Acme United Corp

AMEX:ACU

Earnings Call Analysis

Acme United's Q3 Results Show Resilience Amid Challenges

In the third quarter of 2024, Acme United reported sales of $48.2 million, down 4% year-over-year, with a net income of $2.2 million, a modest 3% increase. Excluding the sold Camillus and Cuda lines, sales grew 4%, driven by strong performances in the first aid and craft segments. The company anticipates continued strong earnings and cash flow amid current macroeconomic challenges. Gross margins slightly declined to 38.5%, reflecting ongoing cost management efforts. Acme is integrating new automation systems to enhance efficiency and promoting its SmartCompliance first aid kits, expected to significantly impact sales next year.

A Solid Foundation Amid Challenges

In the third quarter of 2024, Acme United Corporation reported revenues of $48.2 million, a 4% decline from $50.4 million in the prior year. Notably, their sales performance without the Cuda and Camillus product lines, which were sold off in November 2023, actually increased by 4%. This indicates that core operations are maintaining a steady growth trajectory, crucial for investors seeking resilience amid market volatility.

Profitability and EPS Insights

Despite the decrease in sales, the company's net income rose by 3% to $2.2 million compared to $2.1 million in Q3 2023. Earnings per share (EPS) did, however, experience a decline to $0.54 from $0.58 year-over-year. This discrepancy emphasizes an important point: while profits are increasing, the proportion realized per share is being impacted, likely due to share dilution or other factors, which warrants attention from investors focused on equity valuation.

Diverse Product Performance

The performance of Acme United's product lines varied significantly. The first aid division saw stable revenue, slightly above last year, while the Westcott cutting tools and DMT sharpeners achieved a commendable 10% growth driven by market share gains. These results signal an effective strategy in adapting to customer preferences, particularly in trending markets such as crafts and kitchen tools.

Innovative Product Launches

In an exciting development for future growth, Acme launched SmartCompliance first aid kits featuring an innovative RFID system for real-time consumption tracking and automatic replenishment. This product is poised to enhance customer engagement and loyalty, potentially increasing revenues. Additionally, Acme has integrated the Elite First Aid product line, emphasizing their commitment to high-quality, life-saving solutions.

Cost Management and Operational Efficiencies

Acme's efforts to improve operational efficiency are evident. Gross margins for Q3 were 38.5%, slightly down from 38.7% the previous year, while year-to-date margins improved significantly to 39.4% compared to 37.3% last year. This upward trend in gross margin for the nine months indicates successful cost management initiatives that could bolster future profitability.

Financial Stability and Debt Management

The company effectively utilized $30 million from the Camillus and Cuda sale to significantly reduce its debt from $38 million in 2023 to $27 million by Q3 2024. Maintaining a lower debt level enhances financial stability and positions Acme for future investments or acquisitions, which is reassuring for investors looking for solid financial fundamentals.

Looking Ahead: Guidance and Growth Prospects

For the remainder of 2024, Acme anticipates continuing strong earnings and cash flow that would contribute positively to their balance sheet. Investors can look forward to potential future acquisitions as the company remains committed to strategic growth initiatives. Additionally, market share gains, particularly in first aid and craft products, suggest that the company is well-positioned to capitalize on current market trends.

Navigating Economic Uncertainties

During the call, management acknowledged challenges posed by a volatile economic environment characterized by high inflation and interest rates. The recent softening in demand from industrial customers is a key concern, highlighting the need for ongoing market responsiveness. However, with proactive measures such as diversifying production locations to avoid potential tariffs and a focus on high-demand products, Acme is preparing to mitigate these risks.

Concluding Thoughts for Investors

Investors should remain optimistic about Acme United's growth strategies and product innovation. Though there's a noted decline in overall sales, the increase in core segments and profitability margins is encouraging. With a solid debt reduction strategy and potential for market share growth, Acme United stands as a resilient player worthy of consideration in any diversified investment portfolio.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Third Quarter 2024 Acme United Earnings Conference Call.

At this time, I'd like to turn the call over to your host, Walter Johnsen, Chairman and CEO. Please go ahead, sir.

[Walter Johnsen, executive]

Good morning. Welcome to the Third Quarter 2024 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 a safe harbor statement. Paul?

[Paul Driscoll, executive]

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 a challenging global macro economic environment characterized by continued high inflation and high interest rates. In addition, we have experienced supply chain disruptions. 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.

[Walter Johnsen, executive]

Thank you, Paul. Acme United reported sales for the third quarter of 2024 of $48.2 million compared to $50.4 million in the same period last year, a decline of 4%. Our net income for the quarter was $2.2 million compared to $2.1 million in the third quarter of 2024, an increase of 3%. Our earnings per share were $0.54 compared to $0.58 last year.

Our net sales for the quarter without the Cuda and Camillus business increased 4%. As you may recall, we sold this business in November 2023 for $19.8 million. Revenues and earnings of this business are seasonal with the larger shipments in the third quarter for the hunting season, holiday sales and promotions. This disproportionately impacted the sales earnings for the third quarter of 2024.

Revenues of the first aid business in the U.S. was slightly above last year due to the timing of customer orders and what seemed to be a soft market. The Westcott cutting tool business and DMT sharpeners increased 10% in the quarter, driven by market share gains in the craft channel and the kitchen market. Both businesses have a full pipeline of new products that are being introduced as we speak.

We introduced our latest SmartCompliance first aid kits this past September at the National Safety Conference. These items used our patented RFID system to monitor real-time consumption and expiration of the components in our first aid kits and permit automatic replenishment of refills. We're excited about the prospects for this next-generation product and look forward to seeing its impact on the market next year. To our knowledge, there are no similar products from our competitors.

During the third quarter, we integrated the Elite First Aid product line into our overall product offering. As you know, Elite sells first responder kits that save lives and are at the high end of first aid treatment. We're presenting these items to our first aid customers in the U.S. and Canada and actively promoting them in the e-commerce channels.

We're now installing 2 different automation systems for packing first aid components and lend twice into multi-cat boxes. We've just completed the first stage of new racking and storage in our largest warehouse to increase efficiency and capacity. And we have completed new initiatives to reduce the cost of first aid boxes and cabinets.

For the remainder of the year, we anticipate continuing to generate strong earnings and cash flow and to continue strengthening our balance sheet. We believe we are very well positioned to continue to make accretive acquisitions.

I will now turn the call to Paul.

[Paul Driscoll, executive]

Acme's net sales for the third quarter were $48.2 million compared to $50.4 million in 2023, a decrease of 4%. Excluding the impact of the Camillus and Cuda hunting and fishing product line sold on November 1 of last year, sales for the third quarter of 2024 increased 4%. Sales for the 9 months ended September 30, 2024, were $148.5 million compared to $149.6 million in the same period in 2023, a decrease of 1%. Excluding the impact of Camillus and Cuda, sales increased 5%.

Net sales, excluding Camillus and Cuda in the U.S. segment, increased 3% in the third quarter. Excluding Camillus and Cuda, sales increased 5% for the 9 months ended September 30 due to market share gains with first aid, Westcott craft products and DMT sharpeners. Net sales, excluding Camillus and Cuda in Europe, increased 15% in local currency for the quarter and 10% for the 9 months ended September 30. The sales increase for both periods was mainly due to market share gains in the office channel. Net sales, excluding Camillus and Cuda in local currency for Canada, decreased 6% in the quarter and were constant for the year-to-date. Sales of first aid products were strong. However, there was a decline in sales of school and office products.

The gross margin was 38.5% in the third quarter of 2024 compared to 38.7% in 2023. The gross margin was 39.4% for the first 9 months of 2024 compared to 37.3% in 2023. The higher gross margin in the 9 months was mainly due to productivity improvements in our manufacturing and distribution facilities.

SG&A expenses for the third quarter of 2024 were $15.6 million or 32% of sales compared with $15.8 million or 31% of sales for the same period of 2023. SG&A expenses for the first 9 months of 2024 were $47 million or 31% of sales compared with $45 million or 30% of sales in 2023.

Interest expense for the third quarter of 2024 was $535,000 compared to $785,000 in third quarter of 2023. The decrease was due to lower average debt of approximately $50 million. Net income for the third quarter of 2024 was $2.23 million or $0.54 per diluted share compared to a net income of $2.15 million or $0.58 per diluted share for the same period of 2023, an increase of 3% in net income and a decrease of 7% in EPS. Net income for the first 9 months ended September 30, 2024, was $8.3 million or $2.03 per diluted share compared to $6.6 million or $1.83 per diluted share in the comparable period last year, increases of 26% and 11%.

The company's bank debt less cash on September 30, 2024, was $27 million compared to $38 million on September 30, 2023. During the 12-month period, we purchased the assets of Elite First Aid for $6.1 million, paid $2.2 million in dividends and generated $6.2 million in free cash flow. Additionally, the $30 million of net proceeds from the sale of the Camillus and Cuda product lines was used to reduce debt.

[Walter Johnsen, executive]

Rob, I will now open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from Jeffrey Matthews with Ram Partners.

[Jeffrey Matthews, analyst]

Walter, I'm driving, I hope you can hear me.

[Walter Johnsen, executive]

Yes. You're coming in clearly.

[Jeffrey Matthews, analyst]

Okay. Great. I'm a little surprised that you haven't inserted into your risk factors, the potential for these massive tariffs Trump is talking about on China, if he is elected President. I just wonder what your plan might be if he does get elected and tariffs like that might go through? Is there anything you can do proactively? Or do you just sort of sit there and take whatever they offer?

[Walter Johnsen, executive]

I think that's a really good question, Jeff. So I just got back from almost a month in China, visiting our suppliers, our 4 offices, our factories, and there's several things that are going on. First, in the Westcott area, our key factories are moving operations with us into Malaysia. Vietnam, Thailand and the Philippines. And these are countries that -- it's very easy to have a Chinese visa. They welcome the Chinese. They use the Belton road system to access -- send raw materials to these countries. And so with the items that we're currently doing, which are the ones that have 25% tariffs as we speak, and that's rulers, paper trimmers, pencil sharp, in the Westcott family. By December of this year, some of these will now be produced in places like Thailand and the Philippines.

The wonderful thing about that is we're using our existing suppliers and our existing offices, and they're going into countries that are very familiar to everyone in the community, large Chinese population, very, very receptive to Chinese investment. And so with the Westcott items, we're moving those in that direction.

Now with the First Aid area, it's slightly different. The U.S. is highly dependent on China for most of its medical supplies. So listen to that really carefully, putting tariffs on that would be very, very difficult to do for cancer drugs, antibiotic, [indiscernible]. What pressure builds, the hospitals would come to a halt. So it's highly unlikely, in my view, that 60% tariffs are even remotely going to be real, but it's a negotiating point.

We have moved our sourcing heavily into a number of other places, India for First Aid, some of the lotions and creams. We've built a large production facility in Florida at Med-Nap, which makes alcohol wipes, tip antibiotic wipes, all of which go in the kits. We do a lot of production in Egypt for bandages. And so it's a pretty diverse group. And we have 2 manufacturing plants in the U.S. that are doing first aid kit, first aid only in Vancouver, Washington and Rocky Mountain, North Carolina facility.

So we've got flexibility, I think, in both areas, we're assuming that there'll be more tariffs, and we're working with that. And I think it's actually an opportunity because we're on the ground actively doing this vis-a-vis perhaps others that don't have the scale or the knowledge to be able to do.it?

[Jeffrey Matthews, analyst]

That's very reassuring. And I should have known you've been thinking a few steps ahead and I appreciate that. The general softening that you saw, where did that come from? And is it -- I'm wondering if it relates to these new ordering methods you've got, the automatic replenishment. Was there anything to that? Or is it more a general economic softening that you saw?

[Walter Johnsen, executive]

So one large customer, as a distributor into the foodservice industry, its orders really weakened in September. Another one is the largest industrial distributor in the United States, maybe the world probably, its orders softened. These are industrial distributors. The largest online retailer in the world was soft in the third quarter and very strong in the second. It was a timing thing, and it's come back strong now.

But I think it's really the industrial market in the U.S., which seems to be soggy. And so when we sell industrial first aid kits, at least where it was in the third quarter, it was not what we expected. Having said that, as a thoughtful business coming in right now for perhaps not good reasons, but it relates to 2 hurricanes and a replenishment of a massive amount of first aid supplies into Florida, North Carolina and so forth.

With the Westcott business, which was strong, again, it was totally market share gains, and we're cracking in a substantial way in the craft market. Paul and I spent the morning with our team going over the backlog of business and new business opportunities for next year in Westcott, and it's pretty exciting and surprising actually because we tend to think of it as the slower growing part of the business. But in fact, it is outshining first aid said, at least in the third quarter, and it looks pretty darn solid for Q4.

[Jeffrey Matthews, analyst]

Okay. That's interesting. I appreciate that.

[Walter Johnsen, executive]

Thank you, Jeff. pad.

[Operator]

[Operator Instructions] There are no questions at this time. At this point, I'd like to turn the call back over to Walter Johnsen for closing comments.

[Walter Johnsen, executive]

Well, if there are no further questions, then this call is complete. We look forward to updating you again after the fourth quarter. Goodbye.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.