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spk08: Good day and welcome to the Acme United Corporation second quarter 2023 earnings. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Walter Johnson, Chairman and CEO. Please go ahead, sir.
spk07: Good morning. Welcome to the second quarter 2023 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?
spk09: 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 challenging global macroeconomic environment characterized by continued high inflation and high interest rates. We have experienced supply chain disruptions, including those resulting from the COVID-19 pandemic, and we may experience supply chain disruptions in the future. We're also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission in our current earnings release. Thank you, Paul.
spk07: Acme United had an excellent second quarter of 2023. with net income increasing 26% and earnings per share increasing 35%. Our net sales were $53.3 million, a decrease of 6%, which was anticipated due to inventory reductions of several of our large customers. Net income was $3.4 million compared to $2.7 million in the second quarter of 2022. Earnings per share were 96 cents compared to 71 cents in the second quarter last year. In 2022, the cost of shipping a container from Shanghai to Long Beach, California, increased to as high as $19,000 versus our budget of $12,500. This resulted in additional expenses in 2022 of approximately $4 million. The company did not raise prices to adjust for these costs, but they obviously reduced profitability in 2022 by approximately $4 million. In 2023, container costs have declined to about $5,000 each. We implemented a $5 million cost savings plan in September of 2022, and we were on track to accomplishing our goal. We hired an experienced director of distribution who improved training, increased wages, and began new automation projects in our North Carolina facility. We have also substantially lowered staff turnover. As you may know, we improved the working conditions in our 345,000 square foot facility in North Carolina by installing massive air conditioning units during 2021 and 2022. About nine months ago, it appeared that the worst of the supply chain problems were easing. The company began to reduce its inventory, being careful not to impact unexpected customer requirements or to be unprepared for another interruption. The result has been a $9.1 million reduction in inventory since June 30, 2022. We've used the cash flow to pay down debt and are positioned to fund another acquisition or take advantage of a new growth opportunity. We have not provided guidance for 2023, but we anticipate performance during the year far exceeding that of 2022. We expect sales to be impacted by global supply chain reductions, but we have new programs in all our segments that will also drive us forward. I'll now turn the call to Paul Driscoll.
spk09: Acme's net sales for the second quarter were $53.3 million compared to $56.8 million in 2022, a decrease of 6%. Sales for the six months ended June 30, 2023, were $99.2 million compared to $100.1 million in the same period in 2022, a decrease of 1%. Net sales in the U.S. segment decreased 8% in the second quarter due to customer inventory reductions of school and office products that were heavily purchased in the second quarter of 2022. Sales decreased 1% for the six months and the June 30th. Net sales for Europe decreased 7% in local currency for the quarter and 5% for the six months and the June 30th. The sales decrease for both periods was mainly due to the economic recession in Europe. Net sales in local currency for Canada increased 21% in the quarter and 8% for the year to date due to growth in first aid products. The gross margin was 37.5% in the second quarter of 2023 compared to 32.7% in 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022 as well as lower transportation costs. SG&A expenses for the second quarter of 2023 were $14.8 million or 28% of sales compared with $14.6 million at 26% of sales for the same period of 2022. SG&A expenses for the first six months of 2023 were $29 million or 29% of sales compared with $28 million or 28% of sales in 2022. Operating profit in the second quarter increased 32% due to an improved gross margin and tight control of SG&A spending. Interest expense for the second quarter of 2023 was $830,000 compared to $420,000 in the second quarter of 22. The increase was entirely due to higher interest rates. In fact, average debt declined by $8 million in the second quarter of 2023 compared to Q2 of last year. Our overall average interest rate in the second quarter of 2023 was 6.4% compared to 2.9% for the second quarter of 2022. Net income for the second quarter of 2023 was $3.4 million or 96 cents per diluted share compared to a net income of $2.7 million or 71 cents per diluted share for the same period of 2022. An increase of 26% in net income and 35% in earnings per share. Net income for the first six months in the June 30th, 2023 was $4.4 million or $1.25 per diluted share compared to $3.6 million or 93 cents per diluted share in a comparable period last year, increases of 24% and 34%. The company's bank debt less cash on June 30th, 2023 was $47 million compared to $60 million on June 30, 2022. During a 12-month period, the company paid $2 million in dividends and generated approximately $14 million in free cash flow, including an inventory reduction of $9 million. Net debt declined $8 million from December 31, 2022. Thank you, Paul. I will now open the call to questions.
spk08: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jim Maroney with Singular Research. Please proceed with your question.
spk21: Yes, thank you. Good quarter, gentlemen. I guess my question deals with what you anticipate going forward. It seems like you got past the headwinds of supply side and the higher costs associated with it. But going forward, a lot of economists are talking about recession, and I'm just curious on what your thoughts are on how acne will be insulated, if they are at all insulated, to any upcoming recession. Can you anticipate lower volumes, or what do you plan on doing to mitigate any of the negative effects of a recession? Thanks.
spk07: Good question, Jim. First, acne is not insulated from anything. We face every bit of the challenges of any other company. And if there's supply chain problems, we face that. We face inflation just like everybody else. And if we go into a recession, we face a demand issue. And that's pretty clear. The first aid side, where we're now the second largest in North America, has a recurring revenue stream from our refill business. as kits lose the components either through an accident or it disappears or is obsolete. Those kits have to be refilled and they are regularly. So there's a very strong recurring revenue stream that may be somewhat insulated. Relative to new first aid installations, we've got a number of programs going on with major companies in North America. And we've got increasing growth in Canada using First Aid Central and our multinational companies that operate there throughout every field, including mining, oil and gas, transportation, and general retail. On the First Aid side, we also have a number of new products that are going into retail accounts in the United States and Canada. So those are the things that offset some of the headwinds if we go into a recession. With the Westcott business, the cost of our products, which are primarily scissors and cutting tools, those are not expensive items. Most of them are under $25. Many are under $10. And while there may be migration from one product to another product within different price points, it's not the same as a capital good. It's not a refrigerator, a house, or a car. So in past recessions, we've seen some backing off of Westcott, but certainly not the same as if it was a capital good. Relative to the inventory reductions, it depends on the retailer, and it's uneven within departments. But obviously, the heavy purchasing they did a year ago is gradually decreasing. being worked off. In the case of back to school, it was probably more opportune in the second quarter when back to school actually is an area where you can sell product for that segment. But my belief is that by year end, maybe sooner, most retailers will have been completely out of the inventory that they bought a year ago. And in many cases, that's occurred already. And we're seeing as we speak, increased demand from them. I hope that helps, Jim. It was a good question.
spk21: No, very good. Thank you. That was great insight.
spk08: Our next question comes from the line of Bill Halabowski with Sidoti. Please proceed with your question.
spk04: Thank you for taking my question and allowing me to participate. I have two questions. The first is, again, on the supply chain. I believe earlier in the commentary you mentioned what sounded like customers maybe stocking up last year, which perhaps set difficult comparison for this period. Can you shed any light on your expectations for the second half of the year, if we may see similar? And then my second question, if I may, is since you mentioned recession, is it your belief that that would occur? And if it does, do you feel that you're positioned well based on price points that you mentioned that, as you said, are more affordable and not like buying huge appliances and so forth? Thank you for any light you can shed on this.
spk07: Okay. Well, first on supply chain, customers in the second quarter last year did purchase and place orders from multiple sources in order to get product particularly for back to school, but for other items as well. Those just happen to be in our segment. But you can imagine where you have a seasonal demand, which would be back to school, and your shelves have to be filled, and if you're online, you have to have product. Because the window, while it is throughout the year, is predominantly in the June through September range. And so... Early in this time last year, the second quarter, retailers were just buying whatever they could. You may remember that the ports were plugged up in the East Coast, the West Coast, Rotterdam. It really didn't matter. And there were massive problems getting products out of China, and a lot of peaking demand requirements for products trucks and ships and containers. So that scramble reinforced the need to get stock from our retailers a year ago. Well, that's pretty much changed. And while there was some sell-off in the second quarter, and we anticipated it because we knew what they had and when it was shipped, that's been worked out pretty much now. If you're looking at the second half, The retailers have had a year for working out inventory, really actually since maybe September when it lightened up a lot. But it's not the same kind of issue they had in the past nine months. It's far better. And so you're getting closer to the actual demand from customers. We're seeing as we speak... Pretty good growth, but it's early in the quarter. And I think that in the back half of the year, we should, with the programs we've got in place right now, see continued revenue growth. On the earnings side, it will be substantially improved because we don't have the costs of shipping, which were capitalized as product costs and worked through in the third and fourth quarter. Those are pretty much normalized now. And so the margins will continue to improve, we believe, in the back half of the year. So we're looking for a very strong back half. Now, regarding inflation, I mean, recession, I have to believe that if you keep increasing interest rates, you eventually cause a recession. It may be led by housing. And it may be led by the auto industry and capital goods. But these are things that are interest rate sensitive. And while earnings are increasing for many people, and we've had good increases to our employees, still, you pay tax on your increases, and the spending is after tax. And it's very hard to match up. So I think we will have a recession. And I think that the Fed... in order to break interest rate or break inflation, will continue to raise rates, and they really don't know the unintended consequences for moving that fast. We saw some of that with the banking segment, and there'll be others because things do not operate independently. However, I think as relative to ACME, as outlined earlier, our first aid side with the high refill rates and the programs we've got in place should be pretty strong. And maybe there'll be some weakness in Westcott cutting tools because that is a consumer product, but I don't see it to be major. I hope that helped.
spk04: It does. And I appreciate the candor. Thank you so much.
spk08: Our next question comes from the line of Richard dearly. with Longport Partners. Please proceed with your question.
spk05: Good morning. I guess one for Paul. You're on average inventory rather than LIFO or FIFO, as I remember. Does that mean that the high-cost inventory has largely flown through the P&L at this point?
spk14: Yes.
spk05: Okay. And then last quarter, you were estimating that inventories would be down $5 million for the year, which would get you to something like $58 million. And you're at $58 now. So is there a new goal on the inventory, or is this inventory about right?
spk09: I think the current inventory is about where we will end the year. Maybe it's a million dollars more.
spk05: Okay. That's great. And what was the sales mix in the quarter between First Aid and Westcott?
spk09: Okay, so the First Aid was 59% in the quarter and year-to-date. So for the three months and the six months, it was both 59%.
spk05: Right. And, Walter, how did you get invited to that conference in Qatar? That was quite something.
spk07: Oh, well, for those that don't know, I was presenting at the Bloomberg conference in Qatar, and it related to supply chain, which we live in. And it's not the first time I've spoken about supply chain. Actually, with Bloomberg, it's probably the fourth time. And we know what we're talking about when we're talking about what's going on in China and what's happening with containers. We live it daily. And our calls with Asia are weekly. And for me, it's weekly. And then, of course, I'm in China often. So it was a pretty natural invitation, I felt.
spk05: Great. It was intriguing to hear that. Then the expansion, the square footage expansion in Canada to supply both Canada and multinationals, why does it open markets being in Canada as opposed to the U.S.? ?
spk07: When we bought first aid only, I mean first aid central in Canada, it gave us Canadian manufacturing of first aid. And while the borders are open, the provinces have very, very different requirements. It would be similar to many regions of the United States all having different requirements for what goes into a kit. And it was very difficult. as a non-Canadian supplier prior to First Aid Central to be able to be effectively supplying. But once we bought First Aid Central, we were able to access, first, incredible purchasing power of our combined businesses, so we were able to give them very competitive product costs. Second, we now had the full sales team for North America and Europe working together with multinationals in Canada that were looking for products that we had developed in one of the other regions, but they weren't available in Canada, and we were able to produce them in our facility outside of Montreal. Well, we've been successful with that, so much so that right now, even though we doubled the space, we still need more space, and it's very exciting.
spk05: Great. Oh, Paul, do you have what last year's second quarter mix on first aid cutting was?
spk09: Okay. The second quarter last year was 51%. Great. Okay.
spk05: Thank you very much.
spk08: Thank you. Our next question comes from the line of Norman. Norman? Serfian with RBC Wealth Management. Please proceed with your question.
spk11: Yes, thank you so much. Fantastic call, and I really appreciate all the information. I had two questions, and one question was, it sounded like one fellow implied there might be a recession. What if there's no recession and we continue growing? It looks like the consumer is spending a lot of money this summer in Disneyland and places like this. With that in mind, if We have a soft landing or no recession because it seems to me the economy is acting much better and people are scratching their head, not understanding the impact. Interest rates are going up. It looks like it's actually increasing business activity. There was a lot of inactivity, remember, under the low interest rates. So it seems like people are out doing things. If that's the case, are we prepared for demand for our products? With respect to inventory, if there's not enough inventory to meet the consumer demand, say with the emergency kits and what have you, would that be a drag on the business going forward if we're not prepared for a strong economy? And the other question I have is... Go ahead.
spk07: First, regarding what if there's not a recession. Wow, let's dance. That's awesome. And I think... You prepare for the worst and maybe you're lucky. Relative to inventory, we'd raised our inventory about 30% in preparation for supply chain issues. And we did that during COVID. And that's what we've peeled back. So we're in position for normal growth. And in fact, when Paul said we think we've bottomed out with the inventory, And when the question was asked, well, you said you'd reduce it 5 million, but you actually did 9. That's because we thought we could, but we're very sensitive at this point to being able to supply our customers should there be more demand. And I think we're positioned to do that. So again, we just pulled back the stock that we had done during COVID when we really didn't know what supply would be like And now we're in a position, I think, if we're lucky, we'll get more growth.
spk11: Good. Now, the other part of the question, though, now would be a little bit of a downer. So let's say because of COVID and people aren't going back to work in the office like they were, is this a potential drag on business demand for product if people aren't going to show up in the office? I mean, working remote seems so popular. I'm just wondering how that would affect your business.
spk07: Yeah. I think we've already run through that. And what we did do was we shifted to a remote workforce during COVID. And we basically did promotions online and at places where they would shop for food. And that proved to be the right area. You may remember that when offices were closed, people weren't shopping at many retailers, but we shifted within a week to online sales.
spk11: But if the offices are closed, would you lose business on the safety, the first aid products? In other words, is there less demand if there are fewer people going into the office environment?
spk07: I guess that's the question. The bulk of our first aid business is industrial. And while, sure, we sell to the offices, the bulk of it is going into industrial companies, the Exxon, Bowling, a lot going to companies like Grainger into the industrial market. We sell our biggest online customer, our biggest customer is Amazon, and we find a broad mix of people buying there. I don't think... honestly, that a change in a work pattern at this stage would have any impact.
spk10: Wonderful. Thank you so much, Walter. Appreciate it. Sure.
spk08: As a reminder, it is star one to ask a question. Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.
spk06: Yes, hi, Walter. Just had a question on What's driving the first aid demand in Canada?
spk07: Well, we're gaining market share. We're introducing new products, particularly industrial products that had not been available, at least from Acme in the past. We've got better pricing than most of the Canadian competitors because we've got the scale of purchasing. and we've got a really good team.
spk02: It seems to be working.
spk06: Okay, sounds good. And on to gross margin, I see there's improvement there. How are we supposed to look at that in the future quarters? Will there be more improvement, or will it be leveling off here?
spk07: Chris, I'll turn that over to Paul Driscoll because he models that pretty carefully.
spk09: Paul? Yeah, the next two quarters will be similar to the latest quarter, the second quarter, maybe a little bit higher, maybe 37.5% to 38%. Okay, and then do you have anything about in –
spk06: future quarters after that?
spk09: Well, I think it will level off at that. Okay.
spk19: All right.
spk09: There's a lot of factors that affect the gross margin. So I think at this point, being at 37.5% in the second quarter, we'll probably do something similar to that a little bit higher in the third and fourth quarter. It's hard to predict what will happen next year.
spk02: Okay.
spk06: Okay, thanks.
spk08: Our next question comes from the line of Ralph Marash with First Manhattan Company. Please proceed with your question.
spk13: Hi, Walter and Paul. My first question is, do you think that innovation within your product line has suffered at all with all the puts and takes during COVID?
spk02: That's hard to call, Ralph.
spk07: I would say we've probably done less in the coding area than we had in earlier years. As you know, we have about 150 patents on codings. And I think some of the collaboration that we would have done during COVID probably wasn't done. because you weren't together and it was harder. On the other hand, on the first aid side, our customers are pulling us into different segments so quickly. And a couple of the acquisitions, like Spill Magic, where it's being used for bloodborne pathogen kits and spill cleanups for bodily fluids, those didn't even exist. And we've got a business that's just thriving now that we just didn't have. So I don't think it's across the board. But the kind of research or new products where we're all together and we're thinking through those ideas, we're starting them again. But I think that probably suffered a little bit.
spk13: Okay, thank you. And on the acquisition front, do you see a third leg or are you going to continue to grow First Aid and your office supply business?
spk07: Yeah, I don't see a third leg. In particular, I see reinforcing in the First Aid segment where we've got really a lot of momentum and there's a number of ways that we can grow in first aid you know adjacencies and our market competitors as an example or those that are a half step away with products but also the vertical integration of the components that go into the first aid kits example of that is mednap we're making alcohol wipes prep pads castile wipes all going into our kits as well as selling on the outside and mednap will eventually be making other components perhaps burn creams and hand sanitizers that also go into those kits. So there'll be other acquisitions probably in first aid, again, either horizontally expanding market share or vertically integrating into what we make. And they'll be in probably North America.
spk13: Thank you. My last question is, I'm assuming, since you didn't mention it, that the good news is that your distribution facility in Rocky Mount was spared any tornado damage.
spk07: So for those that don't know, on Friday, a tornado in Rocky Mountain, North Carolina, hit down and destroyed a big section of the Pfizer Hospira facility, which is seven miles away from ours. It destroyed about 25% of the injectable pharmaceuticals in the United States. They're a supplier, but it's going to be a massive shortage. We have an emergency shelter within our facility, and we evacuated 180 workers
spk02: Fortunately, it missed us. We were lucky.
spk07: But for Pfizer and for the country, we've got a handful of problems because it's going to be a shortage of injectable pharmaceuticals, whether that's for chemotherapy or for penicillins or so many other items. It's a big problem. We're okay. We're okay.
spk13: Great. I'm glad that was really, really good news. Thanks, Walter. Thank you.
spk08: There are no further questions in the queue. I'd like to hand the call back to Mr. Johnson for closing remarks.
spk07: Well, for no further questions, thank you for joining us. We look forward to talking to you as we complete the third quarter and have the earnings. Bye-bye.
spk08: Ladies and gentlemen, this does include today's teleconference. Thank you for your participation.
spk02: You may disconnect your lines at this time and have a wonderful day. you Thank you.
spk08: Good day and welcome to the Acme United Corporation second quarter 2023 earnings. At this time, all parts of events are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Walter Johnson, Chairman and CEO. Please go ahead, sir.
spk07: Good morning. Welcome to the second quarter 2023 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.
spk09: 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 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 challenging global macroeconomic environment characterized by continued high inflation and high interest rates. In addition, We have experienced supply chain disruptions, including those resulting from the COVID-19 pandemic, and we may experience supply chain disruptions in the future. We're also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission in our current earnings release. Thank you, Paul.
spk07: Acme United had an excellent second quarter of 2023. with net income increasing 26% and earnings per share increasing 35%. Our net sales were $53.3 million, a decrease of 6%, which was anticipated due to inventory reductions of several of our large customers. Net income was $3.4 million compared to $2.7 million in the second quarter of 2022. Earnings per share were 96 cents compared to 71 cents in the second quarter last year. In 2022, the cost of shipping a container from Shanghai to Long Beach, California, increased to as high as $19,000 versus our budget of $12,500. This resulted in additional expenses in 2022 of approximately $4 million. The company did not raise prices to adjust for these costs, but they obviously reduced profitability in 2022 by approximately $4 million. In 2023, container costs have declined to about $5,000 each. We implemented a $5 million cost savings plan in September of 2022, and we were on track to accomplishing our goal. We hired an experienced director of distribution who improved training, increased wages, and began new automation projects in our North Carolina facility. We have also substantially lowered staff turnover. As you may know, we improved the working conditions in our 345,000 square foot facility in North Carolina by installing massive air conditioning units during 2021 and 2022. About nine months ago, it appeared that the worst of the supply chain problems were easing. The company began to reduce its inventory, being careful not to impact unexpected customer requirements or to be unprepared for another interruption. The result has been a $9.1 million reduction in inventory since June 30, 2022. We've used the cash flow to pay down debt and are positioned to fund another acquisition or take advantage of a new growth opportunity. We have not provided guidance for 2023, but we anticipate performance during the year far exceeding that of 2022. We expect sales to be impacted by global supply chain reductions, but we have new programs in all our segments that will also drive us forward. I'll now turn the call to Paul Driscoll.
spk09: Acme's net sales for the second quarter were $53.3 million compared to $56.8 million in 2022, a decrease of 6%. Sales for the six months ended June 30, 2023, were $99.2 million compared to $100.1 million in the same period in 2022, a decrease of 1%. Net sales in the U.S. segment decreased 8% in the second quarter due to customer inventory reductions of school and office products that were heavily purchased in the second quarter, of 2022. Sales decreased 1% for the six months and the June 30th. Net sales for Europe decreased 7% in local currency for the quarter and 5% for the six months and the June 30th. The sales decrease for both periods was mainly due to the economic recession in Europe. Net sales in local currency for Canada increased 21% in the quarter and 8% for the year to date due to growth in first aid products. The gross margin was 37.5% in the second quarter of 2023 compared to 32.7% in 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022 as well as lower transportation costs. SG&A expenses for the second quarter of 2023 were $14.8 million or 28% of sales compared with $14.6 million of 26% of sales for the same period of 2022. SG&A expenses for the first six months of 2023 were $29 million or 29% of sales compared with $28 million or 28% of sales in 2022. Operating profit in the second quarter increased 32% due to an improved gross margin and tight control of SG&A spending. Interest expense for the second quarter of 2023 was $830,000 compared to $420,000 in the second quarter of 22. The increase was entirely due to higher interest rates. In fact, average debt declined by $8 million in the second quarter of 2023 compared to Q2 of last year. Our overall average interest rate in the second quarter of 2023 was was 6.4% compared to 2.9% for the second quarter of 2022. Net income for the second quarter of 2023 was $3.4 million or 96 cents per diluted share compared to a net income of $2.7 million or 71 cents per diluted share for the same period of 2022. An increase of 26% in net income and 35% in earnings per share. Net income for the first six months in the June 30th, 2023 was $4.4 million or $1.25 per diluted share compared to $3.6 million or 93 cents per diluted share in a comparable period last year, increases of 24% and 34%. The company's bank debt less cash on June 30th, 2023 was $47 million compared to $60 million on June 30, 2022. During the 12-month period, the company paid $2 million in dividends and generated approximately $14 million in free cash flow, including an inventory reduction of $9 million. Net debt declined $8 million from December 31, 2022. Thank you, Paul.
spk07: I will now open the call to questions.
spk08: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jim Maroney with Singular Research. Please proceed with your question.
spk21: Yes, thank you. Good quarter, gentlemen. I guess my question deals with what you anticipate going forward. It seems like you got past the headwinds of supply side and the higher costs associated with it. But going forward, a lot of economists are talking about recession, and I'm just curious on what your thoughts are on how acne will be insulated, if they are at all insulated, to any upcoming recession. Can you anticipate lower volumes, or what do you plan on doing to mitigate any of the negative effects of a recession? Thanks.
spk07: Good question, Jim. First, acne is not insulated from anything. We face every bit of the challenges of any other company. And if there's supply chain problems, we face that. We face inflation just like everybody else. And if we go into a recession, we face a demand issue. And that's pretty clear. The first aid side, where we're now the second largest in North America, has a recurring revenue stream from our refill business. as kits lose the components either through an accident or it disappears or is obsolete. Those kits have to be refilled and they are regularly. So there's a very strong recurring revenue stream that may be somewhat insulated. Relative to new first aid installations, we've got a number of programs going on with major companies in North America. And we've got increasing growth in Canada. We're using First Aid Central and our multinational companies that operate there throughout every field, including mining, oil and gas, transportation, and general retail. On the First Aid side, we also have a number of new products that are going into retail accounts in the United States and Canada. So those are the things that offset some of the headwinds if we go into a recession. With the Westcott business, the cost of our products, which are primarily scissors and cutting tools, those are not expensive items. Most of them are under $25. Many are under $10. And while there may be migration from one product to another product within different price points, it's not the same as a capital good. It's not a refrigerator, a house, or a car. So in past recessions, we've seen some backing off of Westcott, but certainly not the same as if it was a capital good. Relative to the inventory reductions, it depends on the retailer, and it's uneven within departments. But obviously, the heavy purchasing they did a year ago is gradually decreasing. being worked off. In the case of back to school, it was probably more opportune in the second quarter when back to school actually is an area where you can sell product for that segment. But my belief is that by year end, maybe sooner, most retailers will have been completely out of the inventory that they bought a year ago. And in many cases, that's occurred already. And we're seeing as we speak, increased demand from them. I hope that helps, Jim. It was a good question.
spk21: No, very good. Thank you. That was great insight.
spk08: Our next question comes from the line of Bill Halabowski with Sidoti. Please proceed with your question.
spk04: Thank you for taking my question and allowing me to participate. I have two questions. The first is, again, on the supply chain. I believe earlier in the commentary you mentioned what sounded like customers maybe stocking up last year, which perhaps set difficult comparison for this period. Can you shed any light on your expectations for the second half of the year, if we may see similar? And then my second question, if I may, is since you mentioned recession, is it your belief that that would occur? And if it does, do you feel that you're positioned well based on price points that you mentioned that, as you said, are more affordable and not like buying huge appliances and so forth? Thank you for any light you can shed on this.
spk07: Okay. Well, first on supply chain, customers in the second quarter last year did purchase and place orders from multiple sources in order to get products. particularly for back to school, but for other items as well. Those just happen to be in our segment. But you can imagine where you have a seasonal demand, which would be back to school, and your shelves have to be filled. And if you're online, you have to have product because the window, while it is throughout the year, is predominantly in the June through September range. and so early in this time last year the second quarter retailers were just buying whatever they could you may remember that the ports were plugged up in the east coast to the west coast rotterdam it really didn't matter and there were massive problems getting products out of china and a lot of peaking and or demand requirements for trucks and ships and containers. So that scramble reinforced the need to get stock from our retailers a year ago. Well, that's pretty much changed. And while there was some sell-off in the second quarter, and we anticipated it because we knew what they had and when it was shipped, that's been worked out pretty much now. If you're looking at the second half, The retailers have had a year for working out inventory, really actually since maybe September when it lightened up a lot. But it's not the same kind of issue they had in the past nine months. It's far better. And so you're getting closer to the actual demand from customers. We're seeing as we speak... Pretty good growth, but it's early in the quarter. And I think that in the back half of the year, we should, with the programs we've got in place right now, see continued revenue growth. On the earnings side, it will be substantially improved because we don't have the costs of shipping, which were capitalized as product costs and worked through in the third and fourth quarter. Those are pretty much normalized now. And so the margins will continue to improve. We believe in the back half of the year. So we're looking for a very strong back half. Now regarding inflation, I mean recession, I have to believe that if you keep increasing interest rates, you eventually cause a recession. It may be led by housing. And it may be led by the auto industry and capital goods. But these are things that are interest rate sensitive. And while earnings are increasing for many people, and we've had good increases to our employees, still, you pay tax on your increases and the spending is after tax. And it's very hard to match up. So I think we will have a recession. And I think that the Fed... in order to break interest rate or break inflation, will continue to raise rates, and they really don't know the unintended consequences for moving that fast. We saw some of that with the banking segment, and there'll be others because things do not operate independently. However, I think as relative to acne, as outlined earlier, our first aid side with the High refill rates and the programs we've got in place should be pretty strong, and maybe there'll be some weakness in Westcott cutting tools because that is a consumer product, but I don't see it to be major. I hope that helped.
spk04: It does, and I appreciate the candor. Thank you so much.
spk08: Our next question comes from the line of Richard Geardley. with Longport Partners. Please proceed with your question.
spk05: Good morning. I guess one for Paul. You're on average inventory rather than LIFO or FIFO, as I remember. Does that mean that the high-cost inventory has largely flown through the P&L at this point?
spk14: Yes, yes.
spk05: Yeah, okay. And then last quarter, you were estimating that inventories would be down $5 million for the year, which would get you to something like $58 million. And you're at $58 now. So is there a new goal on the inventory, or is this inventory about right?
spk09: I think the current inventory is about where we will end the year. Maybe it's a million dollars more.
spk05: Okay. That's great. And what was the sales mix in the quarter between First Aid and Westcott?
spk09: Okay, so the First Aid was 59% in the quarter and year-to-date. So for the three months and the six months, it was both 59%.
spk05: Right. And, Walter, how did you get invited to that conference in Qatar? That was quite something.
spk07: Oh, well, for those that don't know, I was presenting at the Bloomberg conference in Qatar, and it related to supply chain, which we live in. And it's not the first time I've spoken about supply chain. Actually, with Bloomberg, it's probably the fourth time. And we know what we're talking about when we're talking about what's going on in China and what's happening with containers. We live it daily. And our calls with Asia are weekly. And for me, it's weekly. And then, of course, I'm in China often. So it was a pretty natural invitation, I felt.
spk05: Great. It was intriguing to hear that. Then the expansion, the square footage expansion in Canada to supply both Canada and multinationals, why does it open markets being in Canada as opposed to the U.S.? ?
spk07: When we bought first aid only, I mean first aid central in Canada, it gave us Canadian manufacturing of first aid. And while the borders are open, the provinces have very, very different requirements. It would be similar to many regions of the United States all having different requirements for what goes into a kit. And it was very difficult as a non-Canadian supplier prior to First Aid Central to be able to be effectively supplying. But once we bought First Aid Central, we were able to access, first, incredible purchasing power of our combined businesses, so we were able to give them very competitive product costs. Second, we now had the full sales team for North America and Europe working together with multinationals in Canada that were looking for products that we had developed in one of the other regions, but they weren't available in Canada, and we were able to produce them in our facility outside of Montreal. Well, we've been successful with that, so much so that right now, even though we doubled the space, we still need more space, and it's very exciting.
spk05: Great. Oh, Paul, do you have what last year's second quarter mix on first aid cutting was?
spk09: Okay. The second quarter last year was 51%. Great. Okay.
spk05: Thank you very much.
spk08: Thank you. Our next question comes from the line of Norman. Norman? Serfian with RBC Wealth Management. Please proceed with your question.
spk11: Yes, thank you so much. Fantastic call, and I really appreciate all the information. I had two questions, and one question was, it sounded like one fellow implied there might be a recession. What if there's no recession and we continue growing? It looks like the consumer is spending a lot of money this summer in Disneyland and places like this. With that in mind, if we have a soft landing or no recession because it seems to me the economy is acting much better and people are scratching their head not understanding the impact. Interest rates are going up. It looks like it's actually increasing business activity. There was a lot of inactivity, remember, under the low interest rates. So it seems like people are out doing things. If that's the case, are we prepared for demand for our products? With respect to inventory, if there's not enough inventory to meet the consumer demand, say with the emergency kits and what have you, would that be a drag on the business going forward if we're not prepared for a strong economy? And the other question I have is... Go ahead.
spk07: First, regarding what if there's not a recession. Wow, let's dance. That's awesome. And I think... You prepare for the worst and maybe you're lucky. Relative to inventory, we'd raised our inventory about 30% in preparation for supply chain issues. And we did that during COVID. And that's what we've peeled back. So we're in position for normal growth. And in fact, when Paul said we think we've bottomed out with the inventory, And when the question was asked, well, you said you'd reduce it five million, but you actually did nine. That's because we thought we could, but we're very sensitive at this point to being able to supply our customers should there be more demand. And I think we're positioned to do that. So, again, we just pulled back the stock that we had done during COVID when we really didn't know what supply would be like. And now we're in a position, I think, if we're lucky, we'll get more growth.
spk11: Good. Now, the other part of the question, though, now would be a little bit of a downer. So let's say because of COVID and people aren't going back to work in the office like they were, is this a potential drag on business demand for product if people aren't going to show up in the office? I mean, working remote seems so popular. I'm just wondering how that would affect your business.
spk07: Yeah. I think we've already run through that. And what we did do was we shifted to a remote workforce during COVID. And we basically did promotions online and at places where they would shop for food. And that proved to be the right area. You may remember that when offices were closed, people weren't shopping. at many retailers, but we shifted within a week to online sales.
spk11: But if the offices are closed, would you lose business on the safety, the first aid products? In other words, is there less demand if there are fewer people going into the office environment?
spk07: I guess that's the question. The bulk of our first aid business is industrial. And while, sure, we sell to the offices, the bulk of it is going into industrial companies, the Exxon, Bowling, a lot going to companies like Grainger into the industrial market. We sell our biggest online customer, our biggest customer is Amazon, and we find a broad mix of people buying there. I don't think... honestly, that a change in a work pattern at this stage would have any impact.
spk10: Wonderful. Thank you so much, Walter. Appreciate it. Sure.
spk08: As a reminder, it is star one to ask a question. Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.
spk06: Yes, hi, Walter. Just had a question on What's driving the first aid demand in Canada?
spk07: Well, we're gaining market share. We're introducing new products, particularly industrial products that had not been available, at least from ACME in the past. We've got better pricing than most of the Canadian competitors because we've got the scale of purchasing. and we've got a really good team.
spk02: It seems to be working.
spk06: Okay, sounds good. And on to gross margin, I see there's improvement there. How are we supposed to look at that in the future quarters? Will there be more improvements, or will it be leveling off here?
spk07: Chris, I'll turn that over to Paul Driscoll because he models that pretty carefully.
spk09: Paul? Yeah, the next two quarters will be similar to the latest quarter, the second quarter, maybe a little bit higher, maybe 37.5% to 38%.
spk06: Okay, and then do you have anything about in – future quarters after that?
spk09: Well, I think it will level off at that.
spk19: Okay. All right.
spk09: There's a lot of factors that affect the gross margin. So I think at this point, being at 37.5% in the second quarter, we'll probably do something similar to that a little bit higher in the third and fourth quarter. It's hard to predict what will happen next year.
spk06: Okay. Okay, thanks.
spk08: Our next question comes from the line of Ralph Marash with First Manhattan Company. Please proceed with your question.
spk13: Hi, Walter and Paul. My first question is, do you think that innovation within your product line has suffered at all with all the puts and takes during COVID?
spk02: That's hard to call, Ralph.
spk07: I would say we've probably done less in the coding area than we had in earlier years. As you know, we have about 150 patents on codings. And I think some of the collaboration that we would have done during COVID probably wasn't done. because you weren't together and it was harder. On the other hand, on the first aid side, our customers are pulling us into different segments so quickly. And a couple of the acquisitions, like Spill Magic, where it's being used for bloodborne pathogen kits and spill cleanups for bodily fluids, those didn't even exist. And we've got a business that's just thriving now that we just didn't have. So I don't think it's across the board. But the kind of research or new products where we're all together and we're thinking through those ideas, we're starting them again. But I think that probably suffered a little bit.
spk13: Okay, thank you. And on the acquisition front, do you see a third leg or are you going to continue to grow first aid and your office supply business?
spk07: Yeah, I don't see a third leg. In particular, I see reinforcing in the first aid segment where we've got really a lot of momentum and there's a number of ways that we can grow in first aid, you know, adjacencies in our market competitors, as an example, or those that are a half step away with products, but also the vertical integration of the components that go into the first aid kits. Example of that is MedNap. We're making alcohol wipes, prep pads, Castile wipes, all going into our kits as well as selling on the outside. And MedNap will eventually be making other components, uh, perhaps burn creams and hand sanitizers that also go into those kits. So there'll be other acquisitions probably in first aid, again, either horizontally expanding market share or vertically integrating into what we make. And they'll be in probably North America.
spk13: Thank you. My last question is, I'm assuming since you didn't mention it, that the good news is that your distribution facility in Rocky Mount was spared any tornado damage.
spk07: So for those that don't know, on Friday, a tornado in Rocky Mountain, North Carolina, hit down and destroyed a big section of the Fiserv Hospira facility, which is seven miles away from ours. It destroyed about 25% of the injectable pharmaceuticals in the United States. They're a supplier, but it's going to be a massive shortage. We have an emergency shelter within our facility, and we evacuated 180 workers.
spk02: Fortunately, it missed us. We were lucky.
spk07: But for Pfizer and for the country, we've got a handful of problems because it's going to be a shortage of injectable pharmaceuticals, whether that's for chemotherapy or for penicillins or so many other items. It's a big problem. We're okay. We're okay.
spk13: Great. I'm glad that was really, really good news. Thanks, Walter. Thank you.
spk08: There are no further questions in the queue. I'd like to hand the call back to Mr. Johnson for closing remarks.
spk07: Well, for no further questions, thank you for joining us. We look forward to talking to you as we complete the third quarter and have the earnings. Bye-bye.
spk08: Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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