Earnings Call
Acme United Corp (ACU)
Earnings Call Transcript - ACU Q1 2023
Operator, Operator
Good day, and welcome to the Acme United Corporation First Quarter 2023 Earnings Call. All participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. This conference is being recorded. I would now like to turn the call over to Mr. Walter Johnsen, Chairman and CEO. Please go ahead, sir.
Walter Johnsen, Chairman and CEO
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 the safe harbor statement. Paul?
Paul Driscoll, CFO
Forward-looking statements in this conference call, including 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, 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 as described in our periodic filings with the Securities and Exchange Commission and our current earnings release.
Walter Johnsen, Chairman and CEO
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 income was $990,000 versus $830,000 in 2022, an increase of 19%. Earnings per share were $0.28 versus $0.22, or a 27% increase. The first quarter results mark an important improvement in Acme United's performance. Net sales increased despite ongoing reductions in inventory by our customers. Our gross margins benefited from productivity improvements. The expense reductions in SG&A that we began in 2022 are becoming evident. With sales up, gross margins up and SG&A down, our operating income increased by 60% in the first quarter. We believe that our customers are making progress with their inventory reduction programs. Some are now rightsized, others are understocked, 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 reduced our stock levels by approximately $5 million from December 31, 2022, to March 31, 2023, and we anticipate further reductions during 2023. We've been careful not to reduce too quickly to be in a position 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, an air-conditioned environment, and new leadership. We believe we will continue to see improvements due to improved workforce stability, experience, and automation. The cost of shipping containers from China spiked last year. In the first quarter of 2022, the ports of Shenzhen and Shanghai closed due to COVID; the war in Ukraine began, and the ports of Los Angeles, Long Beach, and Rotterdam were overwhelmed and clogged. We incurred over $4 million in abnormal expenses in 2022 and $500,000 in the first quarter of 2023. These expenses are largely behind us. At the end of March 2023, we had approximately $41 million in variable debt at 7% interest. We also had mortgages of approximately $11 million on our Rocky Mountain, North Carolina, and Vancouver, Washington properties at fixed rates of 3.8%. We are addressing the impact of rising interest rates by lowering debt through inventory reduction efforts, scaling back capital spending, and earnings. We are 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.
Paul Driscoll, CFO
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 of 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. The gross margin was 35.5% in the first quarter of 2023 versus 34.5% in the first quarter of 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022. SG&A expenses for the first quarter of 2023 were $14.1 million, or 30.7% 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 by 60% 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 $900,000 compared to $300,000 in the first quarter of 2022. The increase was almost entirely due to 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 was $990,000, or $0.28 per diluted share, compared to net income of $830,000, or $0.22 per diluted share for the same period of 2022, an increase of 19% in net income and 27% in earnings per share. The Company's bank debt less cash on March 31, 2023, was $48 million compared to $46 million on March 31, 2022. During 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 by $6.5 million from December 31, 2022.
Walter Johnsen, Chairman and CEO
Thank you, Paul. I will now open the call to questions.
Operator, Operator
Our first question comes from Jim Marrone with Singular Research. Please proceed with your question.
Jim Marrone, Analyst
Very nice quarter. I have a couple of questions. I suppose the first one that I'd like to ask is 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. But I'm just curious about your thoughts with regards to back-to-office because it seems like that space is under pressure. A lot of the commercial REITs are actually finding themselves in trouble, and I think it's just a result of the back-to-office. So, if you could just perhaps provide a little bit of color on that, and then I'll ask my second question after that.
Walter Johnsen, Chairman and CEO
Sure. Well, the office channel in the first quarter was reasonably good for us. 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 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 kids is more or less 3.8 million children in North America a year. The actual going back to the office, where maybe it’s two days a week and working at home the rest, is still requiring supplies, and it may be purchased at different places. We may get more Amazon sales because individuals are buying. But for us, at least, the office channel has been reasonably good. Where we're seeing some softness is some retailers would have just overstocked a year ago, and they haven't quite worked through all their inventory to normal levels, and I see that coming to an end sometime fairly shortly.
Jim Marrone, Analyst
Great. 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. Are we looking at it in terms of 2023 or beyond? And what type of acquisition are you looking to make? Is it something that just to expand product lines? Or is it a geographical footprint? And if it is a product line, is it going to be within the first aid kit? Or will it be cutting tools and scissors or something completely different? If you can just give a little bit of color to that, that would be great.
Walter Johnsen, Chairman and CEO
Certainly. Generally, acquiring competitors within the same industry is an effective strategy for increasing market share and possibly enhancing production capabilities. In our first aid segment, which now constitutes over half of our business, we are considering vertically integrating first aid kits, similar to our Med-Nap acquisition where we acquired a company that manufactures alcohol wipes and prep pads for kits. Additionally, we previously purchased Safety Made, which specialized in personalizing first aid and medical items, connecting closely to our product expertise. Typically, you can expect to see these types of acquisitions. Regarding geographic acquisitions, we might consider buying a company in Canada, where we already have a presence, though that wouldn’t significantly transform our business. We have a steady stream of potential acquisition opportunities. As we move into the latter half of the year, we are focusing on integrating our previous acquisitions and assessing areas where they have outgrown their facilities. Once we conclude these efforts, we will be prepared to consider another acquisition, which is always an opportunistic endeavor.
Jim Marrone, Analyst
Great. And is there a particular target price you are looking at or a range? Are you looking at something under 10x EV to EBITDA or 10% to 15% or 15% to 20%? Is there any particular number that you look at or a range in order to find the...
Walter Johnsen, Chairman and CEO
No, we don't really approach it in that manner. Our focus is on how we are adding value to our shareholders and, in some instances, the synergies that allow us to generate value quickly. In some cases, those are quite beneficial. However, we typically pay market prices. Whether in the medical sector, first aid, or office channel, each area has its different multiples, but we aim to remain very competitive.
Operator, Operator
Our next question comes from Richard Dearnley with Longport Partners. Please go ahead with your question.
Richard Dearnley, Analyst
What was the mix of first aid and Westcott, Clauss, et cetera?
Paul Driscoll, CFO
59% was first aid in the first quarter.
Richard Dearnley, Analyst
Okay. And do you have what that was last year?
Paul Driscoll, CFO
I think it was 55%.
Richard Dearnley, Analyst
That sounds right. Could you provide some insight on the discussion about Westcott and the inventory for back-to-school and back-to-office? What is the current situation regarding over-inventory in first aid?
Walter Johnsen, Chairman and CEO
There have also been some customers who purchased more inventory than they needed. For instance, a major online retailer bought a substantial amount of first aid kits a year ago, which has taken some time to sell through. They usually exhibit similar purchasing behavior. However, with first aid kits, there are expiration dates to consider. If they overstock, there's a risk associated with those products that they probably prefer to avoid. As a result, they typically maintain lower inventory levels compared to Westcott, whose product family does not experience much obsolescence.
Richard Dearnley, Analyst
No expiration, right?
Walter Johnsen, Chairman and CEO
Right.
Richard Dearnley, Analyst
It seems that medical usage is strong, as Hospital Corp reported good sales and usage, making that channel look promising.
Walter Johnsen, Chairman and CEO
I think it is.
Operator, Operator
Our next question comes from the line of Michael Wasserman with Moors & Cabot. Please proceed with your question.
Michael Wasserman, Analyst
Walter, how would the Company react to interest rates heading north rather than south from here?
Walter Johnsen, Chairman and CEO
Well, Mike, we've certainly seen in the past year, as Paul pointed out, the interest rates that we paid went from about 2.5% to 6.5%, and you pay more interest. And it may very well go up higher, and we're working as quickly as we can to drive debt down. And I mean you could double the debt, and we're still profitable, double the interest rate.
Michael Wasserman, Analyst
Okay. So you're not overly concerned about possible additional...
Walter Johnsen, Chairman and CEO
I'm concerned because I think we're seeing stresses in the financial system 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 for us, the level of debt and the kind of margin improvement that we've had have more than offset each other right now.
Operator, Operator
There are no further questions in the queue. I'd like to hand the call back over to Mr. Johnsen for closing remarks.
Walter Johnsen, Chairman and CEO
With no further questions, this call is complete. We look forward to speaking with you after the second quarter and thank you very much for joining us. Goodbye.
Operator, Operator
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.