Q2 2022 Acme United Corp Earnings Call
Please standby.
Good day, everyone and welcome to the Acme United Corporations hosted second quarter 2022 earnings Conference call. At this time I'd like to turn the call over to Walter Johnsen, Chairman and CEO . Please go ahead.
Good morning, welcome to the second quarter 2022 earnings Conference call Correct Me United Corporation.
Walter C Johnsen, chairman and CEO .
With me is Paul Driscoll, our Chief Financial Officer, who will first read a safe Harbor statement Paul.
Forward looking statements.
In this conference call, including without limitations 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 1995.
Investors are cautioned that such forward looking statements involve risks and uncertainties such as among others. Those arising 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.
United had a challenging second quarter of 2020, but also one of accomplishment.
The company had record sales, we completed the acquisition of safety made which manufacturers personalized first aid kits and safety products and.
And we increased our debt facility to position the company for additional growth.
Our net sales of $56 $8 million was an increase of 27% over the second quarter of 2021.
This represented the highest revenues in a quarter in the company's history.
However, we did not keep up with rapidly escalating costs.
Our net income for the quarter was $2 $7 million, which was a decrease of 3% from last year. After adjusting for a one time tax credit of $900000 earnings per share without the tax credit in 2021.
It was 71 sense similar to 2021.
Many events happened quickly and they created unanticipated expenses supports in Shenzhen and Shanghai abruptly closed due to COVID-19.
We rerouted a large number of containers to Ningbo and delivered to our customers on time. However, we paid an average of $18000 for container when the budget was $12500.
This extra expense was approximately $500000 in the second quarter.
Fortunately container costs have since declined to about what we have budgeted or $12500.
The U S sports in Los Angeles, and long Beach were overwhelmed with containers due to port workers ordered to work round the clock, but the U S administration.
But they were not enough truck drivers to pick up the containers.
The resulting pile up close to the ports to store containers on available land everywhere, they became jumbled and huge piles and the port workers could not quickly or easily access containers to be placed on trucks.
A similar situation occurred on the East Coast ports. In addition, the containership ever forward got stuck in the mud off Baltimore and our cargo languished for weeks.
U S Federal law limits truck drivers to 10 hours of driving per day we.
We have drivers waiting for containers for 10 hours limiting out and going home without cargo only to return the next day.
The U S administration declared fines or Unpicked up cargo as a result, we incurred demurrage expenses of $130000 in the second quarter.
When the war in the Ukraine broke out in mid March the Euro began a rapid decline in value against the U S. Dollar.
About $1 14.
Two one point O two today since we pay in dollars for our products that are imported to Europe from China, we recognize the unanticipated expense of $160000 in the second quarter as we marked our payables to market.
In addition, our gross margins in Europe declined over eight percentage points.
Our inland transportation costs grew rapidly due to diesel prices increasing for mid March of approximately $4 a gallon.
$5 60, a gallon at the quarter's end.
Well, we could go on forever about the state of affairs, but here's what we're doing.
We've increased prices in the U S and Europe .
July one to be sensitive to the end user demand curve and yet meet the increased costs.
We were implementing serious productivity improvements last year, we installed new warehouse management software in our largest facility located in Rocky Mount North Carolina.
The new software went live in April 2021, and we anticipate savings of over $300000 annually starting in June 2022.
We will be installing new bottling equipment in our spill magic plants in the fourth quarter of this year.
This 580000 dollar investment is projected to generate annual savings of about $450000 in 2023.
And thereafter.
Our med that facility in Florida is building, a robotics machine, which is expected to become operational in the fourth quarter of 2022. This capital project cost about $800000. It reduces the cost of placing alcohol wipes and pads and boxes.
It has projected savings annually of $350000, even more importantly, it reduces our production costs in the U S for many med that products to potentially gain new business in the large domestic medical and defense markets.
As you May know two years ago, we intentionally increased our global inventory. This was done as a precaution for potential supply chain issues, particularly related to the impact of Covid in China.
Our current plan is to reduce our global inventory by $4 million by the end of 2022.
In addition to increasing the prices of our products, bringing on stream, new productivity improvements and beginning to reduce inventory.
Made progress with our new acquisition and an expanded banking facility in the second quarter.
In June 2022, we purchased safety made.
Which produces customized.
Our first aid kits for the promotion market. The company had revenues of approximately $5 million in 2021, and pre tax income of a little over one 1 billion. It has performed well and was accretive in the second quarter.
Quarter. We also entered a new bank line with HSBC in the second quarter of 2020 to our new facility is $65 million compared to the former one of $50 million on essentially the same terms.
The interest rate is sofa, plus one and three quarters or about three 3% today and the term is four years.
As you May recall, we also updated mortgages in November 2021.
Our Rocky Mount North Carolina, and Vancouver, Washington plants totaling $11.6 million at a fixed interest rate of three 8%.
We'd like to thank HSBC court's support as we continue to grow.
We are providing guidance of approximately $200 million in revenues in 2022, we plan to continue to adjust prices as appropriate as the year progresses and look forward to delivering solid results.
I'll return the call to Paul.
Okay.
Acme's net sales for the second quarter were $56 $8 million compared to $44 $8 million in 2021 and.
An increase of 27% sales for the six months ended June 32020 to 100 quite $1 million compared to $88 4 million in the same period in 2021, an increase of 13%.
Net sales in the U S segment increased 33% in the quarter.
Higher sales prices increased volume and first quarter back orders filled in the second quarter.
First quarter back orders, resulting from supply chain disruptions.
Sales increased 13% for the six months ended June 30th mainly due to higher sales in first aid and Westcott products net sales for Europe increased 12% in local currency for the quarter and 7% for the six months ended June 30th the sales increase for both periods was mainly due to new customers in the off.
This channel net sales in local currency for Canada were constant in the quarter and grew 4% for the year to date.
Gross margin was 32% in the second quarter of 2022, compared with 36% in 2021.
And a great year to date gross margin was 34% compared to 36% in 2021.
The lower gross margin was mainly due to product cost inflation pressures higher transportation costs and higher labor costs.
This increase is partially offset the cost.
Increases SG&A expenses for the second quarter of 2022, a four point $14.6 million or 26% of sales compared with $12 $4 million or 28% of sales for the same period in 2021 SG&A expenses for the first six months.
A 2022 or $28 million or 28% of sales compared with $25 million or 28% of sales in 2020 one.
The second quarter of 2021 included three $5 million of PPP loan forgiveness reflected in other income also the second quarter of 'twenty 'twenty. One tax expense included $9 million of tax credit for stock based compensation, excluding these impacts adjust.
Net income in the second quarter 2021 was $2 $8 million.
Net income for the second quarter of 2022 was $2.7 million or <unk> 71 per diluted share compared to the adjusted net income for the second quarter of 'twenty one.
$2.8 million or 71 cents per diluted share a decrease of 3% of net income and constant for earnings per share netting.
Net income for the first six months ended June 32022 was $3 $6 million or <unk> 93 per diluted share compared to adjusted net income of $4 $9 million or $1 23.
Per diluted share in the comparable comparable period last year decreases of 27% and 25% debt net income decline in the six months was due to the decline in gross margin as a percentage of sales.
The company's debt less cash on June 30 of 2022 was $59 $8 million compared to $39 $3 million on June 30 of 2021 during the 12 month period.
We paid $11 million for the safety made acquisition spent $1.8 million on dividends and repurchased $1.5 million of common stock.
Inventory increased approximately $15 million, primarily due to an anticipated growth in our business higher costs and purchasing additional safety stock to offset the impact of <unk>.
<unk> supply chain disruptions related to COVID-19.
Thank you Paul I will now open the call to questions.
Thank you.
I'd like to ask a question simply press the star key followed by the digit one on your telephone keypad also if youre using a speakerphone. Please make sure. Your mute function is turned off to a later signal to reach our equipment.
Once again press star one at this time, we will pause for a moment.
And well first hear from Tim call of the capital Management Corporation.
Congratulations on the very strong sales given all the.
Economic headwinds and disruptions the rest of us are facing.
Well, Tim. Thank you very much it was as I said a challenging quarter.
And our team really the.
They rose up to it it was tough.
This year might see the first normal back to school season.
And in a few years.
And a lot of back to school sales have shifted to the third quarter being.
Web based stores and last minute restocking, how do you see the competitive landscape in shelf space versus peers.
Well, Tim we've been gaining market share and in the second quarter, we had a very strong already back to school we.
We saw a number of our customers, we believe bringing in the product in advance, giving more of a buffer which was terrific and of course it put a lot of strain on us as we tried to expedite that and it causes a lot of money, but it.
It's going to be a very good back to school and.
Youre right it is far more normal.
Fortunately, so we got market share gains and.
It's going to be a good back to school.
And then with foot first aid you finally broke into the Canadian market.
In recent years.
Do you think it's just as hard to enter the EU market and can you make headway there overtime.
So we actually are selling first aid products and.
In Europe .
And it's small compared to our North American business, but the fortunate thing is we're leveraging the knowledge we have and.
We truly are gaining headway in Europe . So.
That's without an acquisition.
Well congratulations thank you.
Thank you.
As a reminder, its star one if you would like to ask a question or make a comment we will pause for a moment.
Well hear from Richard Dearnley have long part partners.
Good morning could you give a rough idea of how much.
Carryover from the first quarter revenue was in the second quarter.
Yeah deck it was about.
Three and a half to $4 million.
Okay and and.
The strength in Europe , and in New office customers was that in both our Westcott and first date or was it mostly in one of them.
In Europe , our biggest segment is westcott and as I mentioned, we're having a very good back to school.
But in addition to that Westcott gained market share in the normal office business as well.
In Europe . So the combination was a very strong second quarter.
Yeah.
Now all we have to do with is a worry about the foreign exchange.
Well, we are adjusting prices, but I mean, the the big thing is.
When you have a stable base you can adjust prices and you can work off of that this was a very precipitous decline within weeks the euro dropped 11% and that was not priced so we're addressing that and as I said, we're working on productivity improvements said hoped.
Fully we're able to really give value to our customers.
Right.
Great well keep up the good work.
Thank you.
Next question comes from Jim Marrone singular research.
Yes, good afternoon, gentlemen, so I have a few questions. So let's start with the sales increase so.
Really nice healthy increase in sales so I'm, just trying to get a sense.
How much of that did it reflect the price increase.
Or how much of that.
<unk> reflected the increase in volumes.
Oh and then.
We were not going to break out our price increases for competitive reasons.
But we said that 4 million carried over from the previous quarter.
And you can imagine that for inflation in the U S is running at nine 1%.
You know and you got gasoline in transportation higher than youre going to be somewhere in that range, depending on the product and the customer and where it's coming from but.
The net was we've had a lot of plain organic growth plus price increase.
Right. Okay. So there is some reflection of the price increase and in these numbers than the right Oh for sure yes, right and so you plan on implementing further price increases from from your prepared comments.
Well.
The challenge for all of Us.
Inflation is not a one and done it compounds.
Do you have just we believe we will have to stay current with the current inflation.
And if it's a number like 9% that gets to be easy because it's predictable it's not predictable when you've got a war and port closures in disease in a disrupted supply chain exasperated by administrative mandates.
That all happened in.
12 weeks.
But yes, the inflation rate whatever it is we intend to be passing through on a consistent basis, plus any productivity that we can do because we're trying to deliver value as well on a regular basis to our customers.
And hopefully, we're providing a value to the end user because after all they are the reason we're in business.
Okay.
Very good and so then in terms of the cost structure.
The issue is not really.
A demand issue is you know everyone's experiencing.
The supply side not the demand side. So I'm just trying to get a sense on how youre going about controlling those costs. So I know you've been doing inventory management for.
For a while I'm just trying to get a sense.
Whether that is starting to factor in.
In your cost structure.
Going forward.
Well so in the second quarter there were.
Many many direct import programs, particularly for back to school with major retailers globally.
And those are picked up in China.
And delivered directly.
To their locations.
That piece is our where we were mostly hurt because.
We had to deliver on the spot market than in there.
And we get.
The inventory that we hold in Europe U S and in Canada for our daily everyday business, the Westcott and first aid only business that is buffered against at least supply chain.
<unk> and we've got that extra capacity that we added.
We're going to start to.
Reduced that safety stock and we are doing that because we believe the supply chain will start to get.
Get better in the course of the next 12 months, we're still gonna be monitoring that very carefully but if that occurs then the plan is to have generated an extra $4 million of.
Cash from inventory by year end.
And as I see it now I believe that that's attainable.
Okay. That's that's encouraging.
And so is there any effort going forward on reducing our reliance on China and other foreign countries and <unk>.
Sourcing out.
Suppliers from maybe domestically or.
Our other options.
Sure So oh.
Some may know that about 10 years ago, we were 80% or more reliant on.
Asian suppliers, primarily China and in the past seven acquisitions. These are all been U S. Manufacturers. So today you are imported piece is about 40% of our global sales.
The remaining 60.
It is coming from plants, and that's why we're baking productivity improvements and making investments.
A couple of identified today, we can do that because we have the plants are you either in the U S or in Canada.
I.
Would you anticipate that some of our future acquisitions will also be.
Either in western Europe or in.
U S or Canada.
Less likely to be.
More reliant on China.
We're at about 40% of reliant now in the second quarter, we were especially hit because of the.
The direct import business to the major retailers for back to school, that's changing as the mix changes for the rest of the year.
Right.
Okay. Thank you for that color at what one final question, so I see the interest expense.
Kind of doubling over a quarter or a year over year. So I think that's kind of reflect the higher rates already.
And you also mentioned the.
A bit of ahead based on the U S dollar strengthening in foreign currencies are depreciating. So I'm trying to get a sense are you implementing any risk.
Risk hedging at all but maybe with the use of derivatives or swaps and with respect.
Back to the.
Interest rate exposure and the foreign exchange exposure.
Well, we are in a very serious but indirect way the inventory that we hold has been delivered.
So there's not a currency risk on that and there's not an interest rate rescue you basically own. It now we did fix the interest rates on the.
$11 $6 million of our debt last November .
In mortgages, so that piece is fixed.
The remainder is variable.
And the goal is to start to drive it down.
Right and are you just going to drive it down by rolling over.
Enter new terms or are you going to do a derivatives overlay like how do you plan on driving not if we're not doing any we're not doing anything with derivatives.
What what I said drive the debt down I mean cash flow pay it off.
Because we were a very strong cash flow business. So you.
The 4 million of inventory reduction of yearend pays down debt the cash flow that comes in from our earnings for the <unk>.
First six months, we'll have been collected by the second half.
Particularly the back to school that pays down debt.
So.
That's what I meant.
Well, that's very encouraging as well and so thank you for the color in regards to my questions.
Thanks, Jim.
Okay.
And then once again star one to ask a question or make a comment we'll pause for a brief moment.
Michael Mark of more capital management.
Hi, Walter.
Good quarter, considering all the problems. Mike. My question is yeah. My question is assuming you do the $200 million this year.
Assuming the inflation rate, which is currently nine or 10% glides down over the next 12 months to 18 months at a four 5%.
What type of revenue should we expect next year like 10 up 10% to 220 million or what do you think.
Well.
I have.
Personal goals of seeing us, adding $20 million to $25 million for each of the next three years plus doing an acquisition.
At least one during that period probably more.
To be looking at closer to 300 million over that timeframe.
Some of that will be from we hope.
Organic growth and so if you would add 10% growth on 200 million Euro to 'twenty, you do that for three years or.
Probably 270.
275, so that's what we are.
Trying to accomplish and I think we can do it.
So your estimate of hopefully inflations at five I hope it is too and I hope the rest of the growth is real growth.
Yeah.
Yeah, well, we followed the monetary stuff real closely here and inflation was because the fed modest play grow up to 27% plus but now it's only growing about five or 6%. So I think the slowdown the inflation is kind of baked in the cake right Bill.
Oh, I hope so that would be terrific.
Okay anyway.
Thanks, a lot.
Thanks, Mike.
Next we'll hear from Samad ameri of Ridgewood investments.
Hey, Walter.
Nice job dealing with all the stuff.
Although she is in the quarter. Thank you.
My My question was kind of related to that is on the M&A front are you seeing others out there who are just kind of maybe you got tired of dealing with.
Inflation and supply chain issue.
Et cetera.
Now maybe come to the table and looking to get.
You got it.
Well.
As you know, we got a pretty substantial database from over 15 years of it.
Meeting companies and talking to companies that are in our business or or related to them and we're constantly talking to them I think there's some opportunities this year that may present themselves and.
You know, we pay fair prices in good markets and bad ones, who just.
And I would hope that some reach out to us.
But the answer is we're actively looking at.
And I think it might be a good time to to team up with us.
Thank you.
And then also on that end as well too.
How do you see this as the opportunity to take share as well like.
Maybe don't take as much pricing with inflation.
I don't know is that it is that something that you look at it and Opportunistically take advantage of as well there were.
Someone else's raising their prices.
Customer.
Maybe they don't want to say or start shopping around the switch suppliers.
Well our customers are really sophisticated.
And you know if we're not in the competitive range well, we're going to lose business and by and large we are in a competitive range and we're gaining share.
And you're correct, if I'm some of our competitors.
Get too far out of step with the costs.
We're gonna be at their tail and hopefully we get some of that business.
Got it okay. Thank you thanks again.
Thank you.
And it appears there are no further questions at this time I will turn the call back over to the presenters for any additional or closing comments.
Well if there are no further questions. Then this call is complete we look forward to speaking with you at the end of the third quarter.
Thank you and goodbye.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
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