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spk01: Good day, everyone, and welcome to the Acme United Corporation's hosted second quarter 2022 earnings conference call. At this time, I'd like to turn the call over to Walter Johnson, chairman and CEO. Please go ahead.
spk09: Good morning. Welcome to the second 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. Paul?
spk05: 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. Thank you, Paul.
spk09: Acme United had a challenging second quarter of 2022. but also one of accomplishment. The company had record sales. We completed the acquisition of SafetyMaid, which manufactures personalized first aid kits and safety products. And we increased our debt facility to position the company for additional growth. Our net sales of $56.8 million was an increase of 27% over the second quarter of 2021. This represented the highest revenues in a quarter in the company's history. However, we did not keep up with rapidly escalating costs. Our net income for the quarter was $2.7 million, which was a decrease of 3% from last year after adjusting for a one-time tax credit of $900,000. Earnings per share without the tax credit in 2021 was 71 cents, similar to 2021. Many events happened quickly, and they created unanticipated expenses. The ports in Shenzhen and Shanghai abruptly closed due to COVID. We rerouted a large number of containers to Ningbo and delivered to our customers on time. However, we paid an average of $18,000 per container when the budget was $12,500. This extra expense was approximately $500,000 in the second quarter. Fortunately, container costs have since declined to about what we have budgeted, or $12,500. The US ports in Los Angeles and Long Beach were overwhelmed with containers due to port workers ordered to work around the clock by the US administration. But there were not enough truck drivers to pick up the containers. The resulting pileup caused the ports to store containers on available land everywhere. They became jumbled in huge piles, and the port workers could not quickly or easily access containers to be placed on trucks. A similar situation occurred on the East Coast ports. In addition, the container ship Ever Forward got stuck in the mud off Baltimore, and our cargo languished for weeks. U.S. federal law limits truck drivers to 10 hours of driving per day. We had drivers waiting for containers for 10 hours, limiting out and going home without cargo, only to return the next day. The U.S. administration declared fines for unpicked up cargo. As a result, we incurred demurrage expenses of $130,000 in the second quarter. When the war in the Ukraine broke out in mid-March, the euro began a rapid decline in value against the U.S. dollar from about $1.14 to $1.02 today. Since we pay in dollars for our products that are imported to Europe from China, we recognized an unanticipated expense of $160,000 in the second quarter as we marked our payables to market. In addition, our gross margins in Europe declined over eight percentage points. Our inland transportation costs grew rapidly due to diesel prices increasing from mid-March of approximately $4 a gallon to $5.60 a gallon at the quarter's end. Well, we could go on forever about the state of affairs, but here's what we are doing. We've increased prices in the US and Europe on July 1 to be sensitive to the end user demand curve and yet meet the increased costs. We're implementing serious productivity improvements. Last year, we installed new warehouse management software in our largest facility located in Rocky Mountain, North Carolina. The new software went live in April 2021, and we anticipate savings of over $300,000 annually starting in June 2022. We will be installing new bottling equipment in our Spill Magic plant in the fourth quarter of this year. This $580,000 investment is projected to generate annual savings of about $450,000 in 2023 and thereafter. Our MedNap facility in Florida is building a robotic filling machine, which is expected to become operational in the fourth quarter of 2022. This capital project costs about $800,000. It reduces the cost of placing alcohol wipes and pads in boxes and has projected savings annually of $350,000. Even more importantly, It reduces our production costs in the US for many MedNap products to potentially gain new business in the large domestic medical and defense markets. As you may know, two years ago, we intentionally increased our global inventory. This was done as a precaution for potential supply chain issues, particularly related to the impact of COVID in China. Our current plan is to reduce our global inventory by $4 million by the end of 2022. In addition to increasing the prices of our products, bringing on stream new productivity improvements, and beginning to reduce inventory, we made progress with a new acquisition and an expanded banking facility in the second quarter. In June 2022, we purchased SafetyMaid, which produces customized first aid kits for the promotion market. The company had revenues of approximately $5 million in 2021 and pre-tax income of a little over $1.1 million. It has performed well and was accretive in the second quarter. We also entered a new bank line with HSBC in the second quarter of 2022. Our new facility is $65 million compared to the former one of $50 million on essentially the same terms. The interest rate is so far plus one and three quarters, or about 3.3% today, and the term is four years. As you may recall, we also obtained mortgages in November 2021 on our Rocky Mountain, North Carolina and Vancouver, Washington plants, totaling $11.6 million at a fixed interest rate of 3.8%. We'd like to thank HSBC for its support as we continue to grow. We are providing guidance of approximately $200 million in revenues in 2022. We plan to continue to adjust prices as appropriate as the year progresses and look forward to delivering solid results. I'll now return the call to Paul.
spk05: ACME's net sales for the second quarter were $56.8 million compared to $44.8 million in 2021, an increase of 27%. Sales for the six months And in June 30, 2022, we're $100.1 million compared to $88.4 million in the same period in 2021, an increase of 13%. Net sales in the U.S. segment increased 33% in the quarter due to higher sales prices, increased volume, and first quarter back orders filled in the second quarter. The first quarter back orders resulted from supply chain disruptions. Sales increased 13%. for the six months and the June 30th, mainly due to higher sales of first aid and Westcott products. Net sales for Europe increased 12% of local currency for the quarter and 7% for the six months and the June 30th. The sales increase for both periods was mainly due to new customers in the office channel. Net sales on local currency for Canada were constant in the quarter and grew 4% for the year to date. The gross margin was 32% in the second quarter of 2022 compared to 36% in 2021. The year-to-date gross margin was 34% compared to 36% in 2021. The lower gross margin was mainly due to product cost, inflation pressures, higher transportation costs, and higher labor costs. Price increases partially offset the cost increases. SGA expenses for the second quarter of 2022 were $14.6 million or 26% of sales compared with $12.4 million or 28% of sales for the same period of 2021. SG&A expenses for the first six months of 2022 were $28 million or 28% of sales compared with $25 million or 28% of sales in 2021. The second quarter of 2021 included $3.5 million of PPP loan forgiveness reflected in other income. Also, the second quarter of 2021 tax expense included $0.9 million of tax credit for stock-based compensation. Excluding these impacts, adjusted net income in the second quarter of 2021 was $2.8 million. Net income for the second quarter of 2022 was $2.7 million or 71 cents per dilute share compared to the adjusted net income for the second quarter of 21 of $2.8 million or 71 cents per dilute share, a decrease of 3% in net income and constant for earnings per share. Net income for the first six months and in June 30th, 2022 was $3.6 million or 93 cents per dilute share compared to adjusted net income of $4.9 million, or $1.23 per diluted share in a comparable period last year, decreases of 27% and 25%. The net income decline in the six months was due to the decline in gross margin as a percentage of sales. The company's debtless cash on June 30, 2022, was $59.8 million, compared to $39.3 million on June 30, 2021, during the 12-month period We paid $11 million for the safety main acquisition, spent $1.8 million on dividends, and repurchased $1.5 million of common stock. Inventory increased approximately $15 million, primarily due to anticipated growth in our business, higher costs, and purchasing additional safety stock to offset the impact of potential supply chain disruptions related to COVID-19. Thank you, Paul.
spk09: I will now open the call to questions.
spk01: Thank you. If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll pause for a moment. And we'll first hear from Tim Call of the Capital Management Corporation.
spk08: Congratulations on the very strong sales, given all the economic headwinds and disruptions the rest of us are facing.
spk09: Well, Tim, thank you very much. It was, as I said, a challenging quarter. And our team, really, they rose up to it. It was tough.
spk08: This year might see the first normal back-to-school season in a few years, and a lot of back-to-school sales have shifted to the third quarter, being web-based stores and last-minute restocking. How do you see the competitive landscape and shelf space versus peers?
spk09: Well, Tim, we've been gaining market share, and In the second quarter, we had a very strong already back to school. We saw a number of our customers, we believe, bringing in product in advance, giving more of a buffer, which was terrific. Of course, it put a lot of strain on us as we tried to expedite that, and it cost us a lot of money. But it's going to be a very good back to school. And you're right, it is far more normal, fortunately. So we've got market share gains, and it's going to be a good back to school.
spk08: And then with first aid, you finally broke into the Canadian market in recent years. Do you think it's just as hard to enter the EU market, and can you make headway there over time?
spk09: So we actually are selling first aid products in Europe. And it's small compared to our North American business. But the fortunate thing is we're leveraging the knowledge we have. And we truly are gaining headway in Europe. So that's without an acquisition. Well, congratulations. Thank you. Thank you.
spk01: As a reminder, it's Star 1. If you would like to ask a question or make a comment, we'll pause for a moment. We'll hear from Richard Durnley of Longport Partners.
spk07: Good morning. Could you give a rough idea of how much carryover from the first quarter revenue was in the second quarter?
spk09: Yeah, Dick, it was about $3.5 to $4 million. Okay. And the strength in Europe
spk07: in new office customers. Was that in both Westcott and First Aid, or was it mostly in one of those?
spk09: In Europe, our biggest segment is Westcott. And as I mentioned, we're having a very good back to school. But in addition to that, Westcott gained market share in the normal office business as well in Europe. So the combination was a very strong second quarter.
spk07: Now all we have to do is worry about the foreign exchange.
spk09: Well, we're adjusting prices. But, I mean, the big thing is when you have a stable base, you can adjust prices and you can work off of that. This was a very precipitous decline. Within weeks, the euro dropped 11%. And that was not priced. So we're addressing that. And as I said, we're working on productivity improvements so that hopefully we're able to really give value to our customers.
spk07: Right. Great. Well, keep up the good work.
spk02: Thank you.
spk01: Next question comes from Jim Marone of Singular Research.
spk03: Yes, good afternoon, gentlemen. So I have a few questions. So let's start with the sales increase. So really nice, healthy increase in sales. I'm just trying to get a sense how much of that did it reflect the price increase or how much of that reflected increased in volumes?
spk09: Jim, we're not going to break out our price increases for today. competitive reasons. But we said that four million carried over from the previous quarter. And you can imagine if inflation in the U.S. is running at nine point one percent, you know, and you've got gasoline and transportation higher than you're going to be somewhere in that range, depending on the product and the customer and where it's coming from. But the net was we had a lot of plain organic growth. plus price increase.
spk03: Right. Okay. So there is some reflection of price increase in these numbers then, though, right? Oh, for sure. Yes. Right. And so you plan on implementing further price increases from your prepared comments?
spk09: Well, the challenge for all of us is that inflation is not a one and done. It compounds. And we believe we have to stay current with the current inflation. And if it's a number like 9%, that gets to be easy because it's predictable. It's not predictable when you've got a war and port closures and disease and a disrupted supply chain exasperated by administrative mandates. That all happened in 12 weeks. But yes, the inflation rate, whatever it is, we intend to be passing through on a consistent basis, plus any productivity that we can do, because we're trying to deliver value as well on a regular basis to our customers. And hopefully we're providing a value to the end user, because after all, they are the reason we're in business.
spk03: Okay, very good. And so then in terms of the cost structure, you know, the issue is not really a demand issue. You know, everyone's experiencing, it's the supply side, not the demand side. So I'm just trying to get a sense on how you're going about controlling those costs. So I know you've been doing inventory management for a while. I'm just trying to get a sense whether that is starting to factor in in your cost structure going forward?
spk09: Well, so in the second quarter, there were many, many direct import programs, particularly for back-to-school with major retailers globally. And those are picked up in China and delivered directly to their locations. That piece is where we were mostly hurt, because we had to deliver on the spot market then and there. And we did. The inventory that we hold in Europe, U.S., and then Canada for our daily, everyday business, the Westcott and first aid only business, that is buffered against at least supply chain shortages. And we've got that extra capacity that we added. We're going to start to reduce that safety stock. And we are doing that because we believe the supply chain will start to get better in the course of the next 12 months. We're going to be monitoring that very carefully. But if that occurs, then the plan is to have generated an extra $4 million of cash from inventory by year end. And as I see it now, I believe that that's attainable.
spk03: Okay, that's encouraging. And so is there any effort going forward on reducing the reliance on China and other foreign countries and sourcing out suppliers from maybe domestically or other options? Sure.
spk09: Some may know that about 10 years ago, we were 80% or more reliant on Asian suppliers, primarily China. In the past seven acquisitions, these have all been U.S. manufacturers. Today, our imported piece is about 40% of our global sales. The remaining 60% is coming from plants and that's why as we're making productivity improvements and making investments that I, a couple that I identified today, um, we can do that because we have the plants, um, either in the U S or in Canada. Um, I would anticipate that some of our future acquisitions will also be, um, either in Western Europe or in, um, uh, U S or Canada and less likely to be, uh, more reliant on China. So we're at about 40% reliant now. In the second quarter, we were especially hit because of the direct import business to the major retailers for back-to-school. That's changing as the mix changes for the rest of the year.
spk03: Right. Okay, thank you for that, Collier. One final question. So I see the interest expense kind of doubling recently. year over year. So I think that's kind of reflecting higher rates already. And you also mentioned a bit of a hit based on the U.S. dollar strengthening and foreign currencies depreciating. So I'm trying to get a sense, are you implementing any risk... Risk hedging at all, maybe with the use of derivatives or swaps with respect to the interest rate exposure and the foreign exchange exposure?
spk09: Well, we are in a very serious but indirect way. The inventory that we hold has been delivered. So there's not a currency risk on that, and there's not an interest rate risk. You basically own it. Now, we did fix the interest rates on... $11.6 million of our debt last November in mortgages. So that piece is fixed. And the remainder is variable. And the goal is to start to drive it down.
spk03: Right. And are you just going to drive it down by rolling over into new terms? Or are you going to do a derivatives overlay like How do you plan on addressing this?
spk09: We're not doing anything with derivatives. When I said drive the debt down, I mean cash flow. Pay it off. Because we're a very strong cash flow business. So, you know, the $4 million of inventory reduction at year end pays down debt. The cash flow that comes in from our earnings for the first six months will have been collected by the second half at it.
spk03: particularly back to school that pays down debt so that's what I meant well that's very encouraging as well then so thank you for the color in regards to my questions thanks Jim and then once again star one to ask a question or make a comment we'll pause for a brief moment
spk01: Michael Mork of Mork Capital Management.
spk06: Hi, Walter. Good quarter considering all the problems. My question is, assuming you do the $200 million this year, and assuming the inflation rate, which is currently 9% or 10%, glides down over the next 12 to 18 months, say to 4% or 5%, what type of revenue should we expect next year, like up 10% to $220 million, or what do you think?
spk09: Well, I have personal goals of seeing this adding 20 to $25 million for each of the next three years, plus doing an acquisition, at least one during that period, probably more, to be looking at closer to 300 million over that timeframe. Some of that will be from, we hope, organic growth. And so if you were to add 10% growth on 200 million, you're at 220. You do that for three years, you're probably 270, um, 275. So that's what we're trying to accomplish. And I think we can do it. Um, so your estimate of hopefully inflation's at five, I hope it is too. And I hope the rest of the growth is real growth.
spk06: Yeah. Well, uh, we follow the monetary stuff real closely here. And, uh, The inflation was because the Fed money supply grew up to 27% plus, but now it's only growing about 5% or 6%. So I think the slowdown in inflation is kind of baked in the cake right now.
spk09: I hope so.
spk06: That would be terrific. Okay.
spk09: Anyway, thanks a lot. Thanks, Mike.
spk01: Next, we'll hear from Sam Namiri of Ridgewood Investments.
spk04: Hey, Walter. Nice job dealing with all the stuff, all the issues in the quarter. Thank you, Sam. My question was kind of related to that. On the M&A front, are you seeing others out there who are just kind of maybe tired of dealing with inflation, supply chain issues, et cetera, and are now maybe coming to the table and looking to get out of business? Well,
spk09: As you know, we've got a pretty substantial database from over 15 years of meeting companies and talking to companies that are in our business or related to them. And we're constantly talking to them. I think there's some opportunities this year that may present themselves. And, you know, we pay fair prices in good markets and in bad ones. We just... And I would hope that some reach out to us. But the answer is we're actively looking. And I think it might be a good time to team up with us. Thank you.
spk04: And then also on that end as well, too, how do you see this as an opportunity to take share as well? Like maybe don't take as much price with inflation and I don't know, is that something that you look at and opportunistically take advantage of as well, too, where someone else is raising their prices and the customer maybe doesn't want to stay or start shopping around to switch suppliers?
spk09: Well, our customers are really sophisticated. And, you know, if we're not in the competitive range, well, we're going to lose business. And by and large, we are in that competitive range, and we're gaining share. And you're correct. If some of our competitors get too far out of step with costs, we're going to be at their tail, and hopefully we get some of that business.
spk02: Got it. Okay. Thank you. Thanks again. Thank you.
spk01: And it appears there are no further questions at this time. I'll turn the call back over to the presenters for any additional or closing comments.
spk09: Well, if there are no further questions, then this call is complete. We look forward to speaking with you at the end of the third quarter. Thank you and goodbye.
spk01: That does conclude today's conference. Thank you all for your participation. You may now disconnect.
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