have truck drivers.

That's not going to change quickly we've got production that's going on in China or.

Delivery now.

Next summer.

And we figure sometime between now and next summer.

We'll get deliveries.

That's ridiculous it's completely ridiculous.

The fact.

The fact that we added 30% extra inventory allows us to plan.

For this kind of chaos and we are but it's crazy for us to be looking at deliveries.

Almost nine months or a year away and we're doing that.

I don't see a near term solution, nor do I believe that people understand this is a lot more than toys for Christmas and the popular commentary talks about.

A weak holiday, they're missing the fact that the U S economy, if it doesn't get critical parts grinds to a halt.

And this is serious.

So while we feel we're.

Prepared.

We don't see enough activity going on on the macro level.

Our own government.

Okay, great. Thank you Walter for that color so.

You mentioned that you've mitigated those higher cost with.

Effective inventory management.

I think you also made the comment though in the prepared comments that they were also off those higher costs were offset by increased CR.

Selling prices.

So I'm just kind of curious.

Hum.

Can you confirm that Steven and as well if this is the case.

How well can you pass.

These higher selling prices to consumers like how much appetite to consumers with increased selling prices.

Got.

If indeed, it's increased selling prices and effective inventory management.

Is that the drivers to that increase profit of 30%.

When you only have topline that's grown at 10%.

Yes.

Well first on the ability to price.

Try very hard to deliver value to our customers.

That's obvious but when your costs go up.

You passed your costs on.

And there are a lot of cost and when you can't identify all of the costs, but they keep coming in everywhere.

You increased your prices to cover that.

We continually done that throughout the year and anticipate continuing to do it because we don't see a letdown whatsoever.

Relative to the gross margin increase in the quarter I think that is representative of the product mix.

But it does represent a that we have pricing power.

Right and then regards to passing on those higher selling prices to consumers.

What point do you have an idea at which point that your volumes are going to hurt as a result of the passing on those higher increase prices.

Well I don't think really our products are the ones, which will have.

Much resistance, because average with average selling prices are well under $25 for most of our westcott items and Camillus knives.

With the first aid kits and the industrial market they're higher.

But there is a whole different market dynamics I think a bigger thing is the collective drag on the U S economy from inflation, that's coming in from every front and.

That may slow demand across the board.

I can see already.

The major capital.

Capital equipment slowing in part because they can't get ports.

But the factories.

Don't operate when they don't get parts and so I think there's a cycle here that is.

Very concerning.

Okay, great Walter Thank you for that commentary.

And as a reminder, it is star one if you do have a question at this time and if you find that your question has already been answered you can remove yourself from the queue by pressing star two.

Well go next to Alan capital at a private investor.

I was wondering do with significant.

Number of your options get awarded to <unk>.

Employees, who are not classified as insiders.

No the options only go to.

Employees and they've been a very important part of maintaining.

Maintaining this.

Talent pool that we have.

Probably more so than any single thing.

But they all go to employees.

What I was asking was.

Or a number of them granted to employees not classified as insiders and therefore not filing form fours.

Oh sure Theres a lot of.

Those that don't file form fours that are employees.

Okay.

Just since you last.

Earnings release, there was a big jump in basic number of shares.

The only thing I can figure out is that some of those employees were exercising their options.

Yeah, I think that would be the accurate Alan.

Okay.

Sure.

Okay.

Thank you.

And well move to our next question from Michael Mork Capital management.

Okay.

Hi, Walter.

Two two questions a couple of years ago.

Amazon was growing exponentially with your company and then it kind of flattened out can you give us any update on what's going on there.

Yeah, Mike.

Amazon has been Hum.

Growing.

Rapidly.

Both in the U S and in Europe for Us.

And amazingly.

Amazingly it should be by now our biggest customer, but Walmart has also been growing very rapidly.

And they've sort of been neck and neck.

Amazon is.

Doing terrific really well for us.

Okay. So youre your Amazon business than it started and has started to increase go north plateaued you weren't quite sure why in them. So it started going up against them.

Yes.

And then the second question I had was you.

<unk> talked quite a bit in your comments.

Hello, gentlemen, about inflation could you give us.

Number are we talking up your prices going up 3%, 5%, 10% can you give us some rough idea on how much inflation, we are seeing there.

Well, we're seeing inflation at the factories in China.

These aren't ours. This is across the board in China.

Around 95% to 10%.

And I don't know that that's been publicly reported but that's what China is facing right now so the broad production.

That's being exported.

So when we get those kinds of increases we match them.

So it's higher numbers than the than you might think.

So do you think your products are buying 10% higher at retail than they were two a year or two ago.

I really can't answer that because I havent actually done that analysis, but I can tell you Mike that if we get a 9% price increase we're going to pass on.

A pretty hefty price increase as well.

And those are the kinds of numbers, we're looking at we're not looking at three or 4%.

Yeah.

Okay, well that's very helpful.

The.

Keep up the good work.

Well, we're working very hard at this mark and thank you for the support.

Thank you.

And well move to our next question from Richard Dearnley of long Port partners.

Good afternoon.

If I could.

Could you give a <unk>.

Approximate head count for the North Carolina distribution Center.

Paul do you have the approximate headcount.

I think it's about 115 there.

Okey doke.

Temporary workers as well.

Probably another.

50 temporary workers.

And I take it.

Finding people is a mess.

Well, finding and retaining people.

Yeah, finding and retaining people and retain them.

Yeah.

Well, there's a there's something going on in it and it depends on of course, where you live but the unemployment in certain areas matches the living standard at which point there appears to be not so much incentive to show up in the game, we see again and again and again.

<unk> come in and work a day or to leave and then you've got another six months of unemployment.

And.

People are smart.

Figured the game out.

Mhm.

You get unemployment or if you're just working.

A day or a week.

You have to be looking for.

Employment, you get employment, you'll have to stay long it can be off.

Yeah.

Got it.

Okay. Thank you.

Last quarter, you said, you had a $5 million or so.

<unk> orders that you couldn't ship because of the warehouse did that did that clear in our in this quarter and is there any carryover from.

Warehouse difficulties this quarter.

Well most of the backwater from at the end of June that was in our warehouse is cleared however, there's a substantial amount.

Product waiting to be shipped up.

In China.

Freight consolidators. So it is not booked as sales it's built against the purchase order, but these are major customers.

Can't get containers to pick them up.

And they've run three and four months late now so the valid purchase orders they will get picked up probably in this quarter, but they carried over from <unk>.

June July August.

And.

They just can't get containers.

To put the goods it.

Yeah.

There was there was an article on Twitter about.

Some investors who rented a boat.

And toward the L. A harbor and then all through the docs and went and talked to people and he said.

If you can find the container you can't find a place to put it I mean, it was just gridlock total mess.

No it's chaos, it's chaos and.

It is so much more than what's being reported about that there will be.

Toys for Christmas, It's just not getting how serious this is mhm.

Uh-huh.

Great well, thank you very much.

Thank you all the best.

Yes.

Yes.

And we'll go to our next question from Jeffrey Matthews of Ram partners.

Hi, Walter.

Hi, Jeff.

I've got a few questions first.

Okay.

On China.

Why two related questions on China why is the inflation. So high there is it raw materials or is it labor.

Shortage, which is something you've been talking about for many years.

As far as the birth rate declining there.

Well first on raw materials.

Everything that's related to oil.

Based on the market and oil prices have gone up.

On the global market.

Really not quite sure, but I think it's probably somewhere around 50%, 60% in the past year, so plastics fuel.

The problem there steel.

There's a shortage of coal.

Coking coal is what you used to make steel because of shortage of electricity. The factories are running anywhere between three days four days down out of the week because it was so overwhelmed that economy.

They can't produce enough electricity.

And then you add on top of that.

The shipping containers shifted shortages within China.

And then the labor shortages.

[laughter].

That's where they get their 10%.

Right and does that does what's happening in China at all.

Further inform your thoughts about your own supply chain going forward or is this just something you're going to have to deal with for a long time to come.

Well over the last.

Six years.

The acquisitions that we've made have all been U S and <unk>.

One Canadian factory, so whether that was spill magic.

DMT, well first aid only or Pac kit first aid central.

These were all U S manufacturers and so we've diversified our base so that today.

Half of our.

Products are sourced outside of the United States.

That's very different than it was five years ago.

And another example is DMT I mean, the Mednet, which we bought in December making critical alcohol truck Ted's and wipes or first aid kits.

Of course in Florida.

The.

Sourcing outside of China continues as we look at places and.

Northern Africa, and Eastern Europe as.

As well as southeast Asia, and the Philippines, but the.

Domestic manufacturing has been a focus of ours and we're working it carefully.

Wouldnt be surprised to see that the next acquisition also is in the U S. Because again, we're building a much more of a domestic.

Sourcing base.

Oh.

Okay and that leads into a question. Another question I wanted to ask which is.

In this difficult environment, it's difficult operating environment are you seeing.

More opportunities potentially for acquisitions or is it still the same.

Kind of flow.

Well we have.

Plenty of activity looking at acquisitions.

And.

As you can imagine we've got quite a database that we've developed over the years and we're constantly calling and checking in and.

Lot of times when you.

Follow up you might be surprised but now is the time and then you follow up with a with an actual transaction.

The I know the private equity market is a very very.

Strong and.

That impacts some of the pricing that we'd see.

For sure but really.

We're not in that market, we're looking at companies.

Step away from what we're doing with his relationships and they tend not to be marketed although we do pay fair prices for them.

Sure.

And final question.

Your comments on the critical.

Shortages supply dislocations in the economy.

Speak to some very.

Significant problems out there.

Is there one or two are there one or two particular examples that you can give.

That kind of blow your mind that youre seeing out there because you're talking about not just acme related issues, but you're talking about capital equipment.

And supply chain issues or is there one or two examples of that is sort of causing this.

Extra anxiety for Ya.

Well I have conference calls every week.

On Tuesday mornings with Asia, and I see what's going on.

And he's a very serious supply chain calls with our team.

And what I see is we can anticipate these things but.

Many many companies did not at 30% of their inventory 18 months ago.

And they're stuck.

And it's terrifying.

I read that one of the.

F 150.

Ford truck plants.

Thousands of trucks right now finished except for components.

I read that a drone manufacturer in Connecticut.

Eight off half the staff.

Because it couldn't get parts for military drones.

I worry about.

Getting critical medicines.

When you can't get them on containers.

I read that.

Major running shoe company, which shifted its production from China to Vietnam.

Can't get the boats.

To pick up those shoes.

And they were afraid of them. These are just some examples I see it everywhere.

Well. Thank you for all that color and good luck and congratulations the way you've managed service, but not at any price for me, but it's nice to see.

Thank you.

Okay.

And with no further questions in the queue right now I'd like to turn the conference back to our presenters for any additional or closing remarks.

Well if there are no further questions. Then this call is complete.

We look forward to providing year end results in early 2022, and thank you for joining us goodbye.

And so this concludes today's call. We thank you for your participation you may now disconnect.

Okay.

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