Earnings Call: Q3 2021

Oct 26, 2021

Quarterly report

Good day, and welcome to the Acme United Corporation's Hosted Third Quarter 2021 Earnings Conference Call. At this time, I'd like to turn the conference over to Walter Johnson. Please go ahead, sir. Good afternoon. Welcome to the Q3 2021 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? 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-nineteen pandemic, including the ongoing economic downturn and the other risks and uncertainties described in our periodic filings with the Securities and Exchange Commission and in our current earnings release. Thank you, Paul. Acme United had a very good Q3 of 2021. Our net sales were $47,900,000 an increase of 11% over last year at this time. Our net income for the quarter was $2,000,000 an increase of 30%. Earnings per share were $0.50 compared to $0.46 last year. Net sales were strong at all of our subsidiaries. In the U. S, our revenues increased 12%. We benefited from excellent back to school sales, strong demand for Westcott cutting tools as people return to their offices and excellent sell through of our craft products. The First Aid and Safety business had increased demand throughout its distribution base. E commerce sales were strong. Our Canadian business benefited from growth at First Aid Central, which has successfully added new multinational customers since its acquisition last year. Its organic e commerce sales were excellent. In Europe, Revenues for the quarter were even with last year due to timing of some large shipments. Acme United has had many cost pressures, and we have been increasing our selling prices regularly. We have had supply chain shortages, increased labor costs, extraordinarily high shipping costs, increased energy costs and inflation nearly across the board. In addition, we have had many positions unfilled at most of our locations despite increasing wages. It was and is a very challenging time. We do not believe the increased costs are temporary. In fact, we are already seeing new levels of cost increases for 2022, and we are instituting new price increases. As you may recall, we installed a new warehouse management system in April 2021 in our Rocky Mount, North Carolina distribution facility. We've made substantial progress with the new software and are now shipping normally. Although there are many areas still to improve, the system is now positioned to increase our efficiencies to ship small parcels, track shipments more thoroughly and strengthen our operational control. Acme United began building global inventory about 30% starting in June of 2020. We did this because we feared supply chain However, we did not anticipate the tsunami of orders to the Chinese factories caused by pent up COVID spending and the U. S. Stimulus packages, but they overwhelmed the Chinese capacity to produce and ship right in the middle of the back to school and summer product surge. The extra inventory provided a substantial cushion to meet customer requirements despite the external shipping chaos. We have extended the projected lead times from order to delivery and are managing our supply chain with the expectation of continued delays. We anticipate these issues in 2022 and are prepared. We're converging on another successful year and anticipate record sales and earnings in 2021. Our sales of Westcott Cutting Tools continue to grow and demand for our first aid products is strong. We're optimistic about 2022. I will now turn the call to Paul. Acme's net sales for the Q3 were $47,900,000 compared to comp. $43,300,000 in 2020, an increase of 11%. Sales for the 9 months ended September 30, 2021 were $136,000,000 compared to $123,000,000 in the same period in 2020, an increase of 11%. Net sales in the U. S. Segment increased 12% in the 3rd quarter and 8% for the 9 months ended September 30. The sales increase for both periods was mainly due to market share gains in first aid and safety products. Net sales for Europe were constant in local currency for the quarter due to some large shipments last year. Sales in the Q3 of 2020 increased 32% compared to the previous year. Sales for the 9 months ended September 30, 2021 grew 15%, mainly due to growth in e commerce and market share gains in Westcott School and Office Products. Net sales in local currency for Canada were constant in the quarter. Higher sales of first aid products offset a decline in sales of school and office products. Due to COVID-nineteen lockdowns in 2020, back to school shipments temporarily shifted from the second to the third quarter. Sales were up 49% in Q2 of this year compared to Q2 of last year. Net sales in local currency for the 9 months ended September 30, 2021 grew 23%, mainly due to higher sales of first aid products. The gross margin was 35.5 percent in the Q3 of 2021 compared to 34.5% in 2020. Selling price increases offset higher material, labor and transportation costs. The year to date gross margin was 36% for both 2021 2020. SG and A expenses for the Q3 of 2021 were $14,000,000 or 29.3 percent of sales compared with $12,800,000 or 29.6 percent of sales for the same period of 2020. SG and A expenses for the 1st 9 months of 2021 were $39,000,000 or 28.6 percent of sales compared with $36,000,000 or 29.3 percent of sales in 2020. Net income for the Q3 of 2021 was $2,000,000 or $0.50 per diluted share compared to a net income of $1,600,000 or $0.46 per diluted share for the same period of 2020, an increase of 30 percent of net income of 9% in earnings per share. Net income excluding the impact of the PPP loan forgiveness for the 1st 9 months ended September 30, 2021 was $7,800,000 or $1.97 per diluted share compared to $6,100,000 or $1.75 per diluted share in the comparable period last year, increases of 29% 13%. The company's debt less cash on September 30, 2021 was $38,100,000 compared to $34,400,000 on September 30, 2020. During the 12 month period, we paid 9 point $3,000,000 for the MedNap acquisition, spent $1,700,000 on dividends, received full forgiveness on the 3,500,000 PPP loan and generated approximately $2,000,000 in free cash flow. Thank you, Paul. I'll now open the call to questions. Thank And we will go to our first question from Jim Maroney of Singular Research. Yes, comp. Great. Thank you for taking my call. Congratulations on a decent quarter. I guess my first question is in regards to Just to provide some color in regards to the logistics and the supply chain. Just trying to get a sense of This backlog of container shipments and the backlog on ports on how it's affecting your business, What you foresee in the near future in regards to that? And then I have a follow-up question after that. Thank you. Well, in general, it's a mess. The supply chain Could have been managed much differently than it has been, but it's being run cluelessly. I can tell you that the shortages of containers are exasperated Because they're stuck in places like our ports and then we don't have truck drivers. That's not going to change quickly. We've got production that's going on in China for delivery now next summer. And we figure sometime between now and next summer, we'll get deliveries. That's ridiculous. It's completely ridiculous. The fact that we added 30% extra inventory allows us to plan For this kind of chaos, and we are. But it's crazy for us to be looking at deliveries, almost 9 months or a year away, And we are doing that. I don't see a near term solution nor do I believe that people understand this is a lot more And toys for Christmas. And the popular commentary talks about a weak holiday. They're missing the fact that the U. S. Economy, if it doesn't get critical parts, grinds to a halt. And this is serious. So while we feel we're prepared, we don't see enough activity going on, on a macro level and within our Own government. Okay, great. Thank you, Walter, for that color. So You mentioned that you've mitigated those higher costs with effective inventory management. I think you also made the comment though in the prepared comments that they were also up those higher costs were offset by increased selling prices. So I'm just kind of curious, can you confirm that Stephen, and as well, if this is the case, how well can you pass these higher selling prices If indeed it's increased selling prices and effective inventory management, is that the drivers to that increased profit of 30% when you only have top line that's growing at 10%? Well, first on the ability to price, We try very hard to deliver value to our customers. I mean, that's obvious. But when your costs go up, you pass your costs on. And there are a lot of costs. And when you can't identify all the costs, but they keep coming in everywhere, Well, you increased your prices to cover that. And we've continually done that throughout the year and anticipate continuing to do it because we don't see a letdown what So ever. Relative to the gross margin increase in the quarter, I think that is representative of Product mix, but it does represent that we have pricing power. Right. And in regards to passing on those higher selling prices to consumers, at what point do you have an idea Which point that your volumes are going to hurt as a result of the passing on those higher increased prices? Well, I don't think really our products are the ones which will have much resistance Because average selling prices are well under $25 for most of our Westcott items and Camillus Knives. With the first aid kits in the industrial market, they're higher. But there, it's a whole different market dynamic. I think a bigger thing is the collective drag on the U. S. Economy from inflation that's coming in from every front. And that may slow demand across the board. I can see already the major Don't operate when they don't get parts. And so I think there's a cycle here that is very concerning. Okay, great. Walter, thank you for that commentary. Star 2. We'll go next to, Alan Kaplan, a Private Investor. Yes. I was wondering, do a employees. And they've been a very important part of maintaining this talent pool that we have, probably more so than any single thing, But they all go to employees. No. What I was asking was, Are a number of them granted to employees not classified as insiders and therefore not Those that don't file Form 4s that are employees. Okay. Because I mean, you did have just since your last earnings release. There was a big jump in basic number of shares. And the only thing I can figure out is that some of those employees were exercising their options. Is that correct? Yes. I think that would be accurate, Alan. Okay. Thank you. Okay. Thank you. And we'll move to our next question from Michael Marck of Marck Capital Management. Hi, Walter. Comp. Two questions. A couple of years ago, Amazon was growing exponentially with your company and then it kind of flattened out. Can Can you give us any update on what's going on there? Yes, Mike. Amazon has been Growing rapidly, both in the U. S. And in Europe for us. And amazingly, it should be by now our biggest customer, but Walmart's also been growing very rapidly. And they've sort of been neck and neck, but Amazon is doing terrifically well for us. Okay. So your Amazon business has started to increase, because I know it plateaued and you weren't quite sure why and then so it started going up again then? Yes. Okay. And then the second question I had was, you talked quite a bit in your comments From the other gentleman about inflation. Can you give us a number? Are we talking Your price is going up 3%, 5%, 10%. Can you give us some rough idea on how much inflation we are seeing here? Well, we are seeing inflation at the factories in China. These aren't ours. This is across the board in China Around 9.5% to 10%. And I don't know that that's being publicly reported, but that's what China is facing right now for the broad production that's being exported. So when we get those kinds of increases, we match them. So it's higher numbers than you might think. So do you think your products are 9%, 10% higher at the retail than they were, say, a year or 2 ago? I really can't answer that because I haven't actually done that analysis. But I can tell you, Mike, that if we get a 9% price increase, we're going to pass on a pretty hefty price increase as well. And those are the kinds of numbers we're looking at. We're not looking at 3% or 4%. Yes. Okay. Well, that's very helpful. And keep up the good work. We're working very hard at this, Mike, and thank you for the support. Yes. Thank you. And we'll move to our next question from Richard Dearnley of Longport Partners. Good afternoon. Could you give an approximate Headcount for the North Carolina distribution center? Paul, do you have an approximate headcount? I think it's about 150 now. Okeydoke. And then there's some temporary workers as well. Yes, there's probably another 50 temporary workers. And I take it Finding people is a mess. Yes, finding and retaining people. Yes, finding and retaining people. Comp. Well, there's something going on and it depends on, of course, where you live. But the unemployment in certain areas matches the living standard, at which point there appears to be Not so much incentive to show up. And the game we see again and again and again is Come in, work a day or 2, leave, and then you've got another 6 months of unemployment. And people are smart and they figured the game out. You get unemployment if you just work at a day or a week? You have to be looking for employment, you get employment, you have to stay long, you can be off, You're right. I got it. Okay. Thank you. Last quarter, you said you had $5,000,000 or so of orders that you couldn't ship because of the warehouse. Did that clear in this quarter? And is there any carryover from Warehouse difficulties this quarter? Well, most of the back order from at the end of June that was in our warehouse has cleared. However, there's a substantial amount of product waiting to be shipped up In China at freight consolidators. So it's not booked as sales, it's built against the purchase order, But these our major customers can't get containers to pick them up. And they've run 3 4 months late now. So the valid purchase orders, they will get picked up probably in this quarter. But they carried over from June, July, August, and They just can't get containers to put the goods in. Yes. There was an article on Twitter about some investor who rented a boat And toured the LA Harbor and then all through the docks and went and talked to people and he said, If you can find a container, you can't find a place to put it. It was just gridlock. It was a total mess. No, it's chaos. It's chaos. And it is so much more than what's being reported about God, there won't be toys for Christmas. It's just not getting how serious this is. Great. Well, thank you very much. Thank you, Steve. All the best. Yes. And we'll go to our next question from Jeffrey Matthews of Art Ram Partners. Hi, Walter. Hi, Jeff. I got a few questions. First, On China, why 2 related questions on China. Why is the inflation so high there? Is it Raw materials or is it a labor shortage, which is something you've been talking about for many years As far as the birth rate decline in there? Well, first on raw materials. Everything that's related to oil is based on the market, and oil prices have gone up On the global market, I'm really not quite sure, but I think it's probably somewhere around 50%, 60% in the past year. So plastics, fuel, big problem there. Steel, There's a shortage of coal, and coking coal is what you use to make steel. There's a shortage of electricity. The factories are running anywhere between 3 days and 4 days down out of a week because we're so overwhelmed that economy That they can't produce enough electricity. And then you add on top of that, the shipping, The container shipment shortages within China and then the labor shortages, That's where they get their 10%. Right. And does that does what's happening in China at all Further inform your thoughts about your own supply chain going forward? Or is this just something you're going to have to deal with for a long time to come? Over the last 6 years, the acquisitions that we've made have all been U. S. And one Canadian factory. So whether that was Spill Magic or DMT First Aid Only or Pac Kid or First Aid Central, these were all U. S. Manufacturers. And so we've diversified our base so that Today, about half of our products are sourced outside of the United States, but that's very different than it was 5 years ago. And another example is DMT, I mean, MedMap, which we bought in December, making critical alcohol prep pads and wipes For our first aid kits, that's, of course, in Florida. The sourcing Outside of China continues, as we look at places in Northern Africa and in Eastern Europe, as well as Southeast Asia and the Philippines. But Domestic manufacturing has been a focus of ours, and we're working it carefully. I wouldn't be surprised to see that the next acquisition also is in the U. S. Because again, we're building much more of a Domestic sourcing base. Okay. And that leads into a question another question I wanted to ask, which is, In this difficult environment, this difficult operating environment, are you seeing Potentially for acquisitions or is it still the same kind of flow? Well, we have Plenty of activity looking at acquisitions. And as you can imagine, We've got quite a database that we've developed over the years, and we're constantly calling and checking in. And a lot of times, when you Follow-up, you might be surprised, but now is the time and then you follow-up with an actual transaction. I know the private equity market is very, very strong and That impacts some of the pricing that we'd see, for sure. But really, we're not in that market. We're looking at companies A half step away from what we're doing with these relationships and they tend not to be marketed, although we do pay fair prices for them. Sure. And final question, your comments on The critical shortages, supply dislocations in the economy speak to some very Significant problems out there. Is there 1 or 2 are there 1 or 2 particular examples that you can give That kind of blow your mind that you're seeing out there because you're talking about not just Acme related issues, but you're talking about Capital equipment and supply chain issues. What is there 1 or 2 examples that is sort of causing this Extra anxiety for you? Well, I have conference calls every week comp. On Tuesday mornings with Asia, and I see what's going on. And it's a very serious supply chain calls with our team. And what I see is we can anticipate these things, but many, many companies did not add 30% to their inventory 18 months ago, and they're stuck. And it's terrifying. I read that one of the F-one hundred and fifty Ford truck plants has thousands of trucks right now finished except for components. I read that a drone manufacturer in Connecticut Laid off half its staff because it couldn't get parts for military drones. I worry about getting critical medicines when you can't get them on containers. I read that a major running shoe company, which shifted its production from China to Vietnam, Can't get the boats to pick up those shoes and they're air freighting them. These are just some examples. I see it everywhere. Well, thank you for all that color and good luck and Congratulations, the way you've managed all this. Not a surprise to me, but it's nice to see. Thank you. And with no further questions in the queue, I'd now like to turn the conference back to our presenters for any additional or closing remarks. Well, if there are no further questions, then this call is complete. We look forward to providing year end results in early 2022, And thank you for joining us. Goodbye. And so this concludes today's call. We thank you for your participation. You may now disconnect.