Acme United Corporation (NYSE:ACU) Q4 2023 Results Conference Call March 1, 2024 12:00 PM ET
Company Participants
Walter Johnsen – Chairman and CEO
Paul Driscoll – Chief Financial Officer
Conference Call Participants
Jim Marrone – Singular Research
Tim Call – The Capital Management Corporation
Richard Dearnley – Longport Partners
Sam Namiri – Ridgewood Investments
Jake Patterson – Talanta Investment Group
Operator
Good day, welcome to the Acme United Corporation Fourth Quarter 2023 Earnings.
At this time, I’d like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir.
Walter Johnsen
Good morning. Welcome to the fourth quarter and year-end 2023 earnings conference call for Acme United Corporation. I am 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 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 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 are 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
Thank you, Paul. Sales in 2023 were $191.5 million, a 1% decrease from 2022. Gross margins were 37.7% versus 32.8% in 2022. Net income was $8.2 million compared to $3.6 million last year. Earnings per share were $2.23 compared to $0.82 in 2022.
Highlights of 2023 included new retail distribution of our first aid kits, expansion of our Westcott ceramic cutters, and new craft planograms in the mass market. Our gross margins increased as we successfully implemented our productivity plans. The productivity improvements and reduction in SG&A expenses resulted in annual savings of approximately $6.5 million. We sold our hunting and fishing business for $19.8 million. We acquired Hawktree Solutions at a bankruptcy auction for $1 million, providing new customers in the Canadian market. We decreased net debt from $55 million at year end 2022 to $19 million.
As we entered 2024, we were optimistic. We have won new distribution of first aid kits in one of the largest drug chains in the United States and expanded our Spill Magic cleanup line to a major mass market retailer.
We have innovative DMT Sharpeners in the kitchen category with significant incremental distribution and new planograms in the craft market. Our Canadian business is expanding from organic growth and the Hawktree acquisition. In Europe, we continue to secure new First Aid and Westcott business.
We are investing in new products, facilities, and people. The company is developing the next generation of our Safety Hub digital requisition system for First Aid refills, and was recently awarded new patents for its design. We have broadened our ceramic safety cutters to expand their personal and industrial uses. We are developing new alcohol and antiseptic wipes and lens cleaners for production at our Med-Nap facility for sale in the United States and Canada. We are upgrading our production and distribution facilities in Rocky Mountain, North Carolina and at Spill Magic in Smyrna, Georgia, and Santa Ana, California.
Our growth plans over the next three years requires additional space. We are expanding our First Aid production in Vancouver, Washington, Dublin, our First Aid facility in Laval, Canada, and expanding our Med-Nap plant in Brooksville, Florida. In each case, we believe we have the business to make these acquisitions accretive — these expansions accretive.
We continue to build the entire organization. The company has talented new sales executives, logistics specialists, plant managers, distribution heads, and shift supervisors. We are promoting from within, and hiring from without, the team is the best we have ever had.
I will now turn the call to Paul.
Paul Driscoll
Acme’s net sales for the fourth quarter were $41.9 million compared to $44.1 million in 2022, a decrease of 5%, excluding the impact of the Camillus included product line sold on November 1, 2023. Sales for the fourth quarter of 2023 declined 1% compared to 2022.
Sales for the year ended December 31, 2023, were $192 million compared to $194 million in 2022. Net sales, excluding Camillus included in the U.S. segment declined 2% in the fourth quarter. Sales were constant for the year ended December 31. Sales of school and office products for the year were impacted by customer reductions of inventory in the first half of 2023. Sales of First Aid products were strong.
Net sales for Europe decreased 13% in local currency for the quarter and 6% for the year ended December 31. The sales decrease for both periods was mainly due to the economic recession in Canada. Net sales in local currency for Canada increased 12% in the quarter and 5% for the year due to growth in First Aid products. The gross margin was 39.1% in the fourth quarter of 2023 compared to 31.9% in 2022. The gross margin for the year was 37.7% compared to 32.8% 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 fourth quarter of 2023 were $14.3 million or 34% of sales compared to $14.1 million or 32% of sales for the same period of 2022. SG&A expenses for the 12 months of 2023 were $59 million or 31% of sales compared with $58 million or 30% of sales in 2022.
The Camillus and Cuda hunting and fishing product lines were sold to GSM Holdings on November 1, 2023, for $19.8 million. The sale resulted in a gain of $12.6 million. This was recorded in other income. The gain net of tax was approximately $9.6 million. Interest expense for the fourth quarter of 2023 was $500,000 compared to $940,000 in the fourth quarter of ’22. The decrease was due to lower average debt of approximately $32 million, partially offset by higher interest rates.
Interest expense for the year went from $2.4 million in 2022 to $3 million in 2023. Average debt declined by $12 million. However, the weighted average interest rate went from 4% in 2022 and to 6.5% in 2023. Today, our average interest rate is approximately 5.6% due to the mortgage being fixed at 3.8%.
Net income for the fourth quarter, excluding the gain on the sale of the Camillus and Cuda product lines was $1.6 million or $0.40 per diluted share compared to a net loss of $600,000 for the same period of 2022. Including the gain, net income was $11.2 million. Net income, excluding the Camillus and Cuda sale, for the year ended December 31, 2023, was $8.1 million or $2.23 per diluted share compared to $3 million or $0.82 per diluted share last year, including the gain on the sale, net income was $17.8 million.
The company’s bank debt less cash on December 31, 2023, was $19 million compared to $55 million on December 31, 2022. During the 12-month period, the company paid $2 million in dividends and generated $24 million in free cash flow, including an inventory reduction of $5 million. Additionally, the $30 million of net proceeds from the sale of the Camillus and Cuda product lines was used to reduce debt.
Walter Johnsen
Thank you, Paul. I will now open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Jim Marrone with Singular Research.
Jim Marrone
My question deals with what you anticipate going forward. Are you going to continue looking at making the business smaller by selling further product lines? Or are you looking at acquisitions? Just looking to get your thoughts on that.
Walter Johnsen
Well, Jim, we have growth plans that we see very clearly. And in my mind, I’m looking at over the next three years, somewhere around $100 million of growth. And we’re doing that from organic growth as well as acquisitions. The focusing of our business by selling our Camillus line for 100x our investment. Now all the shareholders benefited from that. As an example of, if we get an opportunistic sale, we’ll take it. But where we’re going is building. That’s why as we’re doing things like expanding in Canada, it’s because we did an acquisition and has a heck of a lot of business sitting behind that, and we need a bigger boat. Similarly at Spill Magic, we’re lending major new business that’s coming in this year, and we need facilities for it. Med-Nap, we’re working big time on the expansions there because we use the products ourselves, we’re growing our top line in the First Aid area, and we’re gaining business from outside customers. So no, we are not shrinking the business. It’s an aggressive growth plan.
Jim Marrone
Okay. So then is it safe to say that you’re looking at more geographical expansion as opposed to adding product lines. Is that the focus going forward?
Walter Johnsen
No. No. There’s two ways. In the First Aid area, we’re looking at acquiring companies that are competitors in the space or half step away as well as vertically integrating the products that go into the first aid and safety markets. So it’s a horizontal expansion, mostly in the U.S. and Canada, as well as vertical integration.
Operator
Our next question comes from the line of Tim Call with The Capital Management Corporation.
Tim Call
Well, congratulations getting through a year of with many challenges. And hopefully, the upcoming years are much easier. But post-pandemic, Cuda and Camillus had negative sales growth. And we’re holding you back. And so you’ve sold them. Should we think now overall sales growth could accelerate with health care being the largest part of the company and replenishment sales in health care, possibly being the fastest-growing area of Acme?
Walter Johnsen
Tim, I think that’s a pretty perceptive question. The Cuda and Camillus business were about flat, maybe a little bit of decline after the very strong period with COVID. But really, the sale was because we got a good price and because we focus the business. And now we’ve got a much stronger balance sheet to be working on acquisitions, mostly in the first aid area. The organic growth in First Aid is substantially better than what Cuda and Camillus have been in the past couple of years. So your question holding us back in the top line, I guess it would have because it was flat for two years. The other piece of that is Westcott has gained this year new business in the cutting area and in planograms. And so we’re feeling pretty positive about growth there over and above what it normally has grown. So yes, I’m looking for meaningful growth. And frankly, orders are good right now in the first quarter.
Tim Call
And so the first half of ’23 saw softer sales as retailers and wholesalers cut inventory levels. You don’t see that repeating in 2024 necessarily?
Walter Johnsen
No. We believe we’re beyond that.
Tim Call
And then when we look at gross margins and profit margins, again, health care seems to have higher margins and replenishment sales in health care might even have higher margins. As your overall sales mix skews towards health care and toward replenishment sales, do we expect overall corporate faster sales growth and margin expansion?
Walter Johnsen
Well, the margin expansion, and let me just say on that. There’s also inflationary pressure, and we have a lot of uncertainty in the global world. And that generally means more cost, not like we’ve had in the past, but that’s sort of a headwind on some margin expansion from the levels we finished in the fourth quarter. But certainly, on the growth side, some of that, for example, the refills on first aid kits do have higher margins than some of the other products. And that is the fastest-growing part of our business.
As we look to make acquisitions with competitors, we’re also expanding the base of refills. So that helps on margin improvement. So as we’re looking at it, I think, for sure, the First Aid emphasis and the growth there is faster than the rest of the business normally, and that’s pulling organic growth going forward. And on margins, I probably wouldn’t model much more over the fourth quarter. And if we do better, then that’s a pickup.
Tim Call
So organic sales growth, strong margins, probably much lower interest expense and possibility of accretive acquisitions.
Walter Johnsen
Yes.
Tim Call
Well, it sounds wonderful. Thank you for all your hard work in getting us to this point.
Walter Johnsen
Well, Tim, thank you and for everybody on the call, thank you for your support because we focus on growing and there’s a lot of people supporting us in the background.
Operator
Our next question comes from the line of Richard Dearnley with Longport Partners.
Richard Dearnley
What’s the headcount at year-end versus last year’s headcount? Your comment about best-ever is interesting.
Walter Johnsen
Well, Paul, we’ll try to answer the numbers. But we have somewhere around 650 people today. And what I know is that our Rocky Mount leadership is much stronger than it’s ever been. Our leadership at Santa Ana in both plants are excelling. We’ve had some new people join us at Med-Nap and that’s helping us expand there. And we’ve started off very strong at Med-Nap, which I’m cheering about. We’re also strengthening some of the people in our accounting and in IT area. So those are the kinds of people that are really making a difference.
Richard Dearnley
Right. Right. Do you have a feel for what — where the headcount was at the end of ’22?
Paul Driscoll
2022 or 2023, you mean?
Richard Dearnley
No, 2022.
Paul Driscoll
2022, it was 620.
Walter Johnsen
620, and we’re at what about — I think we’re at about 650 right now or at about something like that.
Paul Driscoll
Yes.
Richard Dearnley
That’s close enough. Now on the — if the sale of Cuda and Camillus was $19.8 million, and the taxes were $2.9 million. That suggests proceeds of $16.9 million, but you said the net proceeds were $13.0 million. Where’s the other $3.9 million go? Or is my math go wrong?
Paul Driscoll
The taxes were $3 million. But there’s a holdback of $1.5 million that we haven’t received yet, that we’ll receive at the end of this year at November 1.
Richard Dearnley
All right. But there would still be another $1.5 million missing.
Paul Driscoll
No, I don’t think so. But what — sorry, what was that math again?
Richard Dearnley
Could that be — well, the $19.8 million was the sale taxes.
Paul Driscoll
Yes. Well, we had the expenses associated with this now.
Richard Dearnley
Okay. Okay, that would account for that. All righty. And then the sales mix between Westcott and First Aid, and you might want to break down the pro forma as you leave ’23 if it’s significantly different. But for the fourth quarter and the year.
Paul Driscoll
Are you asking what the percentage of the First Aid business was?
Richard Dearnley
Yes, first aid — yes, the mix — sales mix between the two pieces.
Paul Driscoll
It was 60% for the year. It’s 54% last year. The fourth quarter, I’m not sure I would think it would be like 62% maybe.
Richard Dearnley
Okay. And ex without Cuda and Camillus, we can just adjust the math for one month in the fourth quarter and.
Paul Driscoll
Yes. Two months, right.
Richard Dearnley
Right. The share count, is the bump in the share count from the third quarter to fourth quarter fully diluted? Is that because you closed the year at a high?
Paul Driscoll
Absolutely. It’s the stock price.
Richard Dearnley
Yes. And then in October, you mentioned that the sales had started strong generally. And so it looks like the fourth quarter tailed off. Am I reading that correctly?
Walter Johnsen
Well, we sold 6% of the company. And the sales were a little softer in November and December. But I mean, I guess there’s waves in an ocean too. So January and February really strong.
Richard Dearnley
Yes. And do you have a feel some folks said they were expecting back-to-school to be down in ’24. Do you have any advanced feel given the over-inventory situation as you got into back-to-school in ’23, it would seem like things should be more “normal”?
Walter Johnsen
Yes. I don’t know what somebody else has experienced. But we’re expecting a good back-to-school. And the orders that are coming in are solid. And as far as inventory reduction, if there are customers still out there with inventory reduction programs, then they have a problem.
Operator
[Operator Instructions] Our next question comes from the line of Sam Namiri with Ridgewood Investments.
Sam Namiri
Great year. I like the free cash flow generation. I had a question about that. It was on the press release, you wrote $24 million of free cash flow with the $5 million reduction. So I just wanted to make sure that was cash flow from operations. Is that right?
Paul Driscoll
No. It’s free cash flow. It’s cash flow from operations less the capital expenditures.
Sam Namiri
Okay. But that doesn’t include the Cuda sale?
Paul Driscoll
No, it does not.
Sam Namiri
Okay. Okay. And then — so I mean, that’s pretty solid. And then the other question I had was, so with the expansion plans, are you, I guess, you’re going to see spending some CapEx on that. Do you have a sense of how much CapEx you’re going to spend on that and the timing of that as well so we can think about cash flows?
Walter Johnsen
Yes. We’ll be spending about $6.5 million this year on CapEx. And our depreciation and amortization is somewhere like $5 million.
Paul Driscoll
$5 million.
Sam Namiri
How much did you spend last year on CapEx for ’23?
Walter Johnsen
It’s about $4.3 million. I think this is just from memory…
Paul Driscoll
$4.7 million. .
Walter Johnsen
$4.7 million.
Sam Namiri
Okay. Okay. So not really much more than normal.
Walter Johnsen
No, but it’s impactful spending. For example, in Canada, that HawkTree acquisition is bringing a lot of business, and there’s no place to put it. I mean it’s a good problem. But you got to do it.
Sam Namiri
I get it. So I mean like if I back out the $24 million minus the $5 million of reduction inventory, I get like $19 million. And then assuming everything even stays flat, which I assume won’t because you guys seem to have some nice business. I get to like $17 million of actual free cash flow and on $154 million…
Paul Driscoll
No, the thing is we’re not going to drive down inventory the way we did in 2023. So inventory is going to grow based on our sales growth. So you’re not going to get — that impact is going to go the other direction.
Sam Namiri
Got it. Okay. But then you should have impact of growth from the demand you’re seeing as well.
Paul Driscoll
Yes.
Sam Namiri
Okay. And then another question I had was you’ve reduced your debt quite a bit. If you make an acquisition, I assume you’re going to use debt to finance? What you had in the past.
Paul Driscoll
Yes.
Sam Namiri
Okay. And then your growth, is it coming from like take, I guess, like winning against competition? Or maybe kind of give some color as to like the market, are the markets expanding that you are in? Are you, again, beating competition? Like can you — is there any color you can give in terms of that?
Walter Johnsen
Well, let’s take Westcott first, because that’s the one that you would think, well, the cutting area, it’s probably a slowish growth, and it is, but people are continuing to open boxes and using them for different crafts and so forth. We have gained market share there. So the overall market is expanding at maybe 2% to 3% in my best estimate. But we’re looking at much greater growth in Westcott this year. And it’s from some cutting tools that are going into a mass market retailer that we never had before. It’s a customer we’ve had before but not for the products. And there, it’s a replacement of a competitor.
In the case of Westcott, again, at a major hobby store, it’s a replacement of a competitor with many, many new products. So it’s a multimillion dollar expansion. Again, it’s winning against a competitor. In the case of First Aid, we’re seeing an expanding market growing faster than Westcott where we’re gaining growth this year, a new drug chain where we pushed out a competitor. And then I believe at another industrial hardware chain, we’re not only pushing out a competitor, but gaining more shelf space that didn’t exist dedicated to First Aid.
In the case of foodservice, we’re gaining new whites and lens cleaners. We’re also gaining — and that would be against probably a competitor, but I don’t know which one. And then we’re also gaining first aid, which is going into restaurants that we’ve done quite a bit of work, but we’re — it’s just new business that we’re gaining. At Spill Magic, we gained a major piece of new business at a large grocery chain. And you know that Spill Magic use, for example, one large retailer in the United States, where anybody that spills something on their floors or get sick, they use it for cleanup. And this is a multimillion dollar expansion in new business this year. I’m not sure whether they converted from another competitor, I don’t think so. I think it was really a new use.
In Europe, we’ve gained against a competitor in the Westcott business several hundred thousand dollars that I just became aware of yesterday. And we’re introducing new first aid items there. Probably, that’s in the first aid area, that would be new products to our existing customers in a new category. So that’s sort of a flavor of how we’re doing that, Sam. There was organic growth. And then at DMT, we’ve replaced in the kitchen area at a large retailer sharpening tools for knives, and that’s a multimillion dollar new piece of business. So there was a competitive win. So that’s sort of why we’re seeing this coming year with some pretty good wins that are back.
Sam Namiri
And then I just wanted to get a sense of how much room in terms — how do you think about your capacity for debt? And what level of debt you’d be comfortable with going to for an acquisition?
Walter Johnsen
Well, we have a lot of capacity right now. As you know, we were at $55 million in debt in December of 2022, and we’re at — where are we now, Paul, like $19 million in net debt?
Paul Driscoll
Right. Yes.
Walter Johnsen
Yes. I mean, so we’ve got $35 million, $36 million of excess capacity right now. And we’re generating cash flow. So the kinds of acquisitions we’re looking at are tuck-in acquisitions where we can leverage our distribution channels and our product mix to grow them. So we’re not looking for some transformative deal where I’ve got adding a tremendous amount of debt. That’s probably not what’s in the cards. Is that helpful?
Sam Namiri
Yes. Yes, that’s helpful. I guess part of what I’m thinking is also is with what your outlook is looking like, does it make sense to increase buyback as well? Or I don’t know — I don’t think you actually have — I don’t know, I’m not sure, do you have a buyback in place? I know if you do, it’s small, but…
Walter Johnsen
Yes. We have a buyback in place for over 160,000 shares, and we could do that. But I’m not thinking right now. Well, we could do it with some options because that would be very advantageous for the company because you’ve got the strike price offsetting the number of shares. We may do some of that. And opportunistically, we may find a block that’s available and we take it because if we’re right with where we think we’re going, then that would be a good purchase for the company.
Sam Namiri
Got it. Okay. And of the $100 million you mentioned on the call, you said $100 million of revenue in what, three years is what you expect, both organic and…
Walter Johnsen
I’m not expecting, that’s my objective. Hold it to Walter.
Sam Namiri
Okay. Okay. I guess from the objective there, what would you say is the mix of organic versus positive growth?
Walter Johnsen
Yes. So just for round numbers, say, we were at 200. We’re less. We finished the year at 191, and we sold 6% of the company. So let’s remember that. But let’s say we’re at 200 and we grow 10% a year. In three years, that’s 220, 240, 260. There’s some compounding that’s 270, and we buy $30 million of companies. So that’s how it would happen. I can see that happening.
Operator
Your next question is a follow-up question from Richard Dearnley.
Richard Dearnley
Paul, the tax rate in the fourth quarter looks like ex capital gain was really minimal. Am I getting that right? And if so, why was that?
Paul Driscoll
The tax rate in the fourth quarter was 20%, is that what you…
Richard Dearnley
Well, if the…
Paul Driscoll
The gain on the sale is the — the capital gains rate is the same as the ordinary rate. But I think the tax rate in the fourth quarter was 20%.
Richard Dearnley
Right. Well, the $2.9 million or $3 million that you show there is basically the tax on the capital gain, suggesting the operating pretax, which was about $1.6 million or something had no tax rate.
Paul Driscoll
Right. Well, it’s not the genomic tax rate, Dick. It’s just that during the year, we estimate the full year taxes and we use the effective annual tax rate. So in the fourth quarter, we true up the taxes based on the actual pretax. So there’s always some differences in the fourth quarter.
Richard Dearnley
Okay. That’s what I guess.
Operator
Our next question comes from the line of Jake Patterson with Talanta Investment Group.
Jake Patterson
I was just curious, you said 6% of the company sold. It’s like $11 million, $12 million of revenue for those hunting and fishing lines. Does that sound right?
Paul Driscoll
Right. Yes.
Jake Patterson
And then — so that’s for ’23. What does that — you said that was flat versus ’22 probably? Or is that down a little bit or…
Paul Driscoll
I think it was down a little bit. I think in 2022, it was $12 million. In 2023, it would have been $11 million by region. There were too much [indiscernible] sales.
Jake Patterson
Okay. Got you. And you don’t expect there’s not going to be any like SG&A reduction from that I would assume?
Walter Johnsen
Yes, there was SG&A reduction. Sure, Jake. We had to rightsize ourselves when Dick generally was doing his arithmetic and saying, well, there must have been other expenses. Sure. There was severance. As you can imagine.
Jake Patterson
Yes. Do you have the number for maybe one-time expenses in the fourth quarter that we could back out?
Walter Johnsen
Well, those are just — Paul?
Paul Driscoll
You sold from 19.8, you can work backwards and come up with a number.
Jake Patterson
Okay. So I guess going for, like looking at, I don’t know, $59 million SG&A this year, you’re expecting that to probably stay steady going forward in ’24?
Paul Driscoll
Well, as we grow, we’ll increase a little bit. But the variable cost, there’s a lot of freight to the customers and commissions and — so variable selling. So that will — those will go up with a sales increase. And the rest of the SG&A will stay fairly flat and some savings on Camillus and Cuda. But then we got cost increases and wage increases and so on.
Operator
There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.
Walter Johnsen
Well, thank you very much for joining us. We look forward to speaking with you after the first quarter. Goodbye.
Operator
Ladies and gentlemen, this does conclude 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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