Earnings Call Transcript - ACU Q2 2025

Operator, Operator

Good day, and welcome to the Acme United Corporation Second Quarter 2025 Financial Results Conference Call. At this time, I would like to turn the call over to Walter Johnson, Chairman and CEO. Please go ahead, sir.

Walter Johnsen, Chairman and CEO

Good morning. Welcome to the Second Quarter 2025 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?

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, high interest rates and the imposition of new tariffs or changes in existing tariff rates. In addition, we have experienced supply chain disruptions and 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 an excellent second quarter of 2025, setting a quarterly record for earnings. This, of course, excludes the one-time gains from the forgiveness of the PPP loan in 2021 and the sale of the Cuda and Camillus businesses in 2023. Our net sales in the quarter were $54 million, compared to $55.4 million in 2024. Net income in the quarter was $4.8 million compared to $4.5 million and earnings per share were $1.16 versus $1.09. The market environment was particularly challenging due to tariffs. As you may remember, our last 10 acquisitions have been manufacturers in the United States and Canada. So our reliance on imported items is much less than some of our competitors. When tariffs on goods imported from China were raised to 145%, our customers who planned to directly import our products canceled their orders that were scheduled to ship. They appear to have determined that using existing stocks, substituting items or even having empty shelves were more attractive than losing money on the products. They canceled and delayed orders, which reduced our sales. Acme had built extra inventory during late 2024 and early 2025, we were prepared for the tariffs, but we did not anticipate tariffs as high as 145%. We too stopped importing items to the United States but continued producing and storing the finished goods at our factories in China. We supplied our regular Westcott customers from domestic inventory and tried to help when they ran out of private label products. However, we did not accept large unplanned orders, which would have reduced our ability to meet regular customer requirements. We worked with our suppliers to reduce costs, took advantage of operating efficiencies and increased our selling prices moderately. Our products that we import are currently priced appropriately for the present 30% tariff on Chinese goods. We're also shifting production from China to other locations, including Malaysia, Thailand, Vietnam, Egypt and our own factories. We intend to continue to supply our customers with the best total costs, including tariffs and to maintain excellent service. Our factories in the United States have benefited from the increased tariffs. Our Med-Nap facility in Brookfield, Florida is producing alcohol and BZK wipes, castile soap and other first aid items at record levels. Our Vancouver, Washington and Rocky Mount, North Carolina plants that produce first aid kits are running at full speed. Last week, we purchased a new facility for Spill Magic in Mount Pleasant, Tennessee for approximately $6 million. The plant is 77,000 square feet on 12 acres and has room for expansion. We start production there in the first quarter of 2026. While the second quarter was very challenging, I would like to thank our team for managing the tariff disruptions, working with our customers to meet their supply requirements, and executing well. They turned a challenge into an opportunity. As we look at the rest of the year, we anticipate growth and continued earnings strength. We believe there will be opportunity to gain share in the Westcott cutting tools and our first aid business, particularly in the retail and industrial markets due to our low total costs and supply chain diversification.

Paul Driscoll, CFO

Acme's net sales for the second quarter were $54 million compared to $55.4 million in 2024, a decrease of 3%. Sales for the 6 months ended June 30, 2025, were $100 million compared to $100.4 million in the same period in 2024. Net sales in the U.S. segment decreased 6% in the second quarter due to the cancellation of some back-to-school customer orders as a result of exceptionally high tariffs in April and May. Additionally, there was a large initial order of new kitchen sharpeners to a major mass market retailer that took place in the second quarter of 2024. Sales decreased 2% for the 6 months ended June 30. Net sales in Europe decreased 6% in local currency for the quarter and 6% for the 6 months ending June 30. The sales decrease for both periods was mainly due to the timing of shipments; we expect growth in the third quarter. Net sales in local currency for Canada increased 28% in the quarter and 21% for the year-to-date mainly due to higher sales of first aid products. The gross margin was 41% in the second quarter of 2025 and 2024. Gross margin was 40% for the first 6 months of 2025 and 2024. SG&A expenses for the second quarter of 2025 were $15.8 million or 29% of sales compared with $16.3 million or 29% of sales for the same period of 2024. The lower SG&A in the quarter was due to cost savings and reduced discretionary spending. SG&A expenses for the first 6 months of 2025 were $31.3 million or 31% of sales compared with $31.1 million or 31% of sales in 2024. Net income for the second quarter of 2025 was $4.8 million or $1.16 per diluted share compared to a net income of $4.5 million or $1.09 per diluted share for the same period of 2024, an increase of 7% of net income and 6% in earnings per share. Net income for the first 6 months ended June 30, 2025, was $6.4 million or $1.57 per diluted share compared to $6.1 million or $1.47 per diluted share in the comparable period last year, increases of 5% and 7%. The company's bank debt less cash on June 30, 2025, was $23 million compared to $33 million on June 30, 2024. During the 12-month period, we paid $2.2 million in dividends and generated approximately $12 million in free cash flow.

Walter Johnsen, Chairman and CEO

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

Jim Marrone, Analyst

Job well done on the supply management and working the inventory in your supply chain. And I would imagine that resulted in a small decrease in the top line of 3% and an increase in your net income as a result. But my question then is if the results were tempered as a result of the inventory management and your other cost strategies, what can you expect going forward for the third and fourth quarter? Now you said that you anticipate growth, but could you provide any quantitative guidance? Do you expect a revenue decrease as well as earnings decrease for the third quarter and fourth quarter? I'll anticipate your answer. And then I have a follow-up question after that.

Walter Johnsen, Chairman and CEO

Well, Jim, that's a very good question. And there were a number of programs that were delayed in the second quarter because the customers, frankly, did not want to import them at a 145% tariff, and then lose money. So some of them will probably come into the third and fourth quarters as the inventory that's currently on hand is used up. But it's a very tricky thing because during that period, many retailers and all of the buyers were focused on one thing: get me product, get it cheap, what price and where, the last thing they were thinking about was what will they sell in October, November, December. It was a scramble for here and now. And you may remember that many customers were shipping to bonded warehouses, shipping to Canada, going to places that you'd never dream of, in order to hold stock and we did some of that. But it was, in many ways, chaotic for our customers, particularly because they have planned programs that are slotted. And some of them, when they canceled, don't get repeated. We also have a concern about demand not for our products. I mean, I don't think our prices were particularly aggressively increased because we had other ways to offset price. But in general, there's something of a price increase across the board for many items, and it may reduce some customer spending. We don't know that. But what we do know is that we have adequate stock at good values today. We're working with our customers on recovering programs that were delayed. And we're looking for growth in the third and fourth quarters, not declines, growth in sales. Again, we can't forecast what actually happens with demand. But so far, we haven't seen a big falloff. I hope that helped a little bit.

Jim Marrone, Analyst

Yes. No, that provides some visibility. And are you hearing anything from your competitors, your peers? Like are they faring better? Are they faring worse? And maybe if you can also talk about other strategies, is potentially cutting the dividend? Is that a possibility? I look forward to hearing your answer to that.

Walter Johnsen, Chairman and CEO

Well, we just raised our dividend, and we just generated $12 million of free cash flow in the last 12 months which was a record. So, I mean the dividend, we're very comfortable with. And frankly, our debt is at $23 million. So it's down $11 million in the past 6 months. So no, the dividend we're fully expected to continue and the cash flow and the company's performance support that. Relative to other competitors, one competitor had a disastrous quarter. And I don't know what they were doing or why they were doing it, but it was a complete disaster. We'll be able to see more in the coming weeks. But I can tell you that we did a good job. And we anticipated the tariffs that we managed our customers as well as we thought we could do. Others apparently did not.

Operator, Operator

Our next question is from Tim Call with Capital Management Corporation.

Timothy Call, Analyst

Congratulations on a strong quarter. I know the free cash flow pays down debt and lowers interest expense over time, but if the Federal Reserve lowers interest rates later this year, does that also help lower your interest expense?

Walter Johnsen, Chairman and CEO

Definitely. Right now, I estimate that we have about $10.4 million in fixed mortgage debt, which is associated with our property in Vancouver, Washington, and our property in Rocky Mount, North Carolina. Paul, is that fixed at 3.4%?

Paul Driscoll, CFO

It's 3.8%.

Walter Johnsen, Chairman and CEO

3.8%. So the $10.3 million-ish is fixed. The remaining fees float. And so that would be a benefit to us if rates were to drop.

Timothy Call, Analyst

Great. And then with the capacity constraints you've had in Spill Magic from growing it. It's good to hear you found a way to expand that capacity a great deal. In the near future, sometimes you have similar issues with certain health care lines. Are you experiencing that anywhere in health care? And are you increasing productivity or expanding capacity in any of those areas?

Walter Johnsen, Chairman and CEO

In our Med-Nap facility in Florida, we have seen a significant increase in revenues, although we are currently facing challenges. We are operating two shifts and focusing on developing new products and enhancing productivity. To address immediate needs, we are acquiring portable trailers to relocate offices from production areas, and we have expanded our microbial lab by adding another trailer. Our long-term goal is to secure a more spacious permanent location for the Med-Nap business in Florida. Med-Nap is essential for the U.S. medical sector, supplying alcohol wipes, BZK wipes, and alcohol prep pads, and we believe there is considerable growth potential in the hospital market. We are investing in major new equipment, including automation, to reduce costs and improve product consistency. Additionally, we are making significant investments in documentation and training at Med-Nap as we prepare for future opportunities in the hospital market. Regarding Spill Magic, acquiring a permanent facility will provide stability. This move differentiates us from previous manufacturing situations where moving equipment became necessary with unpredictable price increases. By purchasing the facility in Mount Pleasant, where I will be visiting tomorrow, we are establishing the foundation for substantial improvements in material flow and packaging automation. We believe that owning our facility will enhance productivity through permanent installations. In other locations, like our Vancouver, Washington facility, we aim to expand, but high real estate costs have hindered our progress. We have been looking for expansion opportunities for several years without finding a compelling value proposition compared to other investments within the company. Our Rocky Mount, North Carolina facility increased storage capacity with new racking installed earlier this year, boosting capacity by about one-third. We have also implemented automation for packaging bulk items for our medical business, and I expect to see similar automation in Vancouver, Washington, and potentially at our facility in Canada at First Aid Central. Over the past year, we doubled the space at First Aid Central, which is growing and utilizing the space effectively. We are managing the constraints on space quite well. Our capital spending program remains promising, as the savings we generate create more cash for further investments in stronger automation, which excites me.

Timothy Call, Analyst

Congratulations again.

Operator, Operator

Our next question is from Georgy Vashchenko with Freedom Broker.

Georgy Vashchenko, Analyst

Could you please highlight which segment was mostly helped by the tariff increase, first aid or cutting and sharpening?

Walter Johnsen, Chairman and CEO

Well, the first aid business tends to be more regularly ordered by industrial accounts and retail accounts. And the Westcott cutting tool area has some seasons, for example, back-to-school. So when orders were canceled and programs were canceled in April and May, that directly impacted Westcott because those products that we would have shipped for sale for back-to-school were no longer going to be available, just canceled. It was the Westcott side that was hit more significantly. Also on price increases, the first aid area, because we've got more of a production base in the United States and in Canada, we're able to be a lot more moderate in our price increases. And although we've got productivity improvements and we did a lot of good things on Westcott, the volumes there were impacted more. And of course, the recovery will probably be stronger in Westcott because as the stocks run down with the retailers, assuming demand continues, they'll be buying.

Operator, Operator

Thank you. There are no further questions. I turn it over to Walter Johnsen.

Walter Johnsen, Chairman and CEO

Thank you very much. If there are no further questions, this call is complete. I would like to thank you for joining us, and we look forward to delivering the best results we can in the coming quarters. Goodbye.

Operator, Operator

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