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spk03: Good day and welcome to the Acme United Corporation's third quarter 2023 earnings call. At this time, I would like to turn the call over to Walter Johnson, Chairman and CEO. Please go ahead, sir. Good morning.
spk07: Welcome to the third quarter 2023 earnings conference call for Acme United Corporation. I am Walter C. Johnson, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a safe harbor statement. Paul? 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 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 from as a result of a challenging global macroeconomic environment characterized by continued high inflation and high interest rates. In addition, we have experienced supply chain disruptions, and we may experience these 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 and in our current earnings release.
spk07: Thank you, Paul. Acme United made significant progress during the third quarter of 2023. Our sales were $50.4 million, which was approximately 1% above that in the third quarter of 2022. Operating net income was $3.7 million during the quarter, compared to $955,000 last year. Net income was $2.2 million, compared to $64,000 in the third quarter of 2022. Earnings per share were 58 cents compared to 2 cents last year. The company's sales growth of 1% in the third quarter of 2023 reflects improvement from the prior quarter, where revenues were 6% below last year. There continue to be inventory reductions by our Westcott cutting tool customers. However, we believe our customers are nearing the end of that process, and comparisons going forward will reflect true demand. The first aid and medical business offset the weakness in Westcott sales, and it continues to be strong. Our gross margins in the third quarter were 38.7% compared to 32% in 2022. This reflects shipping costs returning to normal levels and the impact of the productivity program that we initiated about a year ago. As you may recall, we incurred about $4.6 million in unusual shipping expenses last year, due to container costs and port congestion. Our planned productivity program totaled $5 million in annual savings. We're currently projecting to exceed the plan by about $1 million annually. We are demonstrating the results in our improved gross margins. The company has been actively reducing its inventory after increasing it purposefully during the pandemic. Our inventory during the past three quarters has declined $9 million. We directed most of the cash flow from the inventory reductions and earnings during the past year to pay down debt. As a result, our balance sheet has improved substantially, and our net debt at the end of the third quarter in 2023 was $38 million compared to $64 million at the same time last year. That's over a 41% decrease in debt. During the third quarter of 2023, we acquired some of the assets of Hawktree Solutions in Canada for approximately $1 million in a bankruptcy auction. Hawktree sells first aid and medical products and is the exclusive licensee of the Canadian Red Cross for many of the supplies used in their training programs and relief efforts. The company also supplied masks, gloves, and gowns to the Canadian government during COVID, and it became overextended when the pandemic ended. We are reactivating their website, moving inventory to our Laval, Canada location, and filling back orders as we speak. Our fourth quarter of 2023 has started strongly. We are winning new business for 2024 in our Westcott and first aid businesses, as well as DMT sharpeners. And we continue to look at new acquisition opportunities. I'll now turn the call to Paul.
spk05: Sales for the third quarter were $50.4 million, compared to $49.7 million in 2022, an increase of 1%. Sales for the nine months ended September 30, 2023, were $150 million, compared to $150 million in the same period in 2022. Net sales in the U.S. segment increased 2% in the third quarter. Sales of first aid products were strong, however, demand was softer for school and office products. Sales were constant for the nine months ended September 30th. The nine-month sales for school and office products were impacted by customer reductions of inventory in the first half of 2023. Net sales for Europe decreased 1% in low currency for the quarter and 4% for the nine months ended September 30th. The sales decrease for both periods was mainly due to the economic recession in Europe. However, the trend is improving. Net sales in local currency for Canada decreased 7% in the quarter, but increased 3% for the year to date due to growth in first aid products. The gross margin was 38.7% in the third quarter of 2023 compared to 32% in 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022, as well as lower inbound transportation costs. SG&A expenses for the third quarter of 2023 were $15.8 million or 31% of sales compared with $15 million or 30% of sales for the same period of 2022. SG&A expenses for the first nine months of 2023 were $44.7 million or 30% of sales compared with $43.2 million, or 29% of sales in 2022. Operating profit in the third quarter increased 280% due to an improved gross margin and tight control of SG&A spending. Interest expense for the third quarter of 2023 was $820,000 compared to $720,000 in the third quarter of 2022. The increase was entirely due to higher interest rates. In fact, Average debt declined by $20 million in the quarter compared to Q3 last year. Our overall average interest rate in the third quarter of 2023 was 6.25% compared to 3.9% for the third quarter of 2022. Net income for the third quarter of 2023 was $2.2 million, or $0.58 per dilute share, compared to net income of $0.64. or $0.02 per diluted share for the same period of 2022. Income for the first nine months ended September 30, 2023, was $6.6 million, or $1.83 per diluted share, compared to $3.6 million, or $0.96 per diluted share in a comparable period last year, increases of 82% and 91%. The company's bank debt less cash on September 30, 2023 was $38 million compared to $64 million on September 30, 2022. During a 12-month period, the company paid $2 million in dividends and generated approximately $27 million in free cash flow, including an inventory reduction of $12 million. Net debt declined $17 million from December 31st
spk07: Thank you, Paul. I will now open the call to questions.
spk03: Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question at this time, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
spk04: Thank you. Thank you.
spk03: And our first question is from the line of Richard Durnley with Longport Partners. Please proceed with your question.
spk01: Good morning.
spk03: Good morning, Jeff.
spk01: Would you talk about pricing and price resistance? You hadn't been seeing any, but given the economy and so on, are people, folks getting more sensitive?
spk07: Well, honestly, our industry is always price sensitive.
spk01: Right.
spk07: This is not a tough business, and it's always price sensitive. I don't see any change. What I am seeing is a pickup in new business for next year, and it seems like we're now lapping the inventory reductions in the fourth quarter. So while I don't see price resistance, I do see some pretty good demand.
spk01: Good. And would it be a safe guess that inventories are about where they should be given that outlook?
spk07: Yeah.
spk01: The inventory is about right. Yeah, inventories should be flat or reflecting whatever demand is in 24 from here. That's exactly right. Paul, what was the sales mix of First Aid and Westcut?
spk05: It was 60% in the third quarter and for the nine months.
spk01: Do you have last year's?
spk05: Last year was approximately 54%. in the third quarter of the year today. Good.
spk01: Thank you very much. Well done. Good quarter.
spk03: Thank you. Thank you. As a reminder, you may press star 1 at this time if you'd like to ask a question. The next question comes from the line of Chris Sakai with Singular Research. Please receive your questions.
spk06: Hi, Walter. I had a question on the school and office products in the U.S., what drove the decline there in sales?
spk07: During the past year, many of our Westcott customers overpurchased, and they did that because of the port congestion and the difficulty of getting products out of China. And it was understandable. So As you may remember, we also had a war start in the Ukraine in March of 2022. So it all disrupted shipping. We paid for it, of course, with just unusual expenses. But our customers were scrambling for products in 2022, and they got them. In the case of the back-to-school, they had excess product, and we knew that going into this year. So it was not unexpected. But the actual demand underlying it was pretty consistent with prior years. But for us, there was a workout of some of the inventory that they bought the prior year. And that's all it was.
spk06: Okay, thanks for that. And then as far as the Israel conflict is concerned, is AFNI exposed there at all?
spk07: I think the whole world is exposed there, and it's a very, very sad situation. In some areas, we will benefit, for example, more than half our business, 60% of it's in first aid products, and then we've got the MedNap business, which is making alcohol wipes and prep pads and so forth. Those areas probably may get some additional volume, and I even hate to think of it like that. But in general, this is not good news.
spk06: Okay. And then for your gross margin of 38.7%, how should we think of that in the next quarter or quarter or two going forward? Should it be about the same or improve even more?
spk07: We continue to be generating productivity improvements. And it may not have picked up, but what we had been laying out as a $5 million productivity plan annually is now $6 million. So we've gotten additional productivity improvements. And I honestly think we'll be able to not only keep the margin we're at, but expand it in the coming year. So I'm quite optimistic about that.
spk04: Okay, great. Thanks for your answers.
spk03: Our next question is from the line of Timothy Call, Capital Management Corporation. Please receive your questions.
spk02: Congratulations on a great quarter. Thank you, Tim. All the hard work paying off. Yeah. With the easier sourcing now and all the new customers and expanding relationships you mentioned, along with the accretive acquisition you just made and retailer inventory corrections being completed, it sounds like we should expect strong revenue growth looking forward.
spk07: That's my expectation as well. And as you know, the first aid business is now 60% of our revenues, and that's been growing fast, faster than the company in total for a number of years. And so it's not only gaining in its influence, but now we've got the Westcott piece lapping performance, which reflected inventory corrections. And I think I'm fairly accurate in saying that is going to continue. So you're right i mean we should be seeing growth on the top line margins continuing to move in a favorable direction and the productivity improvements continuing also with the debt reduction there's perhaps a little bit more to go and so that's all positive so interest expense should decline on a year-over-year basis that I don't know. Um, yeah, it should, but they keep raising rates and for reasons that are appropriate. I mean, but, uh, we certainly have less debt that's impacted. And as you may recall, um, our debt structure had 11 million of fixed debt. And I think it was 3.8%. And those are mortgages on our properties. So as we drop our, um, uh, our debt, we're dropping the variable piece of it. So, um, we'll see as a percent of our interest rate actually decline.
spk02: Well, with those smart moves and all of your hard work paying off, do you think management will ask the board for a dividend increase over the next three to six months?
spk07: We generally look at cash flow and the projections, and based on The cash flow that we've just generated and what I'm seeing on earnings, I think that's something we should consider.
spk02: Well, congratulations again on a strong quarter, and it's great to see revenue growth, margin expansion, lower debt, and all the good moves you made. So it's paying off. Thank you. It is.
spk07: Thank you, Tim. Thank you.
spk03: Thank you. As a reminder, you may press star 1 at this time if you'd like to ask a question. We'll pause a moment to assemble the queue. Thank you. We've reached the end of the question and answer session. I'll now turn the call over to Mr. Johnson for his closing remarks.
spk07: Thank you. If there are no further questions, then this call is completed. I'd like to thank you for joining us, and we look forward to updating you soon. Goodbye.
spk03: This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.
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