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spk01: Good day, ladies and gentlemen, and welcome to the Acme United Corporation's hosted first quarter 2022 earnings call. At this time, I turn the conference over to Walter Johnson. Please go ahead.
spk06: Good morning. Welcome to the first quarter 2022 earnings conference call for Acme United Corporation. I'm Walter C. Johnson, chairman and CEO. With me is Paul Driscoll, our chief financial officer, who will first read a safe harbor statement.
spk05: 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 pandemic, 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.
spk06: Thank you, Paul. Acme United reported revenues of $43.3 million in the first quarter of 2022, which is approximately even with last year. Net income was $830,000 compared to $2 million in 2021. Our earnings per share were 22 cents versus 52 cents in the comparable quarter last year. As you may be aware, COVID spread rapidly in China after their Chinese New Year ended in late February. Some factories were unable to operate due to quarantines and others limped along. the entire cities of Hong Kong, Shenzhen, Guangzhou, and Shanghai were quarantined, and two of the largest ports in the world were shut down. Our orders were strong in the first quarter, but we were unable to ship approximately $4 million. Most of the products that were delayed were for large mass market retailers that shipped directly from the exporting ports to their distribution centers. Normally, these direct import programs are very efficient and cost-effective, but their just-in-time nature left them vulnerable to the port closures. We see some improvement. Container prices seem to have stabilized. The port of Yanchian in Shenzhen is open and operating. The port of Shanghai has partially opened. Most of our factories are fully staffed, and they are delivering products. We are also increasing production in India and in Egypt. We have continued to raise selling prices to offset increased product costs, wages, and delivery expenses. Demand in the second quarter has also been strong. Approximately half of the delayed orders have now been shipped. We are receiving new orders for alcohol prep pads from the U.S. Army and wipes for meals ready to eat for the Ukraine. we've received large inquiries for first aid and medical supplies, which may be related to the Ukraine war. We have a substantial first aid program to a large mass market retailer, which will be shipped in the second quarter. Our Westcott school and office products continue to have strong demand, and we were looking forward to a good back to school season. As we look into the remainder of 2022, We believe that we will make up the lost sales and earnings in this quarter and move forward with growth. We anticipate revenues in excess of $200 million for the year. I'll now turn the call to Paul.
spk05: Acme's net sales for the first quarter were $43.3 million compared to $43.5 million in 2021. Net sales in the U.S. segment decreased 1% in the quarter due to delayed shipments as a result of supply chain disruptions. Net sales in Europe for the first quarter of 2022 increased 3% in local currency compared to the first quarter of 2021. Net sales in Canada for the first quarter of 2022 increased 8% in local currency mainly due to higher sales of first aid products. The gross margin was 34.5% in the first quarter of 2022 versus 35.8% in the first quarter of 2021. The lower gross margin was mainly due to cost inflation pressures, higher transportation costs, and higher labor costs. Price increases mostly offset the cost increases. SG&A expenses for the first quarter of 2022 were $13.6 million or 31% of net sales compared to $12.6 million or 29% of net sales for the same period of 2021. Net income for the first quarter of 2022 was $830,000 or 22 cents per diluted share compared to net income of $2 million or 52 cents per diluted share for the same period of 2021. The company's bank debt and less cash on March 31, 2022 was $46 million compared to $43 million on March 31, 2021. During the 12-month period, we spent $1.8 million in dividends. We purchased $1.5 million of common stock and received forgiveness of our PPP loan of $3.5 million. Inventory increased approximately $11 million, primarily due to anticipated growth in our business, higher costs, and purchasing additional safety stock to offset the impact of potential supply chain interruptions related to COVID-19.
spk06: Thank you, Paul. I will now open the call to questions.
spk01: Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your touch-tone telephone, star 1 for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star 1 for questions. We'll pause a moment to assemble the phone queue. We'll take our first question from Timothy Call with the Capital Management Corporation. Please go ahead.
spk07: Well, good job operating in a hard environment. With the product costs and freight costs rising, are you able to increase your product prices in order to offset that in the future?
spk06: Well, Tim, thank you very much. As you know, ultimately, it's the consumer. and we have to be careful about um getting ahead of the consumer's buying power um we have passed through price increases and in fact we're readying another one shortly because the rate of inflation continues to increase and it's not just in the us it's in europe and it's in china um and the other costs are increasing so we're on a um treadmill right now where we're continuing to increase costs but again I'm sensitive to the delivering value to our consumer on the other hand it's imperative that we do pass these through and we are with the share buybacks of one and a half million in the last 12 months was most of that in the first quarter
spk05: That was last year, actually. We didn't do any in the first quarter.
spk06: Yeah, we did that at the end of last year, primarily.
spk07: Great. Well, hopefully some will be done this year. It's certainly accretive to earnings per share. And thank you again, and looking forward to next quarter with those delayed orders coming through the revenue line. Thank you.
spk06: Well, Tim, thank you so much for your support. And I'm Really delighted that we are getting shipments out and we're matching up to what we hope is going to be an outstanding second quarter.
spk07: Terrific. Thank you.
spk01: We'll take our next question from Jim Roney with Singular Research. Please go ahead.
spk03: Great. Good afternoon, gentlemen. Forgive me if you did address it. I was kind of in and out of the call. but I'm still curious as to what your answer might be. But could you just discuss your inventory management? In previous calls, you've said that you've executed well on the inventory management. Can you maybe just address that just to see whether it continues to be as effective as you've claimed in the past and how you are going about managing that? And perhaps if you can just share some light as a follow-up question in regards to your segments, in regards to the cutting tools and scissors versus that of the first aid kits. Are they both affecting, both segments being affected by supply chain and what can we expect going forward? Thanks.
spk06: Well, Jim, that's a very good question. There's two types of shipping. One is where we ship from our warehouses either in the US, Canada or Europe and we're shipping directly to the customer. There we have a lot of inventory and we are able in most cases to be able to buffer supply chain issues. And so typically the customer will not see large shortages because we've added inventory to cover. The other portion of the business is where large mass market retailers in various seasons, like right now where it's a back-to-school season, and there'll be another one in September, which will be a holiday season. In those cases, the retailers are placing orders, we're producing, and they are picking up at the ports in China or wherever we're shipping from. That's what primarily was hit in the first quarter because they are moving forward these orders because they know things are delayed. And when we get them and we're not able to ship because the ports are closed, all the inventory that we have in Europe, in the U.S., Canada is meaningless because the products that they are buying are just in time. Now, it's very cost effective for a large retailer to pick up at the port, as opposed to us shipping across, unloading in our warehouses, and then repacking and shipping directly to the retailer. So they get very good value. And in most cases, it works well. In this case, where in two weeks, the major ports were shut, there was nothing we could do. Relative to the segments, the first aid business is much more U.S. centric in that we have production in Rocky Mountain, North Carolina as well as Vancouver, Washington. And we get our products not only from domestic sources but international sources that are more diversified than China. Egypt has a lot of cotton goods, so you might think that gauze and adhesive bandages and products like that could be sourced from Egypt. In fact, they are. And so it's a counterbalance to China. So we're in pretty good shape with first aid, but the products that do cutting are much more focused on China. And as you may know, China has half of the steel production in the world and they're the world's lowest cost producer so it makes sense for things like scissors and knives to be produced near the um the the best steel in the world and most of the time that's not a problem but that was more impacted in the uh first quarter and because these are in many cases back to school items they were delayed Now, the good news is as we ship down in April and May, there's plenty of time to meet the back-to-school demand, and the ports are opening up in China. The ports in the U.S. are still tangled up, but maybe getting a little bit better. And in any case, if we can get the products out of China, we can get them to our customers. So we're doing that.
spk03: Okay, great. And so I think you kind of addressed this as well, but if you could just confirm my question. So given the supply disruptions and given how things are being alleviated, can we anticipate the first quarter being perhaps the toughest quarter of this fiscal year then?
spk06: Well, that would be my expectation. We are expecting a very strong second quarter as we make up for this, plus we have a lot of demand. Looking forward, we're seeing very strong customer demand for our cutting tools as well as first aid. And there is some push for some products for the war in the Ukraine from the U.S. Army and other indirect suppliers. For example, in our European business, there's demand for a lot of first aid products right now to go to the Ukraine.
spk03: That's great. Thank you for taking my questions, then. Thank you, Jim.
spk01: We'll take our next question from Michael Mork with Mork Capital. Please go ahead.
spk02: Hi, Walter. Just one question. I just wonder what the... the COVID lockdowns and the, as you call them, the porch being tangled up, has there been a lot of double ordering and hence potentially cancellations of product orders?
spk06: Mike, I'm not aware of double ordering. And in shortages, that's a pretty common thing to happen. What we were hung up with were specific orders that that went to mass market retailers for their primarily back to school and spring resets in their planograms. Those certainly were not double orders. Most of the order book that we have is pretty built up by customer and it's been over because we've been working on long lead time production now for almost a year and a half. I worry more about ultimate demand. You know, Mike, I worry about ultimate demand because I think we are going to be going into a recession, but I don't see back orders. I mean, double orders is being an issue.
spk02: Okay, well, thank you.
spk06: Thank you.
spk01: Darwin for questions. We'll take our next question from Jeffrey Matthews with Ram Partners.
spk04: Hi, Walter. Hello, Jeff. How are you coping?
spk06: Well, you know what? There's also opportunity in the stress. And I think we will wind up seeing some interesting opportunities that shake loose because we are taking advantage of opportunities that others aren't. And it's a tough time. It's a very tough time. But our European teams and our Asian teams and our Canadian teams and our U.S., they live supply chain. So we're pros in what we're doing.
spk04: You mentioned Egypt. That was the first time I'd heard that, and also India. And it's kind of the first time I've heard you talk about a little bit of a shift out of China, not necessarily related to just adding production elsewhere in other countries like the United States. What's your view of China over the next five to 10 years? Because there's been a pretty significant shift in the perception of our relationship with China. And there's a worry of an over dependence on it from a lot of points of view. Is this having any effect on your thinking or is it more, hey, we need product now, let's find another place to source it from?
spk06: Well, we started sourcing from both India and China three years ago. And India, particularly India. Yeah, I mean, India and Egypt. India has delivery issues. The as you probably know, they were shut down very severely with COVID about a year ago. And we do get some products there. Now in the medical area, as you may know, most US pharmaceuticals come from India. And so it's a very, very good source of FDA-supplied product. Egypt supplies many segments in Europe with things that are cotton-based. And the labor costs are inexpensive. And for the last two years, we've put increasing amounts of first aid business into some of our suppliers in Egypt. And they're very good. It's also FDA facilities. Relative to China over the next five to ten years, that's a pretty broad question. But I would suggest to most everyone that it's in China's best interest to tamp down some of the discussions about a shift away because they are an export-driven country. And both Western Europe and North America and South America are pretty much using them for a great deal of production. So it's not in their interest to hurt themselves in a significant way. Also, the factory owners that we deal with are just like the people on the call. They're very, very attentive to their businesses, and the relationships that we've built with them over years continue. And so you've got background noise, you've got a competition between the US and China for certainty, but the fundamental of the US needs goods and China needs exports is an interconnection that I don't see going away in the next five years.
spk04: Okay. And then one final question, if I may. You are very adept at finding opportunities through acquisitions that kind of foster the cracks for a lot of bigger companies. Do you see expanded opportunities in the stress that we've been having, or is it pretty much things perking along as they always tend to do?
spk06: Well, we're seeing a fair number of opportunities. And the kinds of things I'm looking at right now, I'm trying to lever impacting our whole product class and internationally. So not just in first aid or not just in Westcott, but things that can help us add value to our products, our entire product mix. And we're seeing a couple of those. We're also seeing some both first aid, knife, and Westcott opportunities. So it's active. And I'm optimistic that we'll find an opportunity that fits pretty well for us this year.
spk04: Great. Thanks and good luck. Thank you.
spk01: As a reminder, star one for questions. We'll pause a moment to assemble the queue. It appears we have no further questions at this time.
spk06: If there are no further questions, then this call is complete. We look forward to updating you again at the conclusion of the second quarter, and have a good day. Goodbye.
spk01: Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.
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