Transcript
Good day, ladies and gentlemen, and welcome to the Acme United Corporation's hosted First Quarter 2022 earnings call. At this time, I'd like to turn the conference over to Walter Johnsen. Please go ahead.
Good morning. Welcome to the First Quarter 2022 Earnings Conference Call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read the 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 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. Acme United reported revenues of $43.3 million in the first quarter of 2022, which is approximately even with last year. Net income was $830,000 compared to $2 million in 2021. Our earnings per share were $0.22 versus $0.52 in the comparable quarter last year. As you may be aware, COVID spread rapidly in China after the Chinese New Year ended in late February. Some factories were unable to operate due to quarantines, and others limped along. The entire cities of Hong Kong, Shenzhen, Guangzhou, and Shanghai were quarantined, and 2 of the largest ports in the world were shut down. Our orders were strong in the first quarter, but we were unable to ship approximately $4 million. Most of the products that were delayed were for large mass market retailers that ship directly from the export/imports to their distribution centers. Normally, these direct import programs are very efficient and cost-effective, but their just-in-time nature left them vulnerable to the port closures. We see some improvement. Container prices seem to have stabilized. The Port of Yantian in Shenzhen is open and operating. The port of Shanghai has partially opened. Most of our factories are fully staffed, and they are delivering products. We are also increasing production in India and in Egypt. We have continued to raise selling prices to offset increased product costs, wages, and delivery expenses. Demand in the second quarter has also been strong. Approximately half of the delayed orders have now been shipped. We are receiving new orders for alcohol prep pads from the U.S. Army and wipes for meals ready-to-eat for Ukraine. We've received large inquiries for first aid and medical supplies, which may be related to the Ukraine war. We have a substantial first aid program to a large mass market retailer which will be shipped in the second quarter. Our Westcott school and office products continue to have strong demand, and we are looking forward to a good back-to-school season. As we look into the remainder of 2022, we believe that we will make up the lost sales and earnings in this quarter and move forward with growth. We anticipate revenues in excess of $200 million for the year. I will now turn the call over to Paul.
Acme's net sales for the first quarter were $43.3 million compared to $43.5 million in 2021. Net sales in the U.S. segment decreased 1% in the quarter due to delayed shipments as a result of supply chain disruptions. Net sales in Europe for the first quarter of 2022 increased 3% in local currency compared to the first quarter of 2021. Net sales in Canada for the first quarter of 2022 increased 8% in local currency, mainly due to higher sales of first aid products. The gross margin was 34.5% in the first quarter of 2022 versus 35.8% in the first quarter of 2021. The lower gross margin was mainly due to cost inflation pressures, higher transportation costs, and higher labor costs. Price increases mostly offset the cost increases. SG&A expenses for the first quarter of 2022 were $13.6 million or 31% of net sales compared to $12.6 million or 29% of net sales for the same period of 2021. Net income for the first quarter of 2022 was $830,000 or $0.22 per diluted share compared to net income of $2 million or $0.52 per diluted share for the same period of 2021. The company's bank debt less cash on March 31, 2022, was $46 million compared to $43 million on March 31, 2021. During the 12-month period, we spent $1.8 million in dividends, repurchased $1.5 million of common stock and received forgiveness of our PPP loan of $3.5 million. Inventory increased approximately $11 million, primarily due to anticipated growth in our business, higher costs, and purchasing additional safety stock to offset the impact of potential supply chain interruptions related to COVID-19.
Thank you, Paul. I will now open the call to questions.
We'll take our first question from Timothy Call with The Capital Management Corporation.
Well, good job operating in a hard environment. With the product costs and freight costs rising, are you able to increase your product prices in order to offset that in the future?
Well, Tim, thank you very much. As you know, ultimately, it's the consumer. And we have to be careful about getting ahead of the consumer's buying power. We have passed through price increases. In fact, we're preparing another one shortly because the rate of inflation continues to increase. And it's not just in the U.S., it's in Europe, and it's in China, and other costs are increasing. So we are on a treadmill right now where we're continuing to increase costs. But again, I'm sensitive to delivering value to our consumer. On the other hand, it's imperative that we do pass these through, and we are.
With the share buybacks of $1.5 million in the last 12 months, was most of that in the first quarter?
That was last year. Actually, we didn't do anything in the first quarter.
Yes. We did that at the end of last year, primarily.
Great. Well, hopefully, some will be done this year. It's certainly accretive to earnings per share. And thank you again and looking forward to next quarter with those delayed orders coming through the revenue line.
Well, Tim, thank you so much for your support. I'm really delighted that we are getting shipments out, and we're matching up to what we hope is going to be an outstanding second quarter.
We'll take our next question from Jim Marrone with Singular Research.
Great. I apologize if you already addressed this, as I was somewhat in and out of the call, but I'm still interested in your thoughts. Could you talk about your inventory management? In earlier calls, you mentioned that you performed well in this area. Can you confirm whether it continues to be as effective as stated before? Additionally, can you provide some insights regarding your segments, specifically the cutting tools and scissors in relation to the first aid kits? Are both segments impacted by the supply chain, and what do you anticipate moving forward?
That's a great question, Jim. There are two types of shipping involved. One involves shipping directly to customers from our warehouses in the U.S., Canada, or Europe, where we maintain a significant inventory. This allows us to mitigate supply chain issues, so customers typically do not experience major shortages. The second type involves large mass market retailers, especially during peak seasons like back-to-school and holidays, when these retailers place orders that we fulfill. They pick up products at ports in China or other shipping locations. This segment was primarily impacted in the first quarter due to delays caused by port closures. Even though we have inventory in North America, it doesn't help for these just-in-time orders. It's actually more cost-effective for larger retailers to pick up from the port rather than have us ship, unload, and then repack their orders. Unfortunately, a significant portion of the major ports was closed for two weeks, which limited our shipping capabilities. Regarding our segments, the first aid business is more U.S.-focused, with production in North Carolina and Washington. We source from both domestic and international suppliers, so our supply chain is more diversified than just relying on China. For instance, we source cotton goods like gauze and adhesive bandages from Egypt as a counterbalance to our Chinese suppliers. This puts us in a solid position with first aid products, while cutting products are more dependent on Chinese manufacturing due to its low steel production costs. Typically, this isn’t an issue, but the first quarter was challenging. However, we have ample time to fulfill the back-to-school demand, as we shipped in April and May. The ports in China are reopening, and while the U.S. ports are still congested, there are signs of improvement. If we can move products out of China, we can deliver them to our customers.
Okay. Great. And so I think you kind of addressed this as well, but if you could just confirm my question. So given the supply disruptions and given how things are being alleviated, can we anticipate the first quarter being perhaps the toughest quarter of this fiscal year then?
Well, that would be my expectation. We are expecting a very strong second quarter as we make up for this, plus we have a lot of demand. Looking forward, we're seeing very strong customer demand for our cutting tools as well as first aid. There is some push for some products with the war in Ukraine, from the U.S. Army and other indirect suppliers. For example, in our European business, there's demand for a lot of first aid products right now to go to Ukraine.
We'll take our next question from Michael Mork with Mork Capital.
Walter, I have a question. With the COVID lockdowns and the issues at the ports, has there been a lot of double ordering and possibly cancellations of product orders?
I'm not aware of double ordering. In cases of shortages, that's quite common. The issues we faced were specific orders directed towards mass market retailers primarily for their back-to-school and spring resets in their planograms. Those were definitely not double orders. Most of our order backlog has been accumulated over months by each customer, as we've been engaged in long lead time production for nearly a year and a half. My main concern is about overall demand, as I think we may enter a recession, but I do not see double orders as a significant problem.
We'll take our next question from Jeffrey Matthews with RAM Partners.
Walter, how are you coping?
You know what, there's also opportunity in the stress. I think we will wind up seeing some interesting opportunities that shake loose because we are taking advantage of opportunities that others aren't. It's a tough time. It's a very tough time. But our European teams and our Asian teams and our Canadian teams and our U.S. teams, they live supply chain. So we're pros in what we're doing.
Yes. You mentioned Egypt, which was the first time I heard that, and also India. It's also the first time I've heard you discuss a slight shift away from China, not just about expanding production in other countries like the United States. What is your perspective on China for the next 5 to 10 years? There has been a significant change in how we view our relationship with China, and there is concern about becoming overly dependent on it from various angles. Is this influencing your thoughts, or is it more about the immediate need for products and finding alternative sources?
We began sourcing from both India and China about three years ago, especially in India and Egypt. India has faced delivery challenges, particularly due to severe COVID shutdowns a year ago, but we still receive some products from there. In the medical sector, most U.S. pharmaceuticals are sourced from India, which offers a reliable supply of FDA-approved products. Egypt provides various cotton-based products to Europe at lower labor costs. Over the past two years, we have increased our first aid business with suppliers in Egypt, who also operate FDA facilities. Regarding China, it’s a broad topic, but I believe it’s in China's best interest to minimize discussions about shifting away from their export-driven economy. They are heavily relied upon for production by Western Europe, North America, and South America. It wouldn’t benefit them to significantly harm their economic relationships. The factory owners we work with remain very attentive, and the relationships we’ve established have endured over time. There is ongoing tension and competition between the U.S. and China, but the essential connection between U.S. demand for goods and China's export needs is something I expect to persist over the next five years.
Okay. And then one final question, if I may. You are very adept at finding opportunities through acquisitions that kind of fall through the cracks for a lot of bigger companies. Do you see expanded opportunities in the stress that we've been having? Or is it pretty much things perking along as they always tend to do?
We’re encountering a good number of opportunities. Currently, I’m focusing on ways to enhance our entire product line internationally, not limited to first aid or Westcott, but looking for solutions that can add value across our whole product range. We’re noticing a few of these opportunities, including some related to first aid, knives, and Westcott. Activity is ongoing, and I’m hopeful that we will identify a suitable opportunity this year.
It appears we have no further questions at this time.
If there are no further questions, then this call is complete. We look forward to updating you again at the conclusion of the second quarter, and have a good day. Goodbye.
Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.