Q1 2023 Acme United Corp Earnings Call

Good day and welcome to the Acme United Corporation first quarter 2023 earnings call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

If anybody needs operator assistance, you May press Star zero on your telephone keypad.

As a reminder, this conference is being recorded.

At this time I would like to turn the call over to Mr. Walter Johnsen, Chairman and CEO . Please go ahead Sir.

Good morning.

Welcome to the Acme, United first quarter 2023 earnings Conference call.

I'm 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 limitation.

Payments related to the Companys 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 are rising 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, including those resulting.

When the COVID-19, pandemic and we may experience supply chain 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 our current earnings release.

Thank you Paul Acme, United made progress in the first quarter of 2023.

Our net sales were $45 $8 million compared to $43 $3 million last year, an increase of 6% net.

Net income was $990000.

It's $830000 in 2022, an increase of 19%.

Earnings per share with 28 cents versus <unk>, 22 cents or 27% increase.

The first quarter results, Mark an important improvement and Acme United's performance.

Net sales increased despite ongoing reductions in inventory.

Customers, our gross margins benefited from productivity improvement.

The expense reductions in SG&A that we began in 2022.

Coming evidence with sales up gross margins up and SG&A down our operating income increased 60% in the first quarter.

We believe that our customers are making progress with their inventory reduction programs.

And the summer now rightsize, others are under stocked and some are reducing depending on the item.

We anticipate these kinds of customer actions to continue particularly with back to school items. However, we also believe that our customers will have essentially completed their inventory reduction efforts by the third quarter.

Acme United has also been reducing inventory.

We just we reduced their stock levels by approximately $5 million from December 31, 2022 to March 31, 2023, and anticipate further reductions during 2023.

We've been careful not to reduce to quickly be in.

Positioned to meet customer demand that is not forecast.

We are seeing improvements in productivity, particularly at our major warehouse in Rocky Mountain North Carolina.

As you May recall, we installed new warehouse management software in 2021.

And we had difficulties with implementation it took two years, but we are now seeing efficiencies. We also have less turnover of our workforce due to higher wages and air conditioned environment and new leadership.

We believe we will continue to see improvements due to improve workforce stability experience and automation.

The cost of shipping containers from China, Spike last year, and the first quarter of 2022 reports of Shenzhen and Shanghai closed due to Covid.

The war isn't Ukraine began in the ports of Los Angeles Long Beach in Rotterdam.

Well and clogged with.

We incurred over $4 million in abnormal expenses in 2022 and 500000 in the first quarter of 2023.

These expenses are largely behind us.

At the end of March 2023, we had approximately $41 million and variable debt.

7% interest.

Also had mortgages of approximately $11 million, well know, our rocky Mount North Carolina, and Vancouver, Washington properties at fixed rates of three 8%.

We are addressing the impact of rising interest rates by lowering debt inventory reduction efforts scaled back capital spending and earnings.

We're not providing guidance at this time, but we look forward to stronger performance in 2023 than last year and we continue to look for potential acquisitions I will now turn the call to Paul.

Acme's net sales for the first quarter were $45 $8 million compared to $43.3 million in 2022 net sales in the U S segment increased 9% in the quarter, mainly due to higher sales and first aid and medical products net sales in Europe for the first quarter of 2023 declined 2% in local.

Currency compared to the first quarter of 2022 net sales in Canada for the first quarter of 2023 declined 5% in local currency, mainly due to customer inventory reductions to gross margin.

Was 35, 5% in the first quarter of 2023 versus 34, 5% in the first quarter of 2020 to go.

The higher gross margin was mainly due to the productivity.

The improvement initiatives that began in Q4 of 2022 SG&A expenses for the first quarter of 2023 were $14 $1 million or 37% of net sales compared with $13 $6 million or 31, 4% of net sales for the same period of 2022.

Operating profit in the first quarter increased 6% due to higher sales and improved gross margin and lower SG&A spending as a percentage of sales interest expense for the first quarter of 2023 was $900000 compared to $300000 in the first quarter of 2022, the increase was almost entirely due.

Two higher interest rates, our overall average interest rate in the first quarter of 2023 was 6.4% compared to 2.4%.

For the first quarter of 2022 net income for the first quarter of 2023 with $990000 or 28 cents per diluted share compared to net income of $830000 or 20% to 22% 22 cents per diluted share for the same period of 2022, an increase of.

19% and net income and 27% and earnings per share.

Company's bank debt less cash on March 31, 2023 was $48 million compared to $646 million on March 31 2022.

The 12 month period.

We paid approximately $11 million for the acquisition of the assets of safety made paid $1.9 million in dividends and generated $11 million in free cash flow, including an inventory reduction of $3 million.

Net debt declined $6.5 million from December 31, 2022.

Thank you Paul.

And I will open the call to questions.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is there any question queue.

You May press star two if he would like to remove your question from the Q4.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.

Our first question comes from the line of Jim Marrone with singular research. Please proceed with your question.

Great. Thank you for taking my call very thanks corner.

I have a couple of questions I suppose the first one.

But I'd like to ask as well.

With regards to what you're hearing from clients. So you said, there's a little bit of an uptick with regards to the back to school space.

I'm just curious about your thoughts with regards to Doctor office, because it seems like.

Basis under.

It seems to be under pressure a lot of the commercial rights are actually finding themselves.

In trouble and I think it's just a result of the back office. So it just.

Or perhaps provide a little better color on that and then I'll ask my second question after that.

Sure well the the office channel in the first quarter was a reasonably good.

And for Us.

We we are a little concerned about some overstocking with our.

Retail customers with.

Back to school products that they bought in very heavy supplies in.

In the second quarter of last year, we'll see what happens, but in general the back to school tends to be a pretty stable business because the number of births is more or less $3 8 million.

Children in North America a year.

The.

Actual I'm going back to the office, where maybe it's two days a week.

Working at home the rest.

It's still requiring more supplies and it may be purchased at different places and they get more Amazon sells because individuals are buying but.

For us at least the office channel has been lesions.

Reasonably good where we're seeing some.

Softness.

Some retailers, where they're just overstocked a year ago and they haven't quite worked through older inventory to normal levels.

And I see that coming to an end.

Sometimes fairly shortly.

Great. Thank you for that commentary and my second question is with regards to acquisitions. So you mentioned that you're looking to do an acquisition.

Sometime in the near future Oh are we looking at it in terms of 2023 or beyond.

And what type of acquisition or are you looking to make as it sometimes not.

Yes.

Expand product lines or is it a geographical.

And then if it is a product line.

Is it going to be within the first aid kit or will it be cutting tools like scissors or something completely different if you could just give a little bit of color to that that'd be great.

Sure.

Well in general buying competitors, so already in the same spaces, you tends to be a pretty good way to gain market share.

And.

Some capacity to produce product or.

Warehousing space. So those are good acquisitions in the first aid area, which is more than half of our business now we might also be looking at vertically integrating first aid kits, so that might be similar to our <unk> acquisition, where we bought a company that made alcohol wipes and prep pads.

Which go into kits and which doesn't give us the capability to more vertically integrated.

Might be looking that way or you may remember that we bought the safety made about a year ago in that case.

Wasn't a direct competitor, but it was in the personalization.

First aid.

And medical items and that was.

A half step away, but within our knowledge base of the products.

You would normally see that in and that would be what I would expect.

Relative to geographic distribution, I mean, just geographic acquisitions.

We might find something in Canada, we already have the space, but that wouldn't be a trend it wouldn't be a transformative acquisition by any means.

We have a pretty steady flow.

New possibilities, but my guess is sometime in the back half of the year at least the work we're doing integrating our past acquisitions last year.

Getting the systems in place looking for new space, where they've been growing out of their existing space a lot of those things.

We will start to have been completed.

Therefore.

We would be in a position to take on another transaction.

It's very opportunistic.

Great. Thank you.

And is there a particular target price you are looking at or a range.

Are you looking at something under 10 times.

E D E V. The Ddos or 10 to 15 or 15 to 20 is there is there any particular number that you look at more of a range.

Finally, we really don't.

No we really don't look at it that way we look at it is how we're adding value to our shareholder base.

Some cases, there's synergies where you truly are.

Adding value quickly in some cases, they're very accretive.

But really where we pay market prices, so if and whether it's.

In the medical area, the first aid area or in the office channel in each case, they have different multiples, but we would be.

It'd be very competitive.

Great. Thank you gentlemen.

Thank you.

As a reminder, ladies and gentlemen, it is star one to ask a question.

Our next question comes from the line of Richard Gere.

Generally with long long Port partners. Please proceed with your question.

Good morning, well what was the mix of first aid and and you know westcott classes et cetera.

I think it was.

50, 59% was first paid in the first quarter.

Okay. Do you do you have what that was less last year. It was approximately I think it was 50, 55%.

That sounds great and then could you that that was a good discussion you know west coast and back to school and back to office inventory, how how is what's the over inventory situation and first aid.

Well, there's also been some customers that have purchased.

More inventory than they needed in one big online retailer a year ago, where it was just a great deal of first aid kits that took some time to work through.

So it's.

They tend to be.

Similar the difference of courses with first aid kits there our exploration date.

So if they all the stocks.

Taking some product with that.

They probably would want to do so they tend to keep it lower than Westcott, where our product family is.

It's obsolescence no no exploration.

Right right.

Because it is it looks as though medical usage.

As you.

Hospital Corp.

I had a good good sales and usage and so on so.

That channel looks pretty strong.

Okay I think it is.

Yeah.

Oh, good thank you very much.

Okay.

Our next question comes from the line of Michael Wasserman with Moors <unk> Cabot. Please proceed with your question.

Yeah, Hi, Walter how is the company react if interest rates had ignore rather than sell from here.

Well, Mike we've certainly seen in the past year.

Paul pointed out the interest rates that we paid went from.

About 2.5% to six and a half.

And you pay more interest.

And you named very well go up higher.

And we're working quickly as quickly as we tend to drive that down.

And.

I mean, you could double the debt we're still profitable.

Double the interest rate.

Okay, so you're not overly concerned about.

Possible.

Uh huh.

I'm concerned because I think what's instructions in the financial system globally.

Globally and.

This is not a free trade there are trade offs across the board relative to.

How businesses operate how banks operate and.

How the consumer responds.

But I think.

The level of debt and in the kind of margin improvement that we've had.

More than offset each other right now.

Okay.

Okay. Thank you.

Thank you.

Yeah.

There are no further questions in the queue I'd like to hand, the call back over to Mr. Johnson for closing remarks.

Well no further questions. This call is complete we'd.

We'd like to we look forward to speaking with you after the second quarter.

Thank you very much for joining us.

Pardon.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.