Earnings Call Transcript - ACU Q2 2024

Operator, Operator

Good day, and welcome to the Acme United Corporation's Q2 2024 Earnings. At this time, I would like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.

Walter Johnsen, Chairman and CEO

Good morning. Welcome to the Second 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 our Safe Harbor statement. Paul?

Paul Driscoll, CFO

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, we may experience these disruptions in the future. We are 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.

Walter Johnsen, Chairman and CEO

Thank you, Paul. Acme United had good performance in the second quarter of 2024. Our sales increased 4% to $55.4 million, and net income increased 29% to $4.5 million. Our earnings per share were $1.09 compared to $0.96 in the second quarter of 2023, an increase of 14%. The company's net sales increased 8% in the second quarter without the impact of the hunting and fishing product lines. As you may remember, this business had about $12 million in revenues in 2022 and was sold in November 2023 for $19.8 million. We used the proceeds to pay down debt and to position the company for growth and acquisitions in our core businesses. Our organic growth of 8% in the second quarter of 2024 was due to market share gains and successful new product introductions. In the first aid products segment, we shipped new kits to a large drugstore chain in the United States, broadened our product offerings at a large industrial distributor, and expanded the customer base for our Med-Nap alcohol wipes and lens cleaners. Sales of the Westcott products increased due to shipments of new craft cutting tools to a large mass-market retailer, market share gains in the craft channel, and good back-to-school sales. Our DMT product line continued to benefit from a large rollout of kitchen knife sharpeners to a major mass-market retailer in the United States. Our First Aid Central business in Canada has continued to grow through its web activities, cross-selling of multinational distributors and retailers from the US, and successful product placement of our Westcott customers in the school and office products. The Hawktree acquisition that we completed in September 2023 has helped expand the first aid product line in Canada to address injuries from fires, floods, and earthquakes, and its performance is exceeding our expectations. This quarter, we moved into our new physical footprint in Canada, which is a modern 54,000 square foot facility near Montreal. In late May 2024, we acquired Elite First Aid for $6.1 million. Elite produces first responder kits, which contain items to treat serious bleeding, airway obstructions, and trauma. The product line will be introduced across our entire first aid customer base and represents a further step in our capabilities to save lives. We have continued to invest in new equipment to improve productivity and our operations. We've installed new equipment to automate filling of some unitized kits for first aid and are now using warehouse management software to reduce the cost to pick and ship products. We plan to install robotics to fill boxes of lens wipes and prep pads at Med-Nap in the third quarter. We are currently installing new high-density racking in our 345,000 square foot facility in Rocky Mountains, North Carolina. When completed, it is expected to increase capacity by about 25% and improve the efficiency of picking orders. This is the first step in further pick by wire efficiencies. As we look to the remainder of 2024, we see continued organic growth. We are actively evaluating acquisitions and are optimistic about the year.

Paul Driscoll, CFO

Acme's net sales for the second quarter were $55.4 million compared to $53.3 million in 2023, an increase of 4%. Excluding the impact of the Camillus and Cuda hunting and fishing product lines sold on November 1, 2023, sales for the second quarter of 2024 increased 8%. Sales for the six months ended June 30, 2024 were $100.4 million compared to $99.2 million in the same period in 2023, an increase of 1%. Excluding the impact of Camillus and Cuda, sales increased 5%. Net sales excluding Camillus and Cuda in the US segment increased 10% in the second quarter due to market share gains with First Aid, Westcott craft products, and DMT sharpeners. Excluding Camillus and Cuda, sales increased 6% for the six months ended June 30. Net sales, excluding Camillus and Cuda in Europe increased 9% in local currency for the quarter and 8% for the six months ended June 30. The sales increase for both periods was mainly due to market share gains in the office channel. Net sales excluding Camillus and Cuda in local currency for Canada decreased 4% in the quarter and 2% for the year-to-date, mainly due to a decline in sales of school and office products. The gross margin was 40.8% in the second quarter of 2024 compared to 37.5% in 2023. The gross margin was 39.9% for the first six months of 2024 compared to 36.6% in 2023. The higher gross margin for both periods was mainly due to productivity improvements in our manufacturing and distribution facilities. SG&A expenses for the second quarter of 2024 were $16.3 million or 29% of sales compared with $14.8 million or 28% of sales for the same period of 2023. SG&A expenses for the first six months of 2024 were $31 million or 31% of sales compared with $29 million or 29% of sales in 2023. Interest expense for the second quarter of 2024 was $540,000 compared to $830,000 in the second quarter of 2023. The decrease was due to lower average debt of approximately $18 million. Net income for the second quarter of 2024 was $4.5 million or $1.09 per diluted share compared to a net income of $3.4 million or $0.96 per diluted share for the same period of 2023, an increase of 29% in net income and 14% in earnings per share. Net income for the first six months ended June 30, 2024 was $6.1 million or $1.47 per diluted share compared to $4.4 million or $1.25 per diluted share in the comparable period last year, increases of 37% and 18%. The company's bank debt less cash on June 30, 2024 was $33 million compared to $48 million on June 30, 2023. During the 12 month period, we purchased the assets of Elite First Aid for $6.1 million, paid $2.1 million in dividends, and generated $8.5 million in free cash flow. Additionally, the $30 million of net proceeds from the sale of the Camillus and Cuda product lines was used to reduce debt.

Walter Johnsen, Chairman and CEO

Thank you, Paul. I will now open the call to questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Tim Call with Capital Management Corporation. Please go ahead with your question.

Tim Call, Analyst

Well, congratulations on another good quarter. All the hard work is paying off.

Walter Johnsen, Chairman and CEO

Thank you, Tim.

Tim Call, Analyst

SG&A is growing a little bit faster than sales, it's up around 9% or 10%. Do you think in future years, SG&A will grow slower than sales?

Walter Johnsen, Chairman and CEO

Well, I don't have a good understanding of why that increased to 10%. It may have been because we accrued some bonuses because the team is performing well. But I think in general, the SG&A should be declining with sales. And I think for the year you'll probably see that.

Paul Driscoll, CFO

Yes, you'll probably see it a little bit below 31%. Some of it is just timing differences and cost of living, and some investments in IT. But we are not going to grow that much in SG&A relative to sales.

Tim Call, Analyst

Do you think you'll facilitate some employee stock option cash outs in the years ahead and lower the fully diluted share count?

Walter Johnsen, Chairman and CEO

Yes, Tim. That's our intent. And I think that because the company has a much stronger balance sheet that it's had essentially from the sale of Cuda and Camillus, and of course the cash flow from the business. We will be buying some of those options when it comes time for them to be cashed out.

Tim Call, Analyst

You have a great history of accretive acquisitions, nice tuck-in acquisitions. And the initial cash out for at least First Aid of $6.1 million for $4.2 million of annual sales trailing looks pretty nice. Do you think there will be a lot of cross-selling opportunity where you'll pick up new clients from them and you'll be able to sell their goods to your existing products?

Walter Johnsen, Chairman and CEO

Tim. I think that is a very perceptive question. The Elite First Aid trauma kits are high-performance kits. They are the ones that Medics would be taking to a serious accident, and they deal with life-saving measures. So it was a hole in our product line. And when I said in the conference call that we intend to expand it through our distribution base, we hope that happens. And the reason for that is because those products save lives. It's not for cuts and bruises and scrapes. It's for trauma, it's for serious bleeding, it's for airway obstructions. And Elite First Aid has a very well-established product family and a great reputation. So when we acquired it, and it's very similar to many of the acquisitions we do, we try to leverage our distribution channels. And in this case, we have a hole in the product line and it really does something. So I'm excited about it. Regarding other similar kinds of deals, I can just tell you that we're constantly looking. And the strategy is pretty simple: buy competitors or buy companies that are half-step away, and buy companies to vertically integrate making the components like Med-Nap and Spill Magic for use in the components and within our customer base. And there are plenty of opportunities for those. And we are looking at them.

Tim Call, Analyst

We have organic sales growth, and growth from acquisitions, and you have profit margin expansion. And it sounds like you've set the company up for tremendous long-term growth potential. Congratulations again.

Walter Johnsen, Chairman and CEO

Well, yes. To be honest there are always things on the horizon. There's the economy, container costs go up and down, and sometimes you have some expenses that you don't expect. But the organic growth that we demonstrated this quarter should start to become larger and more apparent in the coming quarters when we don't have the comparison with Cuda and Camillus. And then, of course, you are getting the growth from the acquisitions that take time to get the products placed. But when they do, they should be meaningful.

Tim Call, Analyst

It looks like you are in a strong position. I'm looking forward to your future quarters. Congratulations.

Walter Johnsen, Chairman and CEO

Thank you, Tim.

Operator, Operator

Thank you. Our next question comes from the line of Jeffrey Matthews with Ram Partners. Please proceed with your question.

Jeffrey Matthews, Analyst

Thanks. I have a few. Number one from Paul's disclaimer upfront. He mentioned continued high inflation and supply chain disruptions. Were those just pro forma these could happen? Or are you still seeing high inflation? And do you still see supply chain disruptions?

Walter Johnsen, Chairman and CEO

Well, with inflation, there are clearly salary increases for our team and that's continuing. With container costs, they have increased since the beginning of the year, and it now appears that they are starting to decrease again, although you can't forecast container prices. But they've gone up a little bit. In general neither of them are serious issues, but they're in the disclaimer because it's happened, and we wanted to be complete.

Jeffrey Matthews, Analyst

Sure. How did the Elite acquisition come about? I know the Canadian one was in real trouble, so how did this one come about?

Walter Johnsen, Chairman and CEO

So we regularly contact companies that are interesting to us. And we've been doing this for 15 years. So there's a pretty large database of companies that we've contacted. And as you may know, most of our transactions are self-generated without investment bankers because we are constantly in the market. And in the case of Elite, the CEO reminded me that the first time we talked was in 2019. So I know exactly what happened. They had a price in mind and they weren't big enough for us to pay the price, and then they grew. And in our regular contacts and communications, we talked to them again at the end of last year, and it just made a lot of sense for everybody, so we did it.

Jeffrey Matthews, Analyst

And do they stay on? Or is this something you have to re-engineer yourself?

Walter Johnsen, Chairman and CEO

Yes. The founder is staying on, and his son is going to have a very good role and an important role in our company. And both of them are very, very terrific people who really know the product lines and the supply base. So it's fun working with them.

Jeffrey Matthews, Analyst

That's great. Great. And then on the flip side, the Canadian acquisition, which was pretty messy when you bought it, it sounds like that's getting up to speed. What have been the main things you've had to do to get it there?

Walter Johnsen, Chairman and CEO

We purchased Hawktree Solutions in September 2023. It was an administration purchase where we acquired $1.3 million of inventory for $1 million, effectively at a discount. This acquisition came with the license for the Canadian Red Cross, a customer base, and all associated inventory and intellectual property. In such a scenario, while the downside is limited, there is considerable work to achieve the upside. First, we need to transfer the product from its current warehouse to ours, align our product numbers accurately, and reassure customers, especially since service was poor during the bankruptcy. We pride ourselves on excellent customer service. Additionally, we must engage with customers to address issues stemming from delivery challenges and incomplete product families due to the bankruptcy process, where inventory was not all intact. A significant amount of rework is necessary to rectify this situation. Nonetheless, acquiring the company and its potential at a favorable price has positioned us well. Currently, we have the product family established, a strong relationship with the Canadian Red Cross, and a customer base that overlaps with our Canadian business while also introducing new customers. We are actively shipping products and building upon these relationships with offerings from the First Aid Central and Acme United product lines. Reflecting on the past six months post-acquisition, it has been a lot of work, but we are now gaining momentum, which is exciting.

Jeffrey Matthews, Analyst

Great. And I have three more. The sale of Cuda and Camillus, now that that's in the rearview mirror, has selling those product lines had any other impact on operating the business as far as things that are less distracting to your management time?

Walter Johnsen, Chairman and CEO

The Cuda and Camillus business was a really fun business. And when you talk about distracting management time, I like to use the products, and I like to be out there with the people that use them. And we spent probably a disproportionate amount of time working on the product family, but it was fun. And I would say that we're now more focused, for sure, on the core businesses, and we put Cuda and Camillus into hands that we are able to leverage it. And we weren't able to do that. We had a platform of $12 million, and we were pretty much flat because we didn't have the distribution base in hunting and fishing the way GSM does. And I'm really proud because they have taken it, and it's becoming a real force in the hunting and fishing area. So I think it was an excellent acquisition for them. And yes, it did focus us, although I miss the product family.

Jeffrey Matthews, Analyst

I remember testing the product on the dock. Two more. Paul, I think said something used the number of 39 regarding SG&A. And I wasn't sure what that meant. Is that $39 million a year or 39% of something?

Walter Johnsen, Chairman and CEO

I didn't hear that. Paul, what was the number that you said?

Paul Driscoll, CFO

Yes, I definitely didn't say 39. I said $31 million or 31% or $29 million and 29%.

Jeffrey Matthews, Analyst

29, okay.

Paul Driscoll, CFO

Definitely not 39.

Jeffrey Matthews, Analyst

Okay. And is that an annualized kind of idea or not?

Paul Driscoll, CFO

No, that's a year-to-date. That's a six-month number.

Jeffrey Matthews, Analyst

Got it. Okay. So what I'm trying to figure out here is gross margin of 40% in the quarter. Walter, I always remember, back in the day, when you were shifting production to China and cost of manufacturing was going down. I recall gross margins getting up to 45%. Is that a target? Or is 40% kind of the plateau going out, what do you think for gross margin?

Walter Johnsen, Chairman and CEO

Well, I wouldn't model us increasing the gross margin. And let's be conservative on that. But as we continue to sell more first aid, the products tend to have higher gross margins, and the refills have substantially higher margins. And that's the fastest-growing part of the business. So there will be a natural tendency to increase the gross margin over time, but I wouldn't model anywhere near 45%.

Jeffrey Matthews, Analyst

Got it. Thanks very much. I really appreciate it. And congratulations and best of luck going forward.

Walter Johnsen, Chairman and CEO

Thank you, Jeff.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Johnsen for closing comments.

Walter Johnsen, Chairman and CEO

Thank you very much for joining us. If there are no further questions, this call is complete. I look forward to updating you again in the third quarter. Have a good day.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.