|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||51||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
|Entry||06/04/2007 01:19 PM|
|Thanks for the very interesting idea.|
Can you elaborate some on the reason for their virtual monopoly in certain product areas, and how they are able to achieve this? I may not be up to fashion in the school supplies arena, but I would have guessed that scissors and rulers are about as commodity of a product as you can get, so I'm very curious as to how they have cornered this market.
Also, can you discuss a bit more the specific challenges faced in Europe, and if any of the issues they are facing there could eventually affect their core US business?
|Entry||06/04/2007 03:24 PM|
|Thank you for your questions.|
Regarding their "monopoly", note that this is just with certain distributors, i.e. Staples and OfficeMax. Obviously these are probably among the most desirable distributors for their products, but it isn't as if they have a nationwide monopoly in scissors and rulers at all retail locations. So it is more of a matter of establishing and defending a distribution channel than appealing directly to consumers.
I think the answer to how they have this position is a combination of history, "do one thing and do it well", and scale. Essentially it is a game of incremental advantages.
Many of their brands were established over 100 years ago. Their Westcott brand, featured at Staples, was established in 1872. They successfully made the transition to outsourced manufacturing (obviously the scissors weren't manufactured in China 100 years ago), thus keeping the brand intact, and positioning them to attain their current excellent position with certain distributors. So they have a clear brand advantage.
They focus exclusively on these products, and are one of the largest manufacturers and resellers of these products, so they can get what scale there is to be had in these products. For many competitors, these products are a sideline for them, not a focus. They believe they can source the products as cheap as anyone else, "fill factories in China" as they say. They also innovate perpetually and make significant use of patents, with both existing products and new products. So they have clear scale and innovation advantages.
In the US, they just need to successfully defend this position, which they do the same as any consumer products company, through a combination of controlling distribution and point of sale, patents, branding, and innovation. They are careful about raising prices (and clearly don't have to given their margins), for example on the last CC it was noted that Acco announced that they're raising their prices at Staples. Acme management said they "wish them well" and re-stated how competitive the market is.
I do not know the specifics on how their deals with Staples and OfficeMax and other distributors were negotiated and established, which is a good question, and I think management would regard it as a trade secret (they are often asked this and give various glancing answers). This I believe is the secret sauce they are trying to take to Europe, to establish first a foothold and then category dominance in their chosen product categories.
Regarding Europe, this comes up on every conference call, I encourage you to tune in to hear it from management. Here are some of my notes from the Q4 call (this isn't word-for-word, but should catch the gist):
A: We had a bad year in Europe. The good news was that we added $1M on a few key customers. Unfortunately we spent a lot of money on those sales (air freight, packaging, labor, freight costs). We did that to get the business but have made some changes. We saw high startup costs with some key accounts, but have already seen margin improvement in 2007. We have not been able to leverage our product development in Europe as well as we have in the US. We are not satisfied and are still working.
Q: Regarding Europe, was management bidding too aggressively on new contracts, which led them to being replaced?
A: Some of the business we took in Europe was at very tight margins, some of that was an investment in the business, and some of that just should not have been done.
It sounds like they have difficulties across the board. There are management problems (note their comment that some of the bids "should not have been done"), and they recently replaced management in Europe. They have labor problems, freight cost problems, distribution problems, product problems, margin problems, and currency problems. Besides that it's going great :-).
The good news is that I don't feel that any of this should carry over to their US operations, which seem secure. It is a matter of taking their US "formula" to Europe. I also feel that this is an affirmation of their US business model (or management's perception of it at least) -- they think the formula in the US is good enough to spend 5 years and millions of dollars to try to implement it in Europe. They seem to know what they have in the US, and know not to screw it up in the US, and to try to take it elsewhere.
|Entry||06/04/2007 04:14 PM|
|Thanks for the detailed notes. I'll be doing more work on this one and may pop in with a few more questions down the line.|
Thanks again for the intriguing idea,
|Entry||06/05/2007 03:35 PM|
|can you go into a little more detail about what happened with that property they were forced to demolish. It sounded strange they gave the tenant a lease in exchange for $1 a year (and the tenants assumption of costs managing the property), the tenant decided it didn't want to pay when a roof caved in and the company then paid the tenant $400,000 to cancel the lease and had to demolish the building itself. The whole matter sounds strange, was the tenant a friend of management? |
I also wanted to ask when do you think FFO will be positive, I hate it when a company is reporting significant income but not free cash flow. Do you think this is a temporary issue or will the company not produce free cash flow for some time. Thanks for the interesting idea.
Lastly, do they have any NOL's from their European losses? Thanks for the interesting idea.
|Subject||re: quick questions|
|Entry||06/06/2007 09:45 AM|
|The story behind the Bridgeport property is pretty well spelled out in the most recent 10-K. Let me hit the high points, but it's kind of a long story so let me refer you there for the full story (search for "Bridgeport" and "Non-Recurring Charge").|
They stopped using the property in 1996 but had to keep paying taxes, insurance, and maintenance which cost about $107K annually. In 1998 they leased it to a company (they specify that it is an unrelated company) for $1, and the company had to pay these expenses, so this was savings of $107K per year, which was the basis for this arrangement.
When the roof collapsed in 2005, they filed an insurance claim but it was turned down, it sounds like the place was just worn out (they mention "wear, tear, deterioration, wet rot, dry rot and lack of maintenance"). It could also be that the tenant didn't take very good care of it, so maybe that wasn't such a good deal after all. They ended up having to pay demolition costs out of pocket, which was the $1.5M one-time expense in 2005.
Their tentant had sub-tenants who were paying rent, who apparently occupied parts of the property that were unaffected by the collapse. The $400K paid by Acme was to break the agreement with the tenant and to assume the rights to the sub-tenant rents. In the most recent conference call, management said that these rents provide about $170K of free cash flow per year. So they should make up that $400K in about 2.5 years, and theoretically make up the entire $1.5M expense in 9 more years.
Overall I agree that this whole episode is a bit strange, but not really relevant to the business, and the most material item is the $1.5M one-time charge in 2005. They said in the last CC that they're working with the city to see if the property can be redeveloped or sold. I don't know why they didn't just sell it back in 1996 when they stopped using it, I guess they didn't know that it was going to collapse. I would not anticipate any other significant expenses (they only have to demolish the property once), and there may be some outside chance of some upside if they improve or sell it. It was written off the books in 1998.
Regarding FFO, I realized that I should have spent more time on the cash flow situation in the write-up. The business is seasonal and growing, so working capital requires some management. I think the cash flow situation was impaired by the one-time costs in 2005 and the European problems in 2006. The problems in Europe hits their working capital by bloating inventory and receivables, but this should improve. I expect cash flows to get better in 2007 and subsequent years.
In the last CC, management said that they expect to generate $4M in cash flow from operations in 2007, and they said they expect to pay down some debt, and they have a stock repurchase program too.
Regarding NOLs, "At December 31, 2006, the Company has tax operating loss carry forwards aggregating $5,850,740, all of which are applicable to Germany, and can be
carried forward indefinitely." Considering their long string of operating losses in Europe, I'd expect a significant portion of any initial income to enjoy substantial tax benefits.
|Entry||06/06/2007 03:23 PM|
|for the idea and the well thought out response to my questions|
|Subject||Oscar - how is the industry s|
|Entry||06/07/2007 11:39 AM|
how is the industry structured in Europe? Is it dominated by a handful of large chains, or is it more fragmented? Which countries is Acme competing in? Please give us whatever insights you have on how the business differs in Europe compared to the US market.
Thanks very much.
|Entry||06/07/2007 01:26 PM|
|>>> how is the industry structured in Europe? Is it dominated by a handful of large chains, or is it more fragmented? <<<|
I will admit that I don't have a whole lot of visibility here in terms of broad trends. This is a good question.
Intuitively I can't imagine how Europe (i.e. the EU) would be less fragmented than the US, both in terms of retailers and manufacturers.
Staples and OfficeMax have been active there making acquisitions for about 4-5 years, and the sizes, locations, and number of acquisitions indicate a pretty fragmented market. Their strategy appears to be buy a regional chain in select countries (including eastern Europe) to gain an entry point, indicating retailer fragmentation by country. That said, pan-European chains definitely exist and are growing.
In terms of manufacturers of similar products, there must be plenty, but Acme believes they have a solid global supply chain that should translate well to Europe. Of course, they are having issues, so this has not proven to be true yet.
>>> Which countries is Acme competing in? <<<
Their operational base is in Germany but I believe they are working across Europe, they mention landing a deal with a "large pan-European superstore" and "new sales of paper trimmers into a multinational superstore across Europe". I haven't been able to find a country breakdown or a breakout of western vs. eastern Europe. These would be good questions for management.
>>> Please give us whatever insights you have on how the business differs in Europe compared to the US market. <<<
Europe is generally regarded to have narrower margins and higher overhead in this industry than the US, due to things like labor costs, intra-country issues, etc. Acco, Staples, and OfficeMax often report lower margins and higher costs for their business there.
I don't think it is possible that Acme will replicate the same margins in Europe no matter how well they do, though there is room for a lot of growth.
Hope that helps.
|Entry||06/14/2007 12:01 PM|
|It's been 4 years that they've tried getting Europe right and that's not necessarily a bad thing. However, have they given an indication that they're in fact near the point of FCF neutrality (i.e. the point of choosing once and for all between success or shut-down)?|
|Subject||re: europe decision|
|Entry||06/14/2007 03:41 PM|
|I haven't heard anything in terms of an ultimatum on Europe, i.e. fish or cut bait. They have been trying to make it work in Europe for years, and management has been talking about it all this time, and the shareholders have been hearing it too, meanwhile the results are simply not there. The blow-up in Q4 2006 took many by surprise and made a sore spot worse in terms of the investor community.|
I haven't heard a word from management about backing off or stopping their attempts to get it working. Europe is considered a major growth opportunity for all office supply companies, and having some presence there is probably a necessary, not optional, part of the company's future. There are probably other ways they could get into the European markets, such as with joint ventures or strategic relationships, that maybe they aren't pursuing.
They gave some numbers for Q1 and Q2 showing that losses in Europe should start to subside. Honestly I think we will just see what happens. It is hard to imagine things getting worse than 2006.
If they were to shut down the European ventures (speaking hypothetically), there would be a question of what to do with their cash flows. Various value creation strategies would make the company more valuable than today (buybacks, dividends, putting the company up for sale, etc).
|Entry||09/07/2007 09:30 AM|
|Some quick updates on Acme United.|
The Q2 numbers were on track, revenue growth of 12% from the year-ago quarter, though profitability was flat due to higher costs. I don't think there is any cause for concern, just variability in raw materials, Chinese currency, and product mix.
European revenues are up 17% in the first half of 2007 with improved margins. No more detail on progress there, we need to hope we aren't stung with more surprise losses in Q4.
The big news is the success of their iPoint pencil sharpener. This product was introduced earlier this year and is expected to be a back-to-school hit. It has won numerous design awards. On the brief conference call (exactly one caller), management was ebullient. Some quotes or paraphrased comments:
"The iPoint is selling very very well"
Confident of sell-through, not just sell-in (i.e. no channel stuffing)
Displaced Panasonic at one retailer
iPoint placed at Office Depot, Office Max, SP Richards, United Stationers, Costco, some Sam's, and some Staples
Trying to produce it as fast as we can
Management guided for debt at year-end to be in the $5-6M range, compared to $9.6M in the Q2 report, implying that they will generate $3.6-4.6M of cash during the remainder of the year. This pattern is typical for them as they take on debt to boost inventory in the first half of the year, and generate cash in the second half in the back-to-school rush.
Based on all this I would expect earnings to be quite good during the second half of 2007. Having earned $0.81 per share in the first half of 2007, if earnings were to remain flat, the stock would be at a forward P/E of about 8.5. I expect earnings to grow. The market seems to have forgotten about the stock.
|Entry||09/25/2007 11:32 AM|
|Any thoughts on their recent purchases of knife sharpening assets? I'm not seeing how this fits into their current business. Any insight into how this affects the picture going forward, and what the rationale is here?|
|Subject||Re: Recent acquisitions|
|Entry||09/25/2007 04:18 PM|
|They are spending $550,000 on the acquisitions of two sets of assets. In one case it is just buying brand, patents, and trademarks at a bankruptcy auction. In the other they are getting the assets plus customer accounts that generated revenues of $400,000 in 2006. These products are in the knife and blade categories. In the second press release they mention that the two business lines are complimentary.|
They can afford the $550,000 out of operating cash flow as they had guided for generating $3.6-4.6M of cash in the 2nd half of 2007, so there should be no finance problems here. Debt may end the year slightly higher than anticipated, or share buybacks may be curtailed, but the sales of iPoint seem to be very strong and may offset this spending.
Acme's core business is in office supplies such as scissors, rulers, and pencil sharpeners. However they have many other product lines are probably best described as specialty cutting instruments and tools. From the 10-K:
"Principal products within the cutting device category are scissors, shears,
guillotine paper trimmers, rotary paper trimmers, rotary cutters, hobby knives
and blades, utility knives, manicure products, medical cutting instruments and
pencil sharpeners. Products introduced in 2005 and 2006 included proprietary
titanium bonded scissors and trimmers, mechanical-assisted scissors, a new line
of Clauss(TM) hot forged scissors, and electric and manual iPoint pencil
sharpeners. Other new Clauss(TM) products in 2006 included True Professional(TM)
sewing shears, utility knives, chef shears, hobby knives and craft implements.
Principal products within the measuring instrument category are rulers, math
tools and tape measures. Products introduced in 2006 included the iZone family
of school tools - Twist-it(TM) rulers, erasers, tape measures, staple removers
and math tools. Products introduced in 2005 included a new line of Westcott
tearing rulers and professional grade aluminum rulers. Principal products within
the safety product category are first aid kits, personal protection products and
over-the-counter medication refills. New PhysiciansCare(TM) products included a
one-stop relief station featuring pre-packaged two-packs of analgesics, stomach
remedies, cough and cold, and allergy/sinus medications. Also introduced were an
innovative hand sanitizer and the soft-sided E-Z Care(TM) First Aid Kit.
Products introduced in 2005 included new Physicians Care(TM) branded
In this context, the acquisitions fit in to the current product mix, i.e. they already have lines of hobby and utility knives and blades. Acme has established operations in overseas manufacturing and distribution in the US and Europe, so they are well positioned to acquire these brands, revitalize them, and sell them in markets across the US and Europe. They price they are paying is quite reasonable and includes $400K of 2006 revenues.
I have to assume that management saw an opportunity to enter new high-margin niches in a "bolt on" fashion. Overall I see this as a small deal that will probably give a small revenue bump in 2007 and should contribute to both revenues and earnings in 2008. They have some history with acquisitions, such as Clauss in 2004 which was accretive immediately.
|Entry||12/04/2007 01:38 PM|
|Obviously the stock action has been fairly disappointing, with a write-up price of $14.62 four months ago and today's price of $14.00. That -4% is slightly ahead of the volatile market during this time, but still somewhat disappointing.|
Acme's Q3 results were basically on track similar to Q2, though September results were evidently very poor. Same store sales for important retailers such as Office Max and Staples were poor, along the lines of other retail results. Acco, who is in some of the same markets as Acme, downgraded sales guidance and saw double-digit sales declines in the US and Europe in September.
The iPoint pencil sharpener turned out to be the hot product they anticipated, with retailers reporting 25-40% increases in inventory turns compared to competing products. They were manufacturing at maximum capacity and actually sold out and had a backlog in September when the market went soft. I am hearing reports that this is the only pencil sharpener product available at Costco (not 100% on that though), again demonstrating their ability dominate a category. Revenue growth in Q3 was 10% year over year, which is below historical trends, but looks pretty good considering what their peers and distributors are reporting.
The Q3 conference call lasted an hour with a long Q&A session, which is very unusual, for instance the Q2 call had exactly one brief question. I suspect they are getting more coverage due to the turmoil at Acco and at retailers.
They are following their typical pattern of introducing a number of new and innovative products and widening the distribution of existing products. They have a number of new products in the industrial segment, including a "speed pack" product that they expect to make a big splash as a new entry into the industrial area. They expect some sales from this to start in Q1. They are targeting distribution in Home Depot, Lowes, and Ace Hardware. They're also introducing some manicure and sewing products in Europe. Overall, I think their product line is quite broad, spanning all kinds of cutting instruments in several industries.
They also have the two acquisitions that they closed earlier in the year (mentioned in this Q&A thread) and they expect substantial business from there too. This will probably lead to changes in their product mix, with a broader product base including more industrial and commercial, and probably decreased seasonality. They believe that new product releases will maintain and improve margins.
No real news from the European operations, except that sales have grown 25% while losses have diminished. I am sure a lot of analysts are waiting for a big bath loss in Q4 like last year, so far there is no evidence of such.
They have bought back 35,000 shares at $13.90 during the year, not very substantial and somewhat disappointing, though I think they have chosen to use their capital on acquisitions and new products.
They are guiding for EPS of $1.25 in 2007, which puts them at a multiple of about 11x. With demonstrated sales growth of around 15%, ROE of around 20%, high gross and net margins, substantial cash generation, clear visibility into growth from both existing and new product lines, and hopefully no further big losses from Europe, I will reiterate my opinion that this stock is quite cheap, and should have a bright 2008.