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spk02: Good day and welcome to the ACME United Third Quarter Earnings Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. I would now like to turn the conference over to Mr. Walter Johnson, Chairman and CEO. Please go ahead, sir.
spk08: Good afternoon. I'm Walter C. Johnson, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer. We'll first read a safe harbor statement. Paul?
spk03: 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 provisions 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 our current earnings release.
spk08: Thank you, Paul. Our net sales in the third quarter of 2022 were $49.7 million. compared to $47.9 million last year, an increase of 4%. Our net income was $63,000 compared to $2 million, and earnings per share were 2 cents compared to 50 cents. In the second quarter of 2022, we had revenue growth of 27%, which we believe was due to forward purchasing by our customers to avoid supply chain disruptions. We also had catch-up shipments of $3.5 million to $4 million, which had been delayed by supply chain problems in the first quarter. For the year to date, revenues have increased 10%. Revenues have been lumpy, but moving forward. We anticipate revenues for 2022 to range from $190 million to $195 million, a slight decline from our earlier guidance of $200 million. The supply chain issues in the first six months of 2022 caused us to incur extraordinary shipping, demurrage, and freight costs. As you may know, the cost to deliver a container from Shanghai to Los Angeles increased rapidly, peaking at approximately $20,000 and more than double the prior year. We paid demurrage fees because the containers stayed at the ports longer than contracted, even though this was due to the port's inability to access them. A shortage of truck drivers to deliver the goods and high fuel costs caused our freight to abnormally increase. In total, we incurred approximately $4.4 million of extra expenses due to this array of problems. Our costs of inbound freight are included in our product costs, and we expense them as the inventory is sold. This resulted in $450,000 of extra supply chain costs in the first quarter of 2022, $1.3 million in the second quarter, and $1.3 million in the third quarter. There remains approximately $1.3 million, which we anticipate expensing over the next two quarters. Fortunately, the supply chain issues have substantially improved. The cost to ship a container across the Pacific has fallen to less than $10,000. We are not incurring demurrage fees from the ports and the driver shortage has stabilized. We believe the extra supply chain costs are largely behind us. We've implemented an extensive productivity and cost saving initiative, including $600,000 in reduced selling expenses, $2.4 million in product cost savings and $800,000 annually in lower labor costs. We have purchased new equipment to expand production at our MedNap facility and to gain new business at Spill Magic. We expect these cost savings and productivity improvements to generate over $5 million in savings and we continue to add more. Some of the savings start in this quarter. but all are anticipated to flow in 2023. Taking a step back, like many other companies, we have had unexpected supply chain issues that came and went. They reduced a total of $4 million in pre-tax earnings. However, we see beyond that. We have an excellent first aid and medical business with strong recurring revenues from retail sales. We have new placements in the retail and industrial markets for 2023 and a runway for continued growth. We have the largest global market share of scissors and shears, which benefits from the school, office, craft, industrial, and home users. We've gained new craft placement in 2023 at major mass market retailers, and we continue to gain in e-commerce. The same difficult environment we are in has also opened opportunities. For example, in September, we took over the sales of a small competitor of Safety Maid, by purchasing its inventory and intellectual property for $860,000. The annual revenues of this are forecast to be about $1.4 million with about $400,000 of EBITDA. Although small, it represents the kind of opportunistic situations that may arise. In summary, we have in place the growth platform for 2023 and a $5 million cost savings and productivity plan that has been mostly implemented. We are confident that we will move beyond the supply chain issues to a much better year in 2023. I'll now turn the call to Paul.
spk03: Acme's net sales for the third quarter were $49.6 million compared to $47.9 million in 2021, an increase of 4%. Sales for the nine months ended September 30, 2022, were $149.7 million compared to $136.3 million in the same period in 2021, an increase of 10%. Net sales in the U.S. segment increased 4% in the third quarter. Sales in the second quarter of 2022 are impacted by certain customers making large purchases in anticipation of supply chain delays. Sales increased 12% for the nine months end of September 30th, mainly due to market share gains. and first aid and medical products and higher sales of Westcott products. Net sales for Europe increased 13% on local currency for the quarter and 9% for the nine months ended September 30th. The sales increase for both periods was mainly due to new customers in the office channel. Net sales of local currency for Canada increased 3% in the quarter and 5% for the year to date. Sales of first aid products grew mainly in the online business. The gross margin was 32% in the third quarter of 2022 compared to 35.5% in 2021. The year-to-date gross margin was 33% compared to 35.8% in 2021. The decline of both periods was primarily due to higher ocean freight and related transportation costs for imported goods, also contributing to the decline where weaker currencies in Europe and Canada where we purchased most of our inventory in U.S. dollars. SG&A expenses for the third quarter of 2022 were $15 million or 30% of sales compared with $14 million or 29% of sales for the same period of 2021. SG&A expenses for the first nine months of 2022 were $43 million or 29% of sales compared with $39 million or 29% of sales in 2021. Included in other expense of $210,000 in the third quarter of 2022 was a foreign exchange loss of $170,000 related to revaluating US dollar payables in our European business due to an 8% depreciation in the Euro in the quarter. Interest expense for the third quarter of 2022 was $720,000 compared to $230,000 in the third quarter of 2021. Interest expense For the nine months ended September 30th was $1.4 million compared to $670,000 for the same period of 2021. The increase for both periods was due to higher debt and higher interest rates. Our overall average interest rate for the nine months in 2022 was 3.2% compared to 2% for the nine months in 2021. The overall average interest rate for the three months ended September 30th, 2022 was 4.2% compared to 2% for the same period in 2021. Net income for the third quarter of 2022 was $64,000 or 2 cents per diluted share compared to net income of $2 million or 50 cents per diluted share for the same period of 2021. Net income for the nine months ended September 30th was $3.6 million or 96 cents per diluted share excluding The impact of the PPP loan forgiveness of $3.5 million, net income was $7.8 million, or $1.97 per doula share, and the nine months ended September 30, 2021. The three- and nine-month results were impacted by the exceptional supply chain costs and higher interest expense. The company's debtless cash on September 30, 2022, was $64 million compared to $38 million on September 30th, 2021. During the 12-month period, we paid $11 million for the safety mate acquisition, spent $1.8 million in dividends, and repurchased $1.5 million of common stock. During that period, inventory increased approximately $17 million, primarily due to anticipated growth in the business, higher costs, and purchasing additional safety stock to offset the impact of potential supply chain disruptions related to COVID-19. We expect inventory to decline by approximately $2 million by year end.
spk06: Thank you, Paul.
spk03: I will now open the call to questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble a roster.
spk00: And our first question will come from Chris Sakai with Singular Research.
spk02: Please go ahead.
spk07: Yes, hi. I'm in for Jim Moroney. Just had a question regarding your reduction in SGMA. How is this going to affect headcount next quarter and in the year?
spk08: Well, we've trimmed our headcount in SG&I, and that was done around the middle of September. And so while there's still severance payments, that's done. And going forward, we generate savings.
spk07: Okay, thanks for that. And I noticed there's a lot of currency exchange rate fluctuations. Does Acme United have any exchange rate hedges for their international sales?
spk08: We will sometimes lock in for large customer orders a forward contract. against that purchase order. But in this case, the kinds of declines that happened in the Euro were beyond anything we would have normally hedged for. Of course, this relates to the substantial increases in U.S. rates and, frankly, the war in Ukraine, both of which were really not hedgeable.
spk07: Okay, thanks for that. And finally, for the increase in inventories You know, how much of this, is there any worry about inventory obsolescence, or can you provide any color there?
spk08: Sure. Most of our inventory are items that don't change too much from year to year. Our school products are very, very consistent. Our office products are. In the first aid area, there's some products that have expiration dates, but we tend to keep those carefully managed, so there's not an excess of inventory there. In general, it's not like electronics or semiconductors or clothing where it's a fashion item. These are proprietary, but they're pretty much stable items without rapid changes in designs, and we're quite comfortable with the inventory that we have. Okay. Thanks, Walter. Thank you, Chris.
spk01: Again, if you have a question, please press star, then 1.
spk00: Our next question will come from Richard Durnley with Longport Partners.
spk02: Please go ahead.
spk05: Good morning. Good afternoon.
spk08: Good afternoon, Jeff.
spk05: I had a guess. If your inventories are up 36%, what proportion of that is price and what's units?
spk03: So, Dick, it's approximately evenly split between what we would increase for growth, the cost, and the safety stock that we put in place for potential supply chain disruptions.
spk05: So it would be about even between the three? Correct. Okay. And the EEC was only down 3% in dollars. It would seem like they're in a recession and who knows what happens. not to mention turmoil in Great Britain, what are you expecting out of them?
spk08: Well, our European business is facing some softness in sales. They are having a lot of inflation, and that's in part due to oil and gas. In part, it's the weakness of their currency. They've got price increases that they're passing through with our products that are high. It's very uncomfortable because the people there are under extreme pressure. It's not an easy environment in Europe. We've seen that at least sales in the last quarter were slightly up, so it hasn't fallen off a cliff, but it's been a very tough environment in Europe.
spk05: Right, yeah. It would sure seem that way. The cost decrease estimated for 23, the $5 million, is that independently Of the $4.4 million of supply chain costs, I mean, I would... The answer to that is yes.
spk08: They're additive. The one, the $4.4 million, were just expenses that we ran through and were done with. The cost savings are an additional $5 million.
spk05: Right. And it would seem like of the $4.4 million of supply chain costs, You'd get back, you know, as things normalize, assuming demand doesn't fall off a cliff, you get back a reasonable percentage of that on the other side, if you will, wherever that is.
spk08: Well, that's accurate. In the overall environment, there's a lot of inflation. So we're not counting on that inflation. in our numbers, although it's true that the cost of some containers that we've got now are well under $10,000. Some of them are as low as $4,000. So you would pick up some savings there, but there's still inflation throughout Asia, Europe, and the U.S. So it's really a combination of a lot of cost pressures But in this case, the freight will be working in our favor, we hope.
spk05: Right. And then on your slide eight, I was intrigued by the bullet point about product cost decreases opening up new business opportunities in medical and defense areas. Is that solely because the unit costs went down? What are you trying to say there?
spk08: Well, Dick, I don't know exactly what slide you're looking at because we don't have any slides in this presentation. But in general, what I think we're referring to is In the MedNap business, where we're making alcohol wipes and alcohol prep pads, we are driving the cost down to be absolutely competitive and compelling in the world market so that when we get military or medical business, it's not just because we're U.S. made, but because we're the lowest cost producer. And so many equipment that we're putting in there There's a lot of automation which helps to drive those costs down.
spk02: Great. Okay. Thank you.
spk08: Thank you.
spk02: The next question will come from Peter Sidoti with Sidoti & Company. Please go ahead.
spk04: Good afternoon, gentlemen.
spk02: Hello, Peter.
spk04: Just a quick question about cash flow from operations. It looks like you've been using cash this year. for the first nine months, but I would assume that you're going to start turning cash flow positive this year and into next year. Can you give me a handle on just, you know, what you expect to spend in capital spending and what your working capital next year means?
spk08: Yeah, Paul, why don't you handle that one?
spk03: Well, most of the cash flow from operations is going towards inventory, and we're expecting... to not grow inventory in fact to reduce inventory so we're going to generate um cash flow from from reducing inventory um capital expenditure which has been averaging around five million dollars a year that will um will probably continue at a similar pace um but the big change going forward is going to be um is inventory whereas It's been a negative drain. It'll be, you know, hopefully somewhat positive going forward.
spk04: And as you generate that cash, how will you put it to use?
spk08: Well, I can tell you that the first thing is paying down debt. Yeah, we'll pay down debt. Yeah. And then getting positioned for the next acquisition.
spk04: Okay. Thank you very much.
spk08: Thanks, Peter.
spk02: Again, if you have a question, please press star, then one. Our next question will come from Jeffrey Matthews with Ram Partners. Please go ahead.
spk06: Hi, Walter.
spk02: Hi, Jeff.
spk06: You were one of the first CEOs to highlight the disruption in the U.S. supply chain, well, the global supply chain, really. And that was several calls ago. Where do you see things now in general versus now? the worst of it and versus where you'd like it to be?
spk08: Well, the wild card, of course, for people, for companies that import from China in particular, is that the vast majority of their population has not been vaccinated with Western vaccines. So it's the fear is that it could possibly spread again as the weather gets cold in a serious way. Right now, China is still continuing to be cautious, and it's still pretty difficult to come into China for normal businessmen. So the Chinese are very cautious about that, and rightly so because of the exposure that the population has. If they get seriously sick from COVID, well, then... All the inventory that we have right now will come in very handy. I'm not anticipating that. I think the availability of Western vaccines, while maybe not being used right now, would certainly be available for China to vaccinate its population. That's the biggest risk I see in supply chain right now. If they stay healthy, the factories produce. As far as... The shipping, there's now an overcapacity of container ships. They've been building for the last two years, and there's more of those. Containers themselves, there's many more of them. Many are still in the wrong places, but the price to move them across the ocean has dropped substantially. And in the West Coast ports, the ports like LA and Long Beach are pretty much back to normal. East Coast still has some congestion, but vastly different than six months ago.
spk06: Great. Thanks and good luck. Thank you.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Mr. Walter Johnson for any closing remarks. Please go ahead, sir.
spk08: I'd like to thank you for joining the call today. Just as an aside, the previous and former conference coordinator the organization that we have used for a number of years did not have a schedule and so we fired them and I'm very happy that we've now got a competent conference coordinator and we look forward to speaking to you again at the end of the fourth quarter and I also look forward to seeing some of you at the LD micro conference next week thank you for joining us and goodbye
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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