Transcript
Good day, and welcome to the Acme United Corporation First Quarter Earnings Call. 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 first quarter 2024 earnings conference call for Acme United Corporation. I am 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 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 arising 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 and we may experience these 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 in our current earnings release.
Thank you, Paul. Acme United had a good first quarter of 2024. Net sales were $45 million in 2024 compared to $45.8 million last year. Net income was $1.6 million, an increase of 65%, and earnings per share were $0.39 compared to $0.28 last year, an increase of 39%. Our net sales in the first quarter of 2024 were 2% lower than last year, reflecting the sale of our Camillus and Cuda hunting and fishing business in November 2023 for $19.6 million. As you may remember, this business had approximately $12 million in annual revenues. We reduced expenses to compensate for the lost contribution of the business and focused on the growth of the remaining businesses. We are making progress building the sales momentum of our first aid business as well as our cutting and sharpening tools. This should become apparent in the coming quarters. We have just begun shipping new first aid kits to a major drug store chain in the United States, expanded our presence at a large hardware chain in the US and Canada and started shipping our Spill Magic products to a large mass market retailer in the United States. Also in the second quarter, our Westcott business has begun shipping new cutting tools to a major mass market retailer as well as new craft items to a prominent retailer in the hobby market. In addition, we've just started shipping new DMT sharpeners for the kitchen to a major mass market retailer. So, we believe we will begin seeing meaningful growth in the second quarter and beyond. Our gross margins in the first quarter of 2024 increased to 38.7% compared to 35.5% last year due to productivity improvements and improved shipping performance. We have been making investments in new equipment and automation and driving our manufacturing and distribution costs lower. We also continue to be investing to bring more manufacturing in-house. We are adding new alcohol, BZK and hand sanitizer capabilities at our Med-Nap facility in Brooksville, Florida for use in our first aid kits, refills and sales to other customers. Later in this quarter, we will bring onstream a new clean room at the site and begin boxing automation for alcohol prep pads and other products. We expect savings from this work to begin in the third quarter of 2024. We are also installing high-density racking at our largest distribution center in Rocky Mountains, North Carolina. This is expected to increase our capacity and to lower our cost of distribution. The work is expected to be completed by the fourth quarter of 2024. We are excited about continuing to drive both sales growth and profitability in the coming quarters. I will now turn the call to Paul.
Acme's net sales for the first quarter were $45 million compared to $45.8 million in 2023, a 2% decrease. Excluding the impact of the Camillus and Cuda hunting and fishing product line sold on November 1, 2023, sales for the first quarter of 2024 increased 1%. Net sales, excluding Camillus and Cuda in the US segment, increased 1% in the first quarter. Net sales, excluding Camillus and Cuda in Europe, for the first quarter of 2024 increased 7% in local currency and compared to the first quarter of 2023. Net sales, excluding Camillus and Cuda in Canada, for the first quarter of 2023 increased 1% in local currency. The gross margin was 38.7% in the first quarter of 2024 versus 35.5% in the first quarter of 2023. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022 and lower inbound freight costs. We experienced the full impact of the productivity initiatives beginning in the second quarter of 2023. SG&A expenses for the first quarter of 2024 were $14.8 million or 33% of net sales compared with $14.1 million or 31% of net sales for the same period of 2023. Interest expense for the first quarter of 2024 was $440,000 compared to $900,000 in the first quarter of 2023. The decrease was due to lower average debt of approximately $28 million. Net income for the first quarter of 2024 was $1.6 million or $0.39 per diluted share compared to net income of $1 million or $0.28 per diluted share for the same period of 2023, an increase of 65% in net income and 39% in earnings per share. The company's bank debt less cash on March 31, 2024 was $32 million compared to $48 million on March 31, 2023. During the 12-month period, the company paid $2.1 million in dividends and generated $5.4 million in free cash flow. Additionally, the $13 million in net proceeds from the sale of the Camillus and Cuda product lines was used to reduce debt.
Thank you, Paul. I will now open the call to questions.
Our first question comes from Tim Call with Capital Management Corporation. Please go ahead with your question.
Well congratulations on another quarter of strong earnings.
Thank you, Tim.
It's good to see expanding distribution of your products and the benefits from streamlining operations. The first quarter can sometimes be the weakest quarter of the year. Could that be the case this year?
I believe it will be, Tim. And there was some carryover of first quarter sales that are going into the second quarter, maybe about $2 million. So, it was a somewhat weaker quarter. But looking at the book of business we have going forward, we're pretty optimistic about some great performance in sales.
As your strong cash flows pay down debt, interest expense fell 48%. Is the current quarter's $476,000 of interest expense a good run rate to model going forward, absent acquisitions?
Paul, why don't you cover that one?
Well, the mortgage that we have is about $11 million, so that's at 3.8%. And the bank debt is at 7%. So, that's what we're expecting going forward unless interest rates come down, which we're talking about later in the year.
What about the balance, Paul, of debt, that's probably going to build a little bit as we grow.
It will increase in the second quarter, then decrease in the third and fourth quarters. We expect to finish the year with around $15 million in bank debt, along with an additional $10 million or $11 million in the mortgage.
Is that helpful, Tim?
Yes, thank you. I noticed that the diluted share count increased as older stock options were exercised. When employees cash in those options and incur taxes, could Acme buy back some of those shares or find a way to prevent share dilution?
Yes, that's a very good question. We had an unusual situation last year where the stock was below the option price of most options, and now all of them are in the money. This resulted in extra dilution. The company intends to buy back many options that employees choose to exercise in order to reduce the share count and aim to maintain it at the current level or decrease it.
Well, congratulations again on a great quarter. I know it's a lot of hard work. And greatly appreciate it.
Thank you for your help, Tim.
Thank you. Our next question comes from the line of Jim Marrone with Singular Research. Please proceed with your question.
Thank you. Good quarter, gentlemen. My question is in regards to productivity initiatives. Can you just expand a little bit exactly what those productivity initiatives are and how that will impact the business going forward in 2024? And as well, specifically on the Canadian market, what do you foresee with that particular geographic region? Why it seems to be outperforming the way it is? Thank you.
Sure. One area we have been focusing on for productivity is the automation of boxing lens wipes and alcohol prep pads. We designed a custom piece of machinery, partly in-house and with experts, which required an investment of about $850,000 to $1 million. This equipment was installed in the third week of May and is expected to be operational by July. We anticipate annual savings of over $400,000 to $500,000 from this initiative. This reduction in production costs may also help us attract additional customers in the global market. Another productivity enhancement we are implementing is in the first aid assembly business, where we will be using a machine that can automatically package first aid components into kits. To our knowledge, this is unique in the industry and could potentially be transformative if it performs as expected. We expect to receive this machine in November, with an estimated cost around $700,000 and equivalent annual savings. Additionally, we are expanding production at our Med-Nap facility, which involves an investment of about $850,000 to handle packets of semi-solid solutions. This expansion not only brings savings but also enhances our operational capabilities. In our Spill Magic operations, we are currently benefiting from another productivity improvement that is saving us over $800,000 annually through automated packaging at our plant in Smyrna, Tennessee. There are also ongoing productivity improvements in our warehouse, including automated picking equipment, which we expect to implement by the end of the year, although I can’t recall the specific details at the moment. Regarding our Canadian market, our acquisition of Hawktree Solutions has proven successful. Previously a $50 million business, it entered receivership due to overexpansion in personal protective equipment and subsequent inventory write-downs. We purchased it for $1 million, along with $1.3 million in inventory and the license for the Canadian Red Cross, which is utilized in training and rescue operations. We have integrated it into our Laval facility, enhanced sales efforts, and engaged with their customer base. It is now a fully operational part of our first aid business in Canada, where we doubled our space in the first quarter and are expecting significant growth.
Great. Thank you very much for your answers.
Thank you, Jim.
Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Walter Johnsen for any closing remarks.
I'd like to thank you for joining us today. We're optimistic about the coming quarters, and I look forward to presenting the results of that in the next quarter earnings release in July. Thank you for joining us. Goodbye.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.