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ACU Acme United

Participants
Walter Johnsen CEO
Paul Driscoll CFO
Jim Marrone Singular Research
Tim Call Capital Management Corp
Call transcript
Operator

Good day, and welcome to the Acme United Corporation's hosted Second Quarter 2021 Earnings Conference Call. At this time, I would like to turn the call over to Walter Johnsen. Please go ahead.

Walter Johnsen

Good morning. Welcome to the Second Quarter 2021 Earnings Conference Call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read the safe harbor statement. Paul?

Paul Driscoll

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.

Walter Johnsen

Thank you, Paul. Acme United had a solid second quarter of 2021.

Our net sales were $44.8 million, a record high for the company with growth of 2%.

Our net income from operations was $3.7 million, an increase of 16% and earnings per share were $0.94 compared to $0.92 last year. The company's Paycheck Protection Program loan of $3.5 million was forgiven during the quarter and added to the net income for the quarter. It is nonrecurring and was broken out separately in our financials. The loan was instrumental in avoiding layoffs in our United States operations, and we are grateful for the support. In April, we completed the installation of a new warehouse management system in our largest distribution center in the United States. We did not ship anything from the facility for 10 days during the conversion, as planned. But the early productivity after shipping began again was below what we expected. In normal times, we would have just shipped more in the following days, but we could not hire enough workers and we fell behind. Unshipped orders at the end of June were approximately $5 million.

We are now shipping at normal levels in the United States, but we continue to have a large back order.

In addition, new orders are strong.

We are hiring additional associates in the North Carolina distribution site to bring our customer service levels and fill rates to much higher levels quickly and to ship the unfilled orders.

Our performance during the second quarter of 2021 in Canada was excellent, with sales increasing 68% due to strong back-to-the-office sales and the impact of First Aid Central. In Europe, sales during the second quarter were also strong, with growth of 26%.

We have experienced strong back-to-school, back-to-the-office and craft demand for our Westcott cutting tools and see that continuing.

Our First Aid group has been gaining new business in the retail and industrial markets, and has been benefiting as workers return to offices, factories, hotels and food service establishments and they purchase fresh safety supplies. The capacity expansion at DMT will be completed in July.

As you may remember, DMT manufactures high-quality diamond sharpening tools, which have had strong demand. The latest expansion has already had a positive impact on sales growth this year, and we are now positioned to expand in the e-commerce market in the United States and in industrial accounts in Europe.

We continue to invest in new equipment at Med-Nap, which we acquired in December 2020.

As you may recall, Med-Nap is 1 of the few manufacturers of alcohol wipes and antiseptic pads in the United States.

Our Med-Nap business will have 3 new lines in operation by the end of August, and we will be positioned to fulfill new supply agreements as they develop.

Although we will not be providing guidance, we anticipate strong performance for the year, and we continue to seek acquisitions that expand our product line and customer reach. I will now turn the call to Paul.

Paul Driscoll

Acme's net sales for the second quarter were $44.8 million compared to $44 million in 2020, an increase of 2%. Sales for the 6 months ended June 30, 2021 were $88.4 million compared to $79.8 million in the same period in 2020, an increase of 11%. Net sales in the U.S. segment increased -- sorry, decreased 4% in the second quarter due to delays caused by the implementation of the new warehouse management system. Sales increased 6% for the 6 months ended June 30, mainly due to market share gains in First Aid and Safety Products. Net sales for Europe increased 16% in local currency for the quarter and 23% for the 6 months ended June 30. The sales increase for both periods was mainly due to increased e-commerce sales and continued growth of DMT sharpening products.

The second quarter was also helped by reopening of offices. Net sales in local currency for Canada increased 49% in the quarter and 40% for the year-to-date. Sales of office products increased due to a lifting of COVID-19 restrictions for offices and stores. Also sales of First Aid products grew mainly in the online business. The gross margin was 36% in the second quarter of 2021 compared to 36.5% in 2020. The year-to-date gross margin was 36% compared to 37% in 2020. The decline in gross margin was mainly due to increased labor and transportation costs. SG&A expenses for the second quarter of 2021 were $12.4 million or 28% of sales compared with $11.7 million or 27% of sales for the same period of 2020. SG&A expenses for the first 6 months of 2021 were $25 million or 28% of sales compared to $23.2 million or 29% of sales in 2020.

The second quarter tax expense included a $900,000 tax credit for stock-based compensation. Net income, excluding the impact of the PPP loan forgiveness, for the second quarter was $3.7 million or $0.94 per diluted share compared to net income of $3.2 million or $0.92 per diluted share for the same period of 2020, an increase of 16% in net income and 2% in EPS. Net income, excluding the impact of the PPP loan forgiveness for the first 6 months ended June 30, was $5.8 million or $1.46 per diluted share compared to $4.5 million or $1.28 per diluted share in the comparable period last year, increases of 29% and 14%. Company's debt less cash on June 30, 2021 was $39.5 million compared to $37.3 million on June 30, 2020.

During the 12-month period, we paid $9.3 million for the Med-Nap acquisition, spent $1.7 million on dividends, received full forgiveness on the $3.5 million PPP loan and generated approximately $4 million in free cash flow.

Walter Johnsen

Thank you, Paul. I will now open the call to questions.

Operator

[Operator Instructions] Our first question comes from Jim Marrone with Singular Research.

Jim Marrone

I have two questions.

The first is a short one. It involves the warehouse and the backlog that the warehouse experienced. Is that for the cutting tools segment of the business? Or is it the First Aid part of the business? And the second question is in regards to the loan forgiveness and the impact on the first quarter.

So is that something that's going to continue to impact in later quarters? Or has that just impacted the first quarter alone and you won't have that residual effect anymore?

Walter Johnsen

Jim, I'll start. It's Walter Johnsen. The warehouse handles both the production of some of our First Aid business, because it's a very large facility. It's a 33-acre facility with 345,000 square feet.

So a portion of it does our First Aid production. And after that's produced, some of it goes into the warehouse for shipment, and that was delayed.

We also have a Vancouver, Washington, facility that makes First Aid kits, and that was able to be operating independently. The cutting tools pretty much are all going through the Rocky Mount facility.

So that would be, in particular, the Westcott cutting tools and the Cuda and Camillus fishing tools. That back order, we're addressing right now, and orders continue to be very strong.

So as we continue to add people and the productivity continues to improve, we're gradually digging into the back orders.

Regarding the Paycheck Protection loan, I'll turn that one to Paul.

Paul Driscoll

Yes. The impact of the PPP forgiveness on the financial statements impacted the second quarter and the year-to-date numbers. It will not affect -- it will not impact the third quarter or fourth quarter, but it will continue to be reflected in the year-to-date income statement.

Jim Marrone

Okay. Great. Thank you.

Just going back to the warehouse, Walter.

So how are you addressing that shortfall as far as shortage of labor? So are you increasing wages and is that putting pressure on your cost? Or is it just the fact that people are reluctant to go back to work as a result of government subsidies? Can you comment on that labor shortage and how it's being addressed? And what is the impact to financial results?

Walter Johnsen

Surely. The environment in Rocky Mount, North Carolina for labor is very competitive. And it has been, because it's an excellent place to do business. We've increased the wages consistently during the past 12 months. And as an example, people running machinery typically make $16 to $17 an hour, now starting. And that's up about $2 an hour from a year ago.

The other areas you can address include things like stay bonuses and incentives for good attendance. And we have those in place, which are also helping. We had a job fair this past Wednesday and hired 10 new people.

So addressing it is certainly possible, and we're doing it. It is costing us more. But if you take a broader look, it's not just the labor in Rocky Mount, North Carolina, the labor costs across our company are increasing. And certainly, the products that we are bringing in from Asia are also increasing.

So we have passed through and will continue to pass through commensurate price increases to our customers.

Operator

[Operator Instructions] Our next question comes from Tim Call with Capital Management Corp.

Tim Call

I was wondering with the installed base of health care units increasing greatly over the last year, have those started to result in refill sales?

Walter Johnsen

Tim, absolutely. The refill business is within our First Aid business, one of the fastest-growing segments. And as you can imagine, when you have an increasing installed base of industrial first aid kits, those that are currently on site are consuming components and they are expiring, so they're replacing orders. And then the new ones are doing the same thing.

So it is the -- it's one of the real growth engines within First Aid.

Our automatic replenishment program, SafetyHub, enhances the ability to capture those refills and makes it very easy for our customers to automatically replenish the kits to make them occurring at all times.

So it's an important part of the business, and I'm happy to say that it's one of the fastest-growing portions of that business.

Tim Call

Earnings per share growth has been held back by the diluted share count going up due to the stock options moving into the money. In the past, Acme has settled those stock options with cash, should we expect that going forward eventually the diluted share count, which is 18% higher than the basic share count? Should that decline over time towards a more stable basic share count?

Walter Johnsen

I'll let Paul Driscoll address that one and I'll add to it if it's important. Paul?

Paul Driscoll

I think in the future, things will -- for comparative purposes, things will start to normalize. But we're not doing the cash settlements at the moment, because it's more beneficial to the company to allow optionees to exercise in the market, and it brings in cash instead of cash going out.

So there's a big net benefit in doing this. And there's enough liquidity in our stock now, as you can see.

So we will -- there's no plan in going back to cash settlements.

Walter Johnsen

Tim, there's a little bit more to that, too. The stock appreciated a lot in the past 12 months. And because of that, all of the options are now counted in the fully diluted shares, whereas before, some were issued, but were not counted, because we were below the exercise prices. We may, from time to time, also buy those shares and depending on the cash flow -- in the cash settlements.

So I wouldn't say we won't do that. But as Paul pointed out, in the past year, it's been very beneficial for the company to bring in that equity.

Tim Call

Well, there are not many companies that can grow through when their warehouse is closed, so congratulations on growing through that and look forward to...

Walter Johnsen

Well, thank you, Tim. It was an important step in so many ways for the company. We had an older system that was not fully documented. It was a smaller provider that didn't have the depth to continue to stay abreast with the current environment. This positions us to be able to move into robotics in that warehouse, to truly handle the upgrades that have happened in the past 3 to 4 years, as we've made Amazon and other online sales a major part of the business.

So while it was painful for a quarter, eventually, the productivity and the customer service that comes out of that, I think, will be remarkable.

So -- we're over the implementation.

Now we have to just catch up on some of the back order, which we're working on as we speak.

Operator

Thank you. And gentlemen, at this time, there are no additional questions in queue.

Walter Johnsen

If there are no further questions, then I would like to end the call. We look forward to sharing with you the continued development of the business in the coming quarters and look forward to speaking to you soon. Thank you very much.

Operator

This concludes today's call. Thank you for your participation.

You may now disconnect.