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spk01: Good day, and welcome to the Acme United Corporation's third quarter 2020 earnings conference call. At this time, I would like to turn the call over to Mr. Walter Johnson. Please go ahead.
spk08: Good morning. Welcome to the third quarter 2020 earnings conference call for Acme United Corporation. I am Walter C. Johnson, Chairman and CEO. With me is Paul Dristel, our Chief Financial Officer, who will first read a safe harbor statement.
spk06: 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 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.
spk08: Thank you, Paul. Acme United had a strong third quarter of 2020. Our net sales were $43.3 million, a 17% increase over this time last year. Our net income for the quarter was $1.6 million, 49% increase. Our earnings per share were 46 cents compared to 30 cents in the third quarter last year, a 53% increase. Revenue of our first aid and safety business was strong in the third quarter of 2020, with sales of $20 million representing an increase of 15%. This growth includes not only items such as personal protection kits, that can be traced to the pandemic, but also gains in retail and mass market accounts. Sales of our Westside cutting tools were approximately even with last year due to record sales to the mass market and the e-commerce market offset by weak industrial and office revenues. We have particularly strong growth in our Westside craft products due to new placement in the mass market. Our sales of Camillus knives, EMT sharpening tools, and CUDA fishing products were excellent. In Canada, we had revenues of $2.2 million in the third quarter of 2020 in our historical business, an increase of 25% over last year at the same time. Sales increased in the quarter due to a shift of school opening from the second to third quarter, and new sales as offices began to open. In addition, our First Aid Central business had revenues in the third quarter of $1.1 million. As you may recall, the acquisition of First Aid Central in January 2020 gave us a platform in Canada to sell many of our first aid and safety products to our existing and global customers, as well as to benefit from their continued growth. Sales in Europe were $3.3 million, an increase of 35%. over the third quarter last year. Our revenues in Europe reflected the reopening of offices and schools and increased e-commerce sales. The challenging conditions we faced in the third quarter were similar to those we described in the second quarter 2020 earnings fall. Many of our office customers were closed. Restaurants, hotels, and food service accounts were impacted by closures or limited access. Our sales to these types of customers were severely impacted. There was uncertainty with school openings, and our sales of back-to-school items were spread over a longer time than usual. The safety of our associates continues to be our primary concern. We wear masks at our manufacturing distribution sites. We close our facilities if someone is ill or exposed to COVID-19, followed by contact tracing and testing. We restart when safe and move forward. We continue to incur many expenses as a result of COVID-19, including payment of extra compensation to employees at our production and distribution facilities. We have costs for additional cleaning and maintenance, and we have downtime. The additional expenses of operating in the current environment reflect in our gross margins, which were 34.5%, compared to 35.5% in the third quarter last year. We expect to continue to operate with higher costs for at least the coming year. We're also concerned about potential customer bankruptcies due to the large scale of office and restaurant closures. This could become a serious risk if the COVID-19 epidemic continues for a long period, although we believe we have food and credit policies. We've increased inventory by $9 million to buffer potential supply disruptions during the next six months and to support growth. There are increasing COVID-19 infections in countries where we source or distribute our products, including China, France, Germany, Canada, and the United States. We are hopeful that they will be controlled. If not, we are prepared with inventory on hand to address problems of delivery. On a more optimistic note, we expect to sell the extra inventory during 2021 to normal sales if there are not major supply disruptions. We are aggressively seeking new business, managing new and continuing problems related to the pandemic, and executing our growth plan. As always, we are looking for opportunistic acquisitions. I'll now turn the call to Paul.
spk06: Acme's net sales for the third quarter were $43.4 million compared to $37 million in 2019, an increase of 17%. Sales for the nine-month ended September 30, 2020, were $123.1 million compared to $108.6 million in the same period in 2019, an increase of 13%. Net sales in the U.S. segment increased 12% in the quarter and 11% for the nine months ended September 30th. The sales increase mainly came from first aid and safety products, primarily in market share gains and to a lesser extent, gains from COVID-19 related surge demand. Net sales for Europe increased 32% in local currency for the quarter and 17% for the nine months ended September 30th. The sales increase for both periods was primarily due to increased sales of Westcott and Camilla's product in the e-commerce channel, as well as higher sales of DMT sharpening products. Net sales and local currency for Canada, excluding First Aid Central, increased 25% in the quarter due to easing of COVID-19 lockdown restrictions and a shift in back-to-school from the second quarter to the third quarter. However, year-to-date sales were impacted by the earlier office and store closings. Year-to-date sales declined 10% in local currency. Including first aid central, sales increased 53% year-to-date. The gross margin was 34.5% in the quarter of 2020 compared to 35.5% in 2019. The year-to-date gross margin was 36.2% for 2020 and 36.6% for 2019. The major contributor to the declining gross margin as a percentage of sales was COVID-related expenses. SG&A expenses for the third quarter of 2020 were $12.8 million or 30% of sales compared with $11.4 million or 31% of sales for the same period of 2019. SG&A expenses for the first nine months of 2020 were $36 million or 29% of sales compared with $32.7 million of 30% of sales in 2019. Net income for the third quarter of 2020 was $1.6 million, or 46 cents per diluted share, compared to a net income of $1.1 million, or 30 cents per diluted share for the same period of 2019, an increase of 49% in net income and 53% in earnings per share. Net income for the First nine months ended September 30th, 2020 with $6.1 million or $1.75 per diluted share compared to $4.5 million or $1.32 per diluted share in the comparable period last year. An increase of 33% for both net income and earnings per share. The company debt less cash on September 30th, 2020 was $34.4 million compared to $35.9 million on September 30, 2019. During the 12-month period, we paid $2.1 million for the first aid central acquisition, spent $1.6 million on dividends, and generated $6.5 million in free cash flow. Thank you, Paul. I will now open the call to questions.
spk01: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. We will take our first question from Jim Maroney with Singular Research. Please go ahead.
spk02: Yes, good morning, gentlemen. So I have two questions, both related to revenue, one in regards to the safety and first aid, and the other one related to the cutting tools. So firstly, in relation to the safety and first aid, you had a nice revenue increase. You said it was attributable to market share. Is that as a result of the expansion in Canada? And if so, can you kind of parse out how much of that is really attributed to organic growth rather than just the expansion in Canada? And I have my second question after that answer.
spk08: Okay. Let me address that one. The expansion in Canada is separate from what we talked about in the growth of first aid. What occurred was we gained major share at a very large home improvement chain in North America, as well as a very large wholesale club in North America, and both of those were multi-millions of dollars. So that was new business. In Canada, yes, we added several million dollars from First Aid Central, the acquisition, but that was broken out separately.
spk02: Okay, excellent. Thank you. And in regards to the cutting tools and the sharpeners, so you mentioned that, yes, it was attributed mostly to office closures, but I'm trying to get a sense on, you know, how much of growth or if there was any growth in regards to people opening up home offices and was there any pent-up demand as a result of that? Do you have any sense of
spk08: We have a very good sense, and I think that was a very good question. The school business was spread over a longer period. As you may remember, schools were closed by May, and people were educating children at home then, and we saw substantial school sales in May, June, online. Then it was a little bit slow, and then it picked up a lot in August and into September and partly into October as the schools reopened and as people educated their children. Remember, there's 3.8 million kids born a year. They tend to move in lockstep each year, and they all need to be properly equipped. So in aggregate, while there was a slight decline perhaps in the overall school sales, it was pretty much consistent with prior years. Relative to office closures, well, the companies like those that are dealers and do direct deliveries to offices were very, very much impacted because the offices were closed. Those that sold at retail, some of the office superstores, also were severely impacted on their business-to-business portion because the businesses were closed. On the other hand, sales to the large chains, the mass market chains and the online accounts truly, truly compensated for that. And so as we net out the third quarter, the Westcott business was about flat. And it was flat because of the office closures. But the e-commerce, the mass market was very, very strong. The people shopped in different places. They wanted our product. And the net of it all was about flat sales to West Coast.
spk02: Right. Okay. Thank you. That gives me a better sense of the trend. Great.
spk01: Thank you. Before moving to our next caller, as a reminder, you may ask a question by pressing star 1. Our next question comes from Timothy Call with the Capital Management Corporation. Please go ahead.
spk05: Congratulations on another strong quarter.
spk08: Thank you, Tim.
spk05: With the installations of lower margin first aid hub systems, how do you see that as a proportion of sales, did that hinder overall margins? And what indications do you have that those installations will be followed with higher margin recurring replenishment sales of healthcare products?
spk08: What you're referring to is our safety hub, which allows automatic replenishments for first aid components in large corporate accounts. And as you can imagine, the gross margins on the component refills are well above our average, and they're very good. What we saw was that that business was solid. Margins were about normal and very good. We were brought down by incentive pay, to keep our factories and our distribution centers operating, as well as buying components on the open market. And these would be things that go into first aid kits, like alcohol prep pads and alcohol wipes, EZK wipes, gloves, masks, hand sanitizer. In the open market where we were buying many of these items, there was a lot of price competition. And although we passed price increase through, It also impacted gross margin because the price increases tended to lag the actual sale. Nevertheless, the safety hub business is one that we're continuing to aggressively drive, and to the customer, they're saving money over the van-based delivery systems where people drive and physically stock the locations, whereas we do the replenishment online. But those margins are actually quite good.
spk05: When you look at shipping costs, gas prices are down, but the fees for transporting goods can be up. Do you see that on your inbound or outbound? And are you able to eventually recoup those cost increases as well?
spk08: Well, again, the supply chains are a little bit impacted across the board, both on reliability as well as cost. And you're right about gas prices being down. But for example, containerships right now have increased by about 15% over the last month. And it's because demand is picking up mostly from China. So the shipments out of China are picking up, but the capacity that was laid off has followed behind it. And it's not at the same level. So the prices have gone up. relative to demand for trucks and drivers that has also had a price increase and it's again because of demand the huge shift shift into online sales has meant the demand for delivery drivers and trucks have obviously increased faster than the supply so there's again some price increases there we are passing through and have been passing through price increases to our customers. And fortunately, our market position permits us to be able to do that, and we've consistently done it to be about at the same levels we are. So we're not taking advantage of excessive price increases, but we are trying to be consistent with margins that historically we have.
spk05: And when there's finally a vaccine that gets distributed to your employees, how much do you think COVID-related expenses would decline next year?
spk08: I think that some of the expenses that we're paying, the incentive pay, is very hard to take away from employees that have now had that for six months each week. And that tends to be, for us, $2 an hour per person. And I would guess that that will probably stay in place. I would guess also that the supply chain would stabilize and be not only more reliable, but that the cost would stabilize. If the supply chain is more normalized, we'll be very quick to reduce the $9 million of inventory that we've built. And let me just diverge for a second. My fear is that in countries maybe we're not thinking about, like India, where there's a billion three people and 70 million cases and it's spreading out of control right now, they are placing big orders in China for masks, gloves, sanitizer, all the things you need, antibiotics. And it's sucking production into India, if China gets sick, which they've just had their National Day and Golden Week, and that's a week of the country gathering together in fireworks and great parties. And then there's Chinese New Year, where it's the largest migration of humankind in the world every year for three weeks. That kind of mixing could cause some serious problems. I hope it doesn't happen. But that's why with the inventory that we've built, we're going to be ready. I do see with a vaccine that costs will become more stabilized and margins will probably recover to the levels they were at and certainly will work to do that with pricing. But I also think that right now we're still facing some very serious disruptions.
spk04: Well, you're managing a quite well through that. Thank you for the hard work. Thank you, Tim.
spk01: Our next question is coming from Richard Dearnley with Longport Partners. Please go ahead.
spk03: Good morning. I'm intrigued by your comment about we're aggressively seeking new business. You all have been pretty good about marketing and gathering new business. What is... Is this the same or what changed?
spk08: Let me address it, Dick. We have not laid a single person off other than for cause since the pandemic started. In fact, we've added people. And we've told all of them, all of our associates, we need to be hustling. and we need to be focused on new business. And we're going to be open when others aren't. And we're going to be getting more content online fast. And we're going to put money into search. And we're going to go after with new products those accounts where people are shopping at. And, you know, it's really simple. You sell what people want where they shop. I just don't understand why that's so hard of a concept. And that's why when we migrated so quickly to online and mass market and places that sold food, we thrived. And there are other competitors who are wondering, why are sales down? They're cutting back advertising. They're cutting back new product development. They're firing people. And we're not.
spk03: So when I say aggressive, I mean it. Great. Good answer. Thanks. You're welcome.
spk01: Thank you. We'll move to our next caller, Kevin Didi with HCW. Please go ahead with your question.
spk07: Hi, Walter. I apologize in advance for what might seem like an ambush, but I just wanted to continue on with a discussion we had maybe 12 months ago at the last LD conference. I'm curious to see how you view the upcoming election, how you hedge yourself, and should the incumbent administration remain in place, what do you think happens with U.S.-China relations and how ACME is positioned?
spk08: Those are substantial questions, and Kevin, thank you. The coming election to me is already factored in with whatever is happening. I mean, it's Clearly, if the corporate tax rates were to increase substantially, and I don't think that's really what will ever happen, but if it did, we would tend to be, again, the way we previously had, begin to accumulate more cash in our international operations, and we would not bring that back into the U.S. and pay higher taxes. But on the other hand, there are plenty of acquisitions opportunities in places like Canada and in Germany where we would deploy that capital so I really don't see that as other than maybe in a sense of wanting to bring more money into the US that would hinder that but it wouldn't hinder the growth of the company relative to the taxes for individuals and corporate tax rates we've got a very big deficit, and we will have to all be paying more to help bring that down over time. And I would guess that that would also be reasonable. Relative to the U.S. and China relations, that's kind of more complicated. And part of it is because President Xi, who came into office in 2008, has been taking a more aggressive approach on not only expansion through the Belt and Road initiatives, which, as you know, have been high-speed trains and ports going into the neighboring countries, and some neighboring isn't so close. It might be Abuja in Africa or maybe a port in Pakistan. But what it is doing is an expansionary leadership in China. And there will be clashes. But I also think that it's in both countries' interest to be doing smart trade. And I think that will continue with whichever administration we have. Regarding our sourcing at ACME, During the past five years, we purchased a number of manufacturing companies in the United States. Those included DMT, the diamond machining company in Marlboro, Mass., our sharpener company, First Aid Only in Vancouver, Washington, Spill Magic, two plants, one in Smyrna, Tennessee, and one in Santa Ana, California. We expanded our production in Rocky Mountain, North Carolina. We bought... which was first aid in Connecticut and then merged that later. So we have been aggressively bringing production into the United States. And that trend probably will continue, but China will continue, I think, to be a very important partner going forward. And with either administration, I think the ultimate is we need each other And there is an expansionary leadership in China, and there will be questions from time to time.
spk04: Okay, well, thank you for sharing your perspective, Walter.
spk07: I really appreciate it. I think the experience you bring helps me sort of get my own perspective in line. So thank you for sharing. I really appreciate it. And again, apologies for the heavy-handed question. Congrats on the quarter.
spk08: Thank you, Kevin.
spk01: Thank you. And Mr. Johnson, there are no further questions at this time. I will turn the conference back to you for any closing remarks.
spk08: If there are no further questions, then this call is complete. We look forward to updating you after the fourth quarter, and thank you for your support. Goodbye.
spk01: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
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