Q2 2023 Acme United Corp Earnings Call
Good day and welcome to the Acme United Corporation second quarter 2023 earnings.
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A question and answer session will follow the formal presentation.
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At this time I would like to turn the call over to Walter Johnsen, Chairman and CEO . Please go ahead Sir.
Good morning.
Welcome to the second quarter 2023 earnings conference call for Acme United Corporation.
Walter C Johnsen, chairman and CEO .
With me is Paul Driscoll, our Chief Financial Officer.
First read the Safe Harbor statement.
Forward looking statements in this conference call, including without limitation statements 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.
Clothing, among others those arising as real as a result of challenging.
Challenging global macroeconomic environment characterized by continued high inflation.
And high interest rates. In addition, we have experienced supply chain disruptions, including those resulting from the COVID-19 pandemic and we may experience supply chain disruptions in the future. We're also subject to additional risks and uncertainties are described in our periodic filings with the securities and <unk>.
Change Commission in our current earnings release.
Thank you Paul.
United had an excellent second quarter of 2023, with net income increasing 26% and earnings per share increasing 35%.
Our net sales were $53.3 million, a decrease of 6%, which was anticipated due to inventory reductions at several of our large customers.
Net income was $3 $4 million compared to $2 $7 million in the second quarter of 2022.
Earnings per share were <unk> 96 cents compared to 71 in the second quarter last year.
In 2022, the cost of shipping a container from.
Uh Huh, Shanghai to long Beach, California increase to as high as $19000.
Our budget of $12500. This resulted in additional expenses in 2022 of approximately $4 million.
Company did not raise prices to adjust for these costs.
But they obviously reduced profitability in 2022 by approximately $4 million in.
In 2023 container costs have declined to about $5000 each.
We implemented a $5 million cost savings plan in September of 2022, and we're on track to accomplishing our goal.
We've hired an experienced director of distribution.
Improved training increased wages and began new automation projects in our North Carolina facility.
We have also substantially lowered staff turnover.
As you May know, we improve the working conditions and now with 345000 square foot facility in North Carolina by installing massive air conditioning units during 2021 and 2022.
About nine months ago, it appeared that the worst of the supply chain.
We're easing.
The company began to reduce its inventory being careful not to impact unexpected customer requirements would it be unprepared for another interruption.
The result has been a $9 $1 million reduction in inventory since June 32022.
We've used the cash flow to pay down debt.
Positioned to fund another acquisition will take advantage of a new growth opportunity.
We have not provided guidance for 2023, but we anticipate performance during the year far exceeding that of 2022.
We expect sales to be impacted by global supply chain reductions, but we have new programs in all of our segments. It will also drive us forward.
I'll now turn the call to Paul Driscoll.
Acme's net sales for the second quarter were $53.3 million compared to 56 $8 million in 2022, a decrease of 6% sales for the six months ended June 32023 were $99 $2 million compared to $100.1 million in the same.
Period in 2022, a decrease of 1%.
Net sales in the U S segment decreased 8% in the second quarter due to customer inventory reductions of school and office products that were heavily purchased in the second quarter of 2022 sales decreased 1% for the six months ended June 30th.
Sales for Europe decreased 7% in local currency for the quarter and 5% for the six months ended June 30th.
The sales decrease for both periods was mainly due to the economic recession in Europe net sales in local currency for Canada increased 21% in the quarter and 8% for the year to date unit growth in first aid products.
The gross margin was 37, 5%.
The second quarter of 2023 compared to 32, 7%.
In 2022.
The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022 as well as lower transportation costs SG&A expenses for the second quarter of 2023 were $14 $8 million or 28% of sales compared with $14 6 million.
A 26% of sales for the same period of 2022 SG&A expenses for the first six months of 2023 or $29 million or 29% of sales compared with $28 million or 28% of sales in 2022.
Operating profit in the second quarter increased 32% to two and then pre and.
And improved gross margin and tight control of SG&A spending.
Interest expense for the second quarter of 2023 was $830000 compared to $420000 in the second quarter of 'twenty two the.
The increase was entirely due to higher interest rates in fact, the average debt declined by $8 million in this in the second quarter of 2023 compared to Q2 of last year.
Our overall average interest rate in the second quarter of 2023 was six 4% compared to two 9% for the second quarter of 2022.
Net income for the second quarter of 2023 was $3 $4 million or 96 cents per diluted share compared to.
Net income of $2 $7 million or <unk> 71 per <unk> 70.
71 cents per diluted share for the same period of 2022, an increase of 26% of net income.
And 35% and earnings per share net income for the first six months ended June 32023 was $4 $4 million or $1 25 per diluted share compared to $3.6 million or 93 sounds per diluted share in the comparable comparable period last year.
<unk> increases of 24% and 34%.
The company's bank debt less cash on June 32023 was $47 million compared to $60 million on June 30 of 2022. During the 12 month period, the company paid $2 million in dividends and generated approximately $14 million in free cash flow.
<unk>, including an inventory reduction of $9 million.
Net debt declined $8 million from December 31, 2022.
Thank you Paul I will now open the call to questions.
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Our first question comes from the line of Jim Marrone with singular research. Please proceed with your question.
Yes. Thank you good.
Quarter gentlemen.
I guess my question deals with.
What do you anticipate going forward. It seems like you got past the headwinds of supply side and the higher costs associated with it but.
But going forward.
A lot of Panamax, they are talking about a recession.
And I'm just curious on what your thoughts on how Acme will be insulated if they are at all insulated to any upcoming recession.
Can you anticipate lower volumes or what do you plan on doing to mitigate.
Any of the.
The.
Negative effects of a recession.
Good question, Jim first Acme is not insulated from any of them.
We have faced every bit of the challenge is as any other company and if there are supply chain problems, we face that we faced inflation just like everybody else.
We go into a recession, we face a demand issue and that's pretty clear.
Hum.
First aid side, where we're now the second largest in North America.
It has a recurring revenue stream from our refill business as kits or boost components, either through an accident or it disappears or is obsolete.
Those goods have to be refilled and they are regularly so there's a very strong recurring revenue stream that navy somewhat insulated.
Relative to a new first aid installations, we've got a number of them.
Programs going on with major companies in North America, and we've got increasing growth in Canada.
Are we using first aid central and our multinational companies that operate there throughout every field in cooling mining oil and gas transportation.
And general retail.
On the first aid side, we also.
I have a number of new products that are going into retail accounts and.
What is it states in Canada. So those are the things that offset some of the the headwinds if we go into a recession.
With the Westcott business.
The cost of our products, which are primarily scissors and cutting tools.
Those are I'm not expensive items most of them are under $25. Many of our under 10 and while there may be migration from one product to another product within different price points.
It's not the same as a capital goods, not a refrigerator or a house or a car.
So in past recessions, we have seen some backing off of our westcott, but certainly not the.
Same as if it was a capital good relative to the inventory reductions it depends on the the retailer.
And it's uneven within departments, but obviously the heavy purchasing they did a year ago is gradually.
Being worked off in the case of back to school. It was probably more opportune in the second quarter went back to school actually.
<unk> is an area, where you can sell product.
That segment.
But.
My belief is that by year end or maybe sooner most retailers will have been completed.
Out of the inventory that they bought a.
A year ago and in many cases, that's occurred already and we're seeing as we speak increased demand from them and I hope that helps Jim It was a good question.
Very good. Thank you that was great insight.
But.
Our next question comes from the line of Bill Hello, Valkyrie with Sidoti. Please proceed with your question.
Thank you for taking my question and allowing me to participate I have two questions.
The first it is again on the supply chain I believe earlier in the commentary you mentioned it what sounded like customers may be stocking up last year.
Which perhaps set difficult comparison for this period.
Can you shed any light on your expectations for the second half of the year. If we may see similar and then my second question. If I may is.
Since you mentioned recession is it your belief that that would occur and if it does do you feel that you're positioned well based on price points that you mentioned that.
As you said are more affordable and not like buying huge appliances and so forth.
Any light you can shed on us.
Okay, well first on supply chain.
Customers in the second quarter of last year did purchase.
And place orders for multiple sources in order to get product, particularly for back to school, but for other items as well that was just happened to be in our segment.
But you can imagine.
Well you have a.
Seasonal demand, which would be back to school and yourselves have to be filled and if you're online you have to have product because the window. While it is throughout the year. It was predominantly in the.
June through September range and so.
Early in this time last year.
Second quarter retailers were just buying whatever they could you may remember that the sportswear.
Doctor in the east coast or the West Coast Rotterdam, It really didn't matter.
There were massive problems getting products out of China.
And a lot of.
Peaking.
Right.
Yeah.
Demand requirements for trucks and ships and containers.
Oh, that's scramble reinforced the need to get stock from our retail as a year ago well that's.
Pretty much changed and while there was some sell off in the second quarter than we anticipated because we knew what they had in when it was shipped.
That's been worked out pretty much now if you're looking at the second half.
The retailers have had a year for working out inventory really actually since maybe September when it lightened up a lot but it's.
It's not the same kind of issue they had in the past.
Nine months.
Far better and so you're getting closer to the actual demand from customers.
We're seeing as we speak I'm pretty good growth.
But it's early in the quarter.
And I think that in.
In the back half of the year.
We should with the programs with <unk>.
Got in place right now see a continued revenue growth.
On the earnings side it.
It will be substantially.
Proved because we don't have the cost of shipping which were capitalized as product cost and worked through in the third and fourth quarter. Those are pretty much normalized now and so the margins will continue to improve we believe in the.
Back half of the year. So we're looking for a very strong back half now.
Regarding inflation I mean, a recession.
I have to believe that if you keep increasing interest rates you eventually cause a recession and maybe led by.
Housing and it may be led by the auto industry and capital goods.
But these are things that are interest rate sensitive.
While earnings are increasing for many people and we've had.
Good increases to our employees.
Still you pay tax on your increases in <unk> spending is after tax.
It's very hard to match up.
So I think we will have a recession and I think that the fed in order to break interest rate or break.
Inflation.
We'll continue to raise rates.
And they really don't know the unintended consequences.
We're moving that fast we saw some of that with the banking segment and there'll be others because.
Things do not operate independently.
However, I think as relative to acting as outlined earlier or first aid side with the.
Hi, our refill rates.
Programs, we've got in place.
Should be pretty strong and maybe there'll be some weakness in the.
Westcott cutting tools, because that is a consumer product, but I don't see it to be major I hope that helped.
It does and I appreciate the candor. Thank you so much.
Our next question comes from the line of Richard Dearnley with a long Port partners. Please proceed with your question.
Good morning.
I guess one for Paul.
Uh huh.
You're on average.
Rather than a LIFO or FIFO unless I remember.
It has to be.
That mean that the high cost inventory has largely flown through the P&L at this point.
Yes, yes, yeah, Okay and then.
Last quarter.
You were.
Estimating that inventories would be down $5 million for the year.
Get you to something like 58 million and you're right now so is it is there.
There are new new gold in inventory or is this inventory about right.
I think the.
Current inventory is about where we will end the year, maybe its $1 million more.
Okay.
That's great and what was the sales mix in the quarter between first aid and Westcott.
Okay. So.
The first aid was 59%.
In the quarter and year to date.
So for the three months ended six months it was.
So 59% right.
Oh and Walter.
How did you get invited to that conference and quick car.
Yeah that was quite something.
Well for those that don't know I was presenting at the Bloomberg conference and in Qatar and it related to our supply chain, which we live regularly and I. It's not the first time, we've spoke ive spoken about supply chain actually with Bloomberg is probably the fourth time.
And.
We know what we're talking about when we're talking about what's going on in China, and what's happening with containers, we live it daily and our calls with Asia or weaker.
Weekly and for me, It's weekly and then of course in China, often so it was a pretty natural invitation I felt.
Uh-huh great.
And it was.
Intriguing to.
To hear that.
Then.
The expansion of the square footage expansion in Canada.
Two two.
Supply, both Canada and the multinationals are why why does the open market.
Being in Canada as opposed to the U S.
When we bought first aid only.
I mean first aid central in Canada.
Gave us Canadian manufacturing, our first aid and while the borders are open.
The provinces have very very different requirements.
It would be similar to.
Many regions in the United States, all having different requirements for what goes into a kit.
It was very difficult as a non Canadian supplier.
Prior to first aid central to be able to be effectively supply, but once we bought first aid central we were able to access.
First incredible purchasing power.
Of our combined businesses, so we're able to give them very competitive product costs.
Second.
We now had the.
Full sales team for North America, and Europe , working together with multinationals in Canada that we're looking for products that we had developed in one of the other regions, but they weren't available in Canada, and we were able to produce them in our facility outside of Montreal well.
We've been successful with that so.
So much so that right now even though we doubled the space, we still need more space and that's very exciting.
Oh, Great Oh, Paul do you do you have the what what last years.
Second quarter mix on first aid cutting was.
Okay, the second quarter.
Last year was a 51%.
Okay. Thank you very much.
Yeah.
Our next question comes from the line of Norman Sarafian with RBC wealth management. Please proceed with your question.
Yes. Thank you so much.
Fantastic call, so and I really appreciate all the information I have two questions.
And one question was and it sounded like one color on implied there might be a recession, what if theres no recession, and we continue growing it looks like the consumer is spending a lot of money this summer and Disneyland in places like this.
With that in mind, if we have a soft landing or no recession.
Because it seems to me.
The economy.
The economy is actually much better than people are scratching their head not understanding.
The impact interest rates going up it looks like it's actually increasing business activity. There was a lot of inactivity remember under the low interest rates. So it seems like people are out doing things. If that's the case are we prepared for demand for our products are with respect to inventory if there's not enough inventory to meet the.
Demand say with the emergency kits and what have you would that'd be a drag on the business going forward. If we're not prepared for a strong economy and the other one that should hurt as well.
Yeah.
Oh go ahead go ahead.
First regarding what if theres not a recession Wow, let's dance that's awesome and.
I think.
You prepare for the worst and maybe Youre Lucky.
Relative to inventory.
We've raised our inventory about 30% in preparation for supply chain issues and we did that during COVID-19.
And that's what we've peeled back so we're in a position for normal growth and in fact, when Paul said, we think we bottomed out with the inventory and when the question was asked where you said you would reduce it $5 million, but you actually did nine.
That's because we thought we could but we're very sensitive at this point.
To being able to supply our customers should there be more demand and I think we're positioned to do that so again, we just.
Pulled back the stock that we had done during COVID-19 when we really didn't know what supply would be like and now we're in a position I think to if we're lucky we'll get more growth.
Now the other part of the question, though now it would be a little bit of a downer, so, let's say because of COVID-19 and people aren't going back to work in the office like they were is this a potential drag on business demand for product if people arent going to show up in the office I mean, working remote seems so popular.
Just wondering how that would affect your business yeah, I think we've already gone through that and what we did do was we shifted.
To a remote workforce.
During COVID-19 and we basically did promotions.
Online and at the places where.
They would shop for food.
And that proved to be the right area you may remember that when offices were closed.
The people weren't shopping.
Many retailers, but we shifted within a week.
Online sales and if the offices, okay excuse me alright, but if the offices are closed I mean without.
You lose business on the safety first aid products.
Is there less demand if there are fewer people going into the office environment I guess, that's the bulk of our the bulk of our industrial first aid businesses industrial and well sure we sell to the offices.
The bulk of it is going into industrial companies.
Yes.
Boelens.
A lot going through companies like grainger into the industrial market.
We saw our biggest online customer our biggest customer is Amazon and we find a broad mix of people buying there.
I I.
I don't think honestly that a change in a work pattern at this stage would have any impact wonder.
Wonderful. Thank you so much Walter I appreciate it.
As a reminder, it is star one to ask a question. Our next question comes from the line of question Cai with singular research. Please proceed with your question.
Yes, Hi, Walter.
Just had a question on.
What's driving the FERC they demand in Canada.
Okay.
Well, we're gaining market share.
We're introducing new products, particularly industrial products that.
Had not been available at least from actively in the past.
You've got better pricing than most of the Canadian <unk>.
Competitors, because we've got the scale of purchasing.
And we've got a really good team.
It seems to be working.
Okay sounds good.
Onto gross margin.
Steve there's improvement there.
How are we supposed to look at that in the future quarters will there be more improvements.
Or will it be leveling off here.
Chris I'll turn that over to Paul Driscoll because he models.
Carefully.
Yes.
Two quarters will.
It will be similar to the this latest quarter this second quarter maybe.
A little bit higher maybe 37% to 38%.
Yeah.
Okay and then.
Yeah.
In future quarters after that.
Well I think it will level off at that.
Okay Alright.
There's a lot of factors that affect the.
The gross margin so I think at this point.
It would be.
Being at 37, 5% in the second quarter.
We'll probably do something similar to that in a little bit higher in the third and fourth quarter, it's hard to predict what will happen next year.
Okay.
Thanks.
Our next question comes from the line of Ralph Marash with first Manhattan Company. Please proceed with your question.
Hi, Walter and Paul.
My first question is do you think that innovation within their product line has suffered at all with all the puts and takes during COVID-19.
That's hard to call Ralph.
Uh huh.
I would say.
We've probably done less in the coding area than we had in earlier years as you know we have about 150 patents on.
Coatings and I think some of the collaboration that we would've done during.
Covid probably wasn't done.
Because you work together really was harder.
On the other hand on the first aid side.
We've just our customers are pulling us into different segments. So quickly.
And a couple of the acquisitions like spill magic, where it's being used for bloodborne pathogen.
The kits and spill cleanups for bodily fluids, those didn't even exist and we've got a business that's just driving now.
Hum.
Just didn't have.
So I don't think it's across the board.
But the kind of research.
Or new products, we were all together and we're thinking through those ideas, we're starting them again, but I think that probably suffered a little bit.
Okay. Thank you and on the acquisition front do you see a third leg or you're going to continue to grow first aid and your office supply business.
Yeah, I I don't see a third leg.
In particular, I see reinforcing and the first aid segment, where we've got really a lot of momentum.
And.
There's.
A number of ways that we can grow in first aid adjacencies in our market competitors. As an example of those that are a half step away with products.
But also the vertical integration of the components that go into the first aid kits example of that is.
Net net we're making alcohol wipes prep pads Castile wipes.
All going into our kits as well as selling on the outside.
Mednet will eventually be making other components.
Perhaps burn creams.
And hand, Sanitizers that also go into those kits.
So there'll be other acquisitions, probably in first aid again, either horizontally expanding market share we're vertically integrating into what we make and there'll be probably North America.
Thank you my last question is I'm, assuming since you didnt mention that but the good news is that your distribution facility in Rocky Mount was spared any tornado damage.
So for those that don't know.
On Friday.
A tornado in Rocky Mount North Carolina.
Hit down and destroyed.
Big section of the Pfizer Hospira facility, which is seven miles away.
For Morris.
It destroyed about 25% of the injectable pharmaceuticals.
In the United States. So there are supplier, but it's going to be a massive shortage we.
We have a and emergency shelter within our facility and we evacuated 180.
Workers.
Fortunately.
Mr <unk>.
We were lucky.
But for Pfizer.
And for the country.
We've got a handful of problems because it's going to be a shortage of injectable pharmaceuticals, whether that's for chemotherapy or four.
Penicillin or so many other items it was a big problem.
We're okay.
Yeah.
Great.
Excuse me I'm glad there was a really really good news. Thanks, Walter Thank you.
There are no further questions in the queue I'd like to hand, the call back to Mr. Johnson for closing remarks.
If there's no further questions.
Thank you for joining us we look forward to talking to you as we complete the third quarter and have the earnings Bye bye.
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.