Acme United Corporation

Good morning. Welcome to the third quarter 2012 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 a Safe Harbor statement. Paul?

Forward-looking statements in this conference call including without limitations 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 including without limitation the following: One, the company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the company.

Two, the company’s plans and results of operation will be affected by the company’s ability to manage its growth. And three, other risks and uncertainties indicated from time-to-time in the company’s filings with the Securities and Exchange Commission.

Thank you, Paul. Acme United had a good third quarter.

Our sales for the quarter were $20.4 million, an increase of 7% over last year. Net income increased 17%.

For the 9 months of the year, sales increased 13% and net income grew 23%.

Our sales in the US in the third quarter were strong, increasing 11%. Canadian sales increased 19%.

European sales declined due to the liquidation of Schlecker, its largest customer. There was also a decline in revenues from Europe due to the weakness of the Euro.

Back-to-school sales were strong, with strong growth of our iPoint pencil sharpeners. We began shipping Camillus knives in much higher volumes from last year.

Sales of the Pac-Kit and PhysiciansCare first-aid products were excellent. In June 2012, we acquired The C-Thru Ruler Company.

Revenues in the third quarter from C-Thru exceeded our expectations and totaled about $900,000.

Gross margins for the third quarter increased 1 percentage point to approximately 36% compared to last year. New office products, higher Camillus revenues, improved Pac-Kit margins, the reduction of low margin business at Schlecker and the impact of The C-Thru product line, all contributed to the improvement.

We believe this trend will continue for the rest of the year.

Operating income for the third quarter increased 21% and 30% for the first 9 months. The fourth quarter of the year looks strong.

We are beginning shipments of iPoint pencil sharpeners to new customers, increasing shipments of Clauss industrial tools and filling customer demands of Camillus knives. It is too early to give guidance for 2013, but we see potential revenues in the $90 million to $95 million range.

We will be refining this as we close new business opportunities and roll them into the forecast.

I will now turn the call to Paul.

Acme’s net sales for the third quarter were $20.4 million compared to $19 million in 2011, an increase of 7% or 8% in local currency. Sales for the 9 months ended September 30, 2012 were $64.8 million compared to $57.5 million in the same period in 2011, an increase of 13%.

Net sales in the U.S. segment increased 11% in the quarter and 18% for the 9 months ended September 30th.

The biggest contributors to the sales increase in the third quarter came from Camillus knives and C-Thru Ruler products.

The year-and-date figures also included higher sales of iPoint pencil sharpeners, paper trimmers and first-aid kits. Net sales in local currency for Canada increased 21% in the quarter and 5% for the 9 months.

Camillus knives contributed to the sales increase.

Net sales for Europe decreased by 14% in the quarter in local currency, due loss of Schlecker, a large customer. Sales for the 9 months increased 4% in local currency compared to the same period last year due to higher sales in the growing mass market channel.

The loss of Schlecker sales amounted to approximately $1.5 million annually. The increased mass market business is mostly offsetting the lost Schlecker business.

SG&A expenses for the third quarter of 2012 were $6.1 million or 30% of sales compared with $5.5 million or 29% of sales for the same period of 2011. SG&A expenses for the first 9 months of 2012 were $18.3 million, or 28% of sales compared with $16.9 million or 29% of sales in 2011.

The increase for the quarter and 9 months was primarily due to higher sales commissions and delivery cost associated with increased sales, new product development spending and higher personnel related costs.

Operating profit in the third quarter increased from $1.1 million last year to $1.4 million this year, a 21% increase; operating profit for the 9 months increased by 30%.

Net income for the third quarter of 2012 was $798,000 or $0.26 per diluted share, compared to a net income of $682,000 or $0.22 per diluted share for the same period of 2011. Net income for the first 9 months ended September 30, 2012 was $3.1 million or $1 per diluted share, compared to $2.5 million or $0.82 per diluted share in the comparable period last year.

The company’s bank debt less cash on September 30, 2012 was $14.2 million compared to $11.9 million on September 30, 2011. During the 12-month period, we spent $1.5 million on C-Thru Ruler; $400,000 on treasury shares and paid $800,000 in dividends.

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

[indiscernible] what kind of retailers are you into with Camillus now?

The question broke up a little bit Jeff, but I think what you asked was regarding Camillus knives, what type of retailers are we selling to? And the answer to that is, the Camillus product family has opened up a large segment of sporting goods retailers and those that either have the product now, the Camillus knives now or have shipments on the way includes Cabela's [ph], Bass Pro Shops [ph], and Smoky Mountain Knife Works, Wal-Mart, Canadian Tire and those are some of the big ones and there are many, many smaller ones as well.

What we have found is that the Camillus knives which are really well done with Japanese and Swedish steel and U.S. steel, but made in China.

It price points and performance points that are outstanding in the market. So we are getting good reception from that.

The other thing that we are finding is that the Les Stroud survival tools are doing very well and in fact in Canada one of the reasons for its growth there in part was due to the strength of the Les Stroud brand. So we are very excited about that.

Just a follow-up on the Camillus, so that’s the Survivorman product?

Well it’s much more than that. The Camillus product family has folding knives, hunting knives, the Tiger Sharp knives which have replaceable, razor edges, they have machete’s and in addition to [indiscernible], they've also got the Les Stroud line which is the survivor -- survival tool.

Right, I mean, that’s what's causing the strong sales?

Well, the whole Camillus product family is.

And then you had also mentioned that C-Thru ruler is doing better than you had anticipated. I think you said $900,000 in sales in the quarter.

Can you give us like -- how much better that is or some kind of level of magnitude?

When we modeled the business, we assumed it was some around a $2 million business, and obviously if you do $900,000 a quarter, you’ve done better than you expected. The business is changing pretty quickly as we bring it into the product line and to the mass market and in our other categories.

So it’s going to be hard to measure comparables compared to our budget, but when we model that at least we are very conservative and if we took $2 million and divide it by 4, we would expect $500,000 and $600,000 and it came in at $900,000.

And finally, the Schlecker situation Europe, is that pretty much resolved now?

Well, it’s resolved because they liquidated most of the stores. And I can’t think the worst scenario for our customers and already goes bankrupt, you can plan for that and you can work with the administration, bankruptcy administration.

But when they liquidated, well, you’ve got to get new customers. So it’s resolved in regards to we’re not selling to them any more in any volumes and that was pretty abrupt.

But the other side, as Paul pointed out, the mass market business to Regal [ph], and Aldi [ph], and [indiscernible] and so many others. We've got products that will take some time to get placed but we're making progress there and we expect this to more than compensate for the Schlecker lost in the next year.

Could you talk about the shipping cadence of Mouse placements and then Wal-Mart placement in terms of how much has shipped in the quarter versus visible orders and placements?

Dick, I'm not quite sure I understood that question, but I'll attempt to answer it. For those listening, Scissor Mouse is a proprietary and patent-pending item that will cut a piece of paper very, very quickly.

It looks like a mouse for a computer, it's got a little blade underneath it that's shielded from surface beneath it where it captures the paper and cuts it very, very quickly. We've got that placed in quite a number of mass market retailers for the fourth quarter and it's, for example, used for wrapping paper.

Now regarding the shipments of those, we shipped some in the second quarter. That was mostly the Staples and then in the third quarter, we shipped more and in the fourth quarter we expect to ship more in preparation for the Christmas and holiday period.

So you're really expecting it to be a Christmas item? I mean, an overall item, but initially it is -- in terms of placements, it'll be a fourth quarter item?

Yes, it's clearly in for the Christmas split. The product itself, we believe has a lot of application in the craft area and as we work through later generations with that, I think it could be, quite a bit of a family that has every day use.

Right, and then kind of the same question for Camillus. You're gearing up and have a lot of placements.

How much of those are actually in the stores versus still getting produced or in inventory?

The holiday and the hunting season is a big area, big timeframe for Camillus. So we were shipping Camillus knives in August and September in pretty good volumes.

That will step up in October and November as we're filling stores both for hunting and of course Christmas and the holidays. So the bigger Camillus shipments are yet to be achieved.

Right, I see. And then maybe for Paul, but -- an SG&A question.

SG&A seems to be going up $400,000 or $500,000 a quarter on a year-to-year basis. And the percentages were meaningfully down, as a percentage of sales they were down 310 basis points in the first and 150 in the second and then up 80 in this quarter.

Which one of those trends is correct for the future? And then, part B is that was there a bonus accrual this quarter?

No, there was not a bonus accrual for the quarter. And so we put everything into earnings.

But let me address the SG&A. We're adding some staff to handle some future growth, one area is in the e-commerce area would be [indiscernible], another is in the mass market sales area/craft area.

We've added another person, we've added somebody in Asia for additional sourcing. We've added a quality control person in Guangzhou for again, our quality control sourcing audit.

And this is just part of -- we're cracking into this next level of growth and preparation for next year. And the actual hiring happen to have formed a lot in the August and September range.

Somewhere between 29% and 30% is where the SG&A has been running.

It's probably going to be 29% for the year, Dick. It's typically lower in the second quarter as a percentage because that's where the most of the sales volume has been.

Well 29%, as memory serves, is significantly below where you've been running so that's doing -- sales leverage is good.

Right, we were at 30% at the end of last year, so right, point.

My usual question to Walter, anything over in China that we should be thinking about adding factories, closing factories, facing competition what have you?

Well we just had a quite a number of people in China both for meeting customers and their buying trips as well as review of some of our new products and our costing for next year, and I can tell you that the economy seems to be slowing there, that's certainly not new news. We're expecting the R&D to be pretty much holding stable, although it's strengthened in the past -- against the dollar in the past week.

We are placing orders for production earlier than we did last year, we're trying to get the factories to run a little bit more efficiently by aggregating them and having longer runs and giving them time for the back to school and some of the new business that we've got set up starting next year. But short of that it's pretty much business as usual, the lending rate is a little bit higher, so for some of the factories, they're paying like 8% interest, and so they're paying attention to their payment terms, but in general it's pretty much the same as it's been.

As we continue to grow, Walter, are we going to maintain our pretty significant dependence upon China as your source, or you giving a little thought to other locations?

We're giving a lot of thought to other locations, but honestly the Chinese operation that we have is running very, very well. And we're managing some of the cost, for example, the labor cost by increasing productivity and new designs.

The C-Thru business was moved to China and so that's an additional piece of business in Asia now. But we may find an acquisition in the U.S.

that more to packet that gives us some more domestic production. If that were to happen, my guess is it would not be in scissors, but something maybe higher value-added like knives or in the first-aid area.

And then lastly on C-Thru, Walter. Now that we've owned it for a brief period any further thoughts on where you may take it over the next year or 2?

Well, I can tell you that we're integrating it into our major product lines. We're pushing it -- the products across the board to our mass market customers as well as our craft customers, in addition to the online customers.

It's -- may not have the same growth lengths that say packet does, because of the first aid area, which has so much increasing utilization that it's almost across the board with our customers. But it's a good solid addition to our Westcott family and my guess is that it will be a growing contributor next year.

Is the market primarily school kids?

No. You'd be surprised, we've got C-Thru products that are in the marine area for navigation sets.

We've got the C-Thru products at places like Rhode Island School of Design. We've got them in many of the craft stores, big in Michaels and Jo-Ann Fabrics.

That's how it's - it's a broad base of customers. But in each case they were looking for higher quality products that addressed crafting needs or specialized measuring area like navigation.

Well, if there's no further question I'd like to thank you for joining us. This call is complete.

Goodbye.