Acme United ACU
June 04, 2007 - 11:12am EST by
oscar1417
2007 2008
Price: 14.62 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 51 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Acme United manufactures and sells primarily cutting and measuring tools (i.e. scissors and rulers) and other school and office supplies, and has 95-100% of the distribution of certain products in nationwide chains like Staples and OfficeMax. This strong position provides excellent margins, ROE, and cash flows in their core business, and they are trying to take this formula to Europe, where they are currently showing losses. I believe the problems in Europe are surmountable, and that the stock is substantially underpriced considering a "not excellent" outcome in Europe, and if they gain gain traction in Europe, the stock is very cheap.

Acme regularly shows up on various "best small companies" lists (i.e. Forbes, Business Week, etc) due to its excellent financial performance. The market cap is currently around $50M, which I understand is small for some VIC regulars, though it is possible to get a position -- watch for high volume days, which do occur. The business is straightforward and easy to understand.

Acme was organized as a partnership in 1867 and incorporated in 1882. The company and its execs have their roots in the medical supply business. In March 1999 they sold their Medical Division, which sold things like medical instruments and bandage products, to focus on consumer products. Now they sell primarily scissors, cutting devices, rulers, pencil sharpeners, and first aid kits. The next time you are in your local Staples, look at the scissor and ruler offerings. 100% of them will be from Acme, their "Westcott" brand. Having a "category monopoly" with nationwide distribution is what explains their excellent domestic results.

The business and the financials are refreshingly simple and easy to understand. I'll let the 5 year history speak for itself. Numbers in 000's, except for percentages and per-share figures.


2006
2005
2004
2003
2002
Net Sales
$56,863
$49,947
$43,381
34,975
30,884
Change %
14%
15%
24%
13%







Gross Margins
43%
45%
45%
38%
34%
Book Value
18,131
14,065
9,623
9,132
8,479
ROE
21.4%
20.9%
33.6%
13.4%
7.8%
Net Income
3,886
2,937
3,238
1,222
660






European losses
1,017
159
664
859
500






Total Assets
35,021
28,194
22,967
19,743
17,614
LT Debt
10,221
5,577
1,434
2,752
2,032






EPS (Diluted)
1.05
0.78
0.85
0.34
0.19
Dividends/Share
0.12
0.11
0.06
-
-






You can see the excellent top line, bottom line, margins, ROE, and growth in book value. Remember that the earnings and ROE figures are after the significant losses in Europe (more on that in a minute). In terms of one-time items and adjustments, there was a one-time charge of $1.5M (about $0.43/share) in Sept 2005 due to a warehouse demolition. The property had already been written off the books by 1998. There was a small acquisition for $446K in 2004. Sales in 2006 were 78% US, 13% Canada, and 9% Europe.

Earnings in 2005 were suppressed by the warehouse demolition, and in 2006 by unusually high European losses which I don't expect to last forever. So earnings for the company have arguably been suppressed for 2 years, and even so, the figures are good. Without these negative effects, the numbers would be excellent.

Insiders

Execs and directors own about 28% of the stock, and there was insider buying in April 2007. Management comp is reasonable in the context of the entire market (i.e. management salaries of around $150-385K plus bonuses and options), though perhaps a bit high in relation to revenues and earnings, a common problem with micro-caps. I believe management truly works for the benefit of shareholders.

Debt and Working Capital

The company is both growing rapidly and seasonal, and they usually load up on debt to boost inventory before the hot quarters (Q2 and Q3, think back to school). They also used debt to pay the warehouse demolition costs in 2005. Given the strong cash flows, reliable sales and low cost of debt they can obtain, my take is that the debt financing makes perfect sense as a working capital strategy, and helps to boost ROE. Debt is generally on good terms, a revolver at LIBOR+1%, and long term debt with an average fixed rate of 6.5%.

The current ratio for 2006 was 5.31, and inventory turns are around 2.2 to 2.6. Working capital is strong and well managed. This bears watching as the company tinkers with its product mixes, but I believe that this is very well managed, in fact one of the areas where management excels.

US

Domestically, Acme simply has to play a great hand. They have category dominance, nationwide distribution, and high returns on equity and capital, and are maintaining their lead by spending on R&D and making acquisitions. In the last CC, the CEO said that 30% of sales come from new products. Their iPoint pencil sharpener is an example, which won prestigious product design awards (and is featured on the cover of their annual report). They strive to establish proprietary, manufactured products and stay out of commodity markets.

Notes from the last CC: they have 100% of the scissor and ruler market at Staples, and a "very strong" position in the first 8 safety categories in commercial channels.

Europe

The European operations are the big variable and the crux of this story. I have added a line item for the European operating losses in the financials above to highlight this. Note that the losses had been declining for 3 years from 2003-2005, and suddenly spiked in 2006, and about half of that was in Q4, which was a very unpleasant surprise. Also note that the earnings figures are after the European losses, so for instance in 2006 they showed $3,886 of net income ($1.11 per share) and ROE of 21% even after $1,017 of losses in Europe.

The European losses are the elephant in the room, and are a sore spot among the investor community. This came up in most recent conference call (where Jeff Matthews of "is not making this up" fame made an appearance). One caller was clearly throwing in the towel, being clearly disappointed by the spike in losses after years of the losses seemingly being contained (and recurring promises from management to that effect). I suspect that the big sell-off on the day of earnings was due to this sentiment. However, I think it is very unlikely that these losses will continue indefinitely. Management seems very sensible and capable, and I believe they will eventually either get it right or quit.

In Europe, they are changing the product mix, have made management changes, and are cutting costs. Here are my notes from the 2006 Q4 CC (paraphrased, not an exact quote): "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."

Two things are clear: 1) management is absolutely committed to trying to make things work in Europe, and 2) they are still searching for the right formula. They have changed their products, manufacturing, sales strategy, shipping & distribution strategy, management team, and keep making changes trying to make it work. Clearly they are trying to take their successful domestic formula to Europe. Two more things are clear: 1) they are still able to post very good numbers while absorbing these losses, and 2) if they can gain the same kind of traction in Europe that they already have in the US, the stock is undervalued by a very wide margin.

The numbers bear this out plainly. In the absence of losses in 2006, earnings would have been 26% higher, and the stock would be trading at a current P/E of 10 and their ROE in 2006 would have been 27%, very cheap figures for a company with the excellent 5 year financial history. If they were able to obtain even modest profits in Europe, the numbers would be even better. If they are able to, within 2-3 years, achieve the same success in Europe as they have in the US, the numbers are better still.

2007 forecasts: $65M in revenue (representing growth of 14%), $4.7M in earnings (growth of 22%), $1.25 EPS. With the stock at $14.62, this puts them at a forward P/E of around 11. This is for a company that has grown revenues and earnings at 12-15%+ with ROE of around 20% for 5 years running, with an easily identifiable "moat".

I believe that the company, as it stands now with European losses at the blowout levels, is still cheap. I believe that the losses in Europe, while unwelcome and substantial, will not last forever. This is in essence a very simple business, with clearly proven demand and success in the US, and should translate well to the European economy once they get the formula right.

It is hard to see a lot of downside from here, since the European losses seem to be about as bad as they can be, meanwhile the domestic operations are still strong. The company has no problem showing excellent profits while they tinker with Europe, and the stock seems to be valued as if Europe will never add any value and will always show losses. So, probabilistically speaking, there is very little chance of downside, a good chance of upside, and some chance of extraordinary upside.

Management has never made any indication of putting the company up for sale, but I believe they would make an excellent acquisition, due to their simple "pure play" business, cash flows, and ability to support leverage.

Q1 update:

- European losses declined from ~$220K to ~$185K. Admitted that they were "derailed" by European losses last year.
- Demand for the new iPoint pencil sharpener is strong and they anticipate strong results with it in Q2 and Q3 (based on orders they have already received).
- Estimated EPS for the year will be $1.25. This puts them at a forward P/E of about 11.6.
- The demolition of the Bridgeport property is complete, but there are tenants paying rent and providing about $170K of free cash flow. They are looking at options for developing the property. Development may cost $140-170K.
- Bought back $400K of stock during the quarter "in the 13.90's", and have 100K shares remaining on the authorization.


Catalyst

- Discontinuance of European losses (which have already improved in Q1 2007), either through success or by discontinuing those operations, and simply value being discovered, this is a rare cheap stock in this market
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    Description

    Acme United manufactures and sells primarily cutting and measuring tools (i.e. scissors and rulers) and other school and office supplies, and has 95-100% of the distribution of certain products in nationwide chains like Staples and OfficeMax. This strong position provides excellent margins, ROE, and cash flows in their core business, and they are trying to take this formula to Europe, where they are currently showing losses. I believe the problems in Europe are surmountable, and that the stock is substantially underpriced considering a "not excellent" outcome in Europe, and if they gain gain traction in Europe, the stock is very cheap.

    Acme regularly shows up on various "best small companies" lists (i.e. Forbes, Business Week, etc) due to its excellent financial performance. The market cap is currently around $50M, which I understand is small for some VIC regulars, though it is possible to get a position -- watch for high volume days, which do occur. The business is straightforward and easy to understand.

    Acme was organized as a partnership in 1867 and incorporated in 1882. The company and its execs have their roots in the medical supply business. In March 1999 they sold their Medical Division, which sold things like medical instruments and bandage products, to focus on consumer products. Now they sell primarily scissors, cutting devices, rulers, pencil sharpeners, and first aid kits. The next time you are in your local Staples, look at the scissor and ruler offerings. 100% of them will be from Acme, their "Westcott" brand. Having a "category monopoly" with nationwide distribution is what explains their excellent domestic results.

    The business and the financials are refreshingly simple and easy to understand. I'll let the 5 year history speak for itself. Numbers in 000's, except for percentages and per-share figures.


    2006
    2005
    2004
    2003
    2002
    Net Sales
    $56,863
    $49,947
    $43,381
    34,975
    30,884
    Change %
    14%
    15%
    24%
    13%







    Gross Margins
    43%
    45%
    45%
    38%
    34%
    Book Value
    18,131
    14,065
    9,623
    9,132
    8,479
    ROE
    21.4%
    20.9%
    33.6%
    13.4%
    7.8%
    Net Income
    3,886
    2,937
    3,238
    1,222
    660






    European losses
    1,017
    159
    664
    859
    500






    Total Assets
    35,021
    28,194
    22,967
    19,743
    17,614
    LT Debt
    10,221
    5,577
    1,434
    2,752
    2,032






    EPS (Diluted)
    1.05
    0.78
    0.85
    0.34
    0.19
    Dividends/Share
    0.12
    0.11
    0.06
    -
    -






    You can see the excellent top line, bottom line, margins, ROE, and growth in book value. Remember that the earnings and ROE figures are after the significant losses in Europe (more on that in a minute). In terms of one-time items and adjustments, there was a one-time charge of $1.5M (about $0.43/share) in Sept 2005 due to a warehouse demolition. The property had already been written off the books by 1998. There was a small acquisition for $446K in 2004. Sales in 2006 were 78% US, 13% Canada, and 9% Europe.

    Earnings in 2005 were suppressed by the warehouse demolition, and in 2006 by unusually high European losses which I don't expect to last forever. So earnings for the company have arguably been suppressed for 2 years, and even so, the figures are good. Without these negative effects, the numbers would be excellent.

    Insiders

    Execs and directors own about 28% of the stock, and there was insider buying in April 2007. Management comp is reasonable in the context of the entire market (i.e. management salaries of around $150-385K plus bonuses and options), though perhaps a bit high in relation to revenues and earnings, a common problem with micro-caps. I believe management truly works for the benefit of shareholders.

    Debt and Working Capital

    The company is both growing rapidly and seasonal, and they usually load up on debt to boost inventory before the hot quarters (Q2 and Q3, think back to school). They also used debt to pay the warehouse demolition costs in 2005. Given the strong cash flows, reliable sales and low cost of debt they can obtain, my take is that the debt financing makes perfect sense as a working capital strategy, and helps to boost ROE. Debt is generally on good terms, a revolver at LIBOR+1%, and long term debt with an average fixed rate of 6.5%.

    The current ratio for 2006 was 5.31, and inventory turns are around 2.2 to 2.6. Working capital is strong and well managed. This bears watching as the company tinkers with its product mixes, but I believe that this is very well managed, in fact one of the areas where management excels.

    US

    Domestically, Acme simply has to play a great hand. They have category dominance, nationwide distribution, and high returns on equity and capital, and are maintaining their lead by spending on R&D and making acquisitions. In the last CC, the CEO said that 30% of sales come from new products. Their iPoint pencil sharpener is an example, which won prestigious product design awards (and is featured on the cover of their annual report). They strive to establish proprietary, manufactured products and stay out of commodity markets.

    Notes from the last CC: they have 100% of the scissor and ruler market at Staples, and a "very strong" position in the first 8 safety categories in commercial channels.

    Europe

    The European operations are the big variable and the crux of this story. I have added a line item for the European operating losses in the financials above to highlight this. Note that the losses had been declining for 3 years from 2003-2005, and suddenly spiked in 2006, and about half of that was in Q4, which was a very unpleasant surprise. Also note that the earnings figures are after the European losses, so for instance in 2006 they showed $3,886 of net income ($1.11 per share) and ROE of 21% even after $1,017 of losses in Europe.

    The European losses are the elephant in the room, and are a sore spot among the investor community. This came up in most recent conference call (where Jeff Matthews of "is not making this up" fame made an appearance). One caller was clearly throwing in the towel, being clearly disappointed by the spike in losses after years of the losses seemingly being contained (and recurring promises from management to that effect). I suspect that the big sell-off on the day of earnings was due to this sentiment. However, I think it is very unlikely that these losses will continue indefinitely. Management seems very sensible and capable, and I believe they will eventually either get it right or quit.

    In Europe, they are changing the product mix, have made management changes, and are cutting costs. Here are my notes from the 2006 Q4 CC (paraphrased, not an exact quote): "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."

    Two things are clear: 1) management is absolutely committed to trying to make things work in Europe, and 2) they are still searching for the right formula. They have changed their products, manufacturing, sales strategy, shipping & distribution strategy, management team, and keep making changes trying to make it work. Clearly they are trying to take their successful domestic formula to Europe. Two more things are clear: 1) they are still able to post very good numbers while absorbing these losses, and 2) if they can gain the same kind of traction in Europe that they already have in the US, the stock is undervalued by a very wide margin.

    The numbers bear this out plainly. In the absence of losses in 2006, earnings would have been 26% higher, and the stock would be trading at a current P/E of 10 and their ROE in 2006 would have been 27%, very cheap figures for a company with the excellent 5 year financial history. If they were able to obtain even modest profits in Europe, the numbers would be even better. If they are able to, within 2-3 years, achieve the same success in Europe as they have in the US, the numbers are better still.

    2007 forecasts: $65M in revenue (representing growth of 14%), $4.7M in earnings (growth of 22%), $1.25 EPS. With the stock at $14.62, this puts them at a forward P/E of around 11. This is for a company that has grown revenues and earnings at 12-15%+ with ROE of around 20% for 5 years running, with an easily identifiable "moat".

    I believe that the company, as it stands now with European losses at the blowout levels, is still cheap. I believe that the losses in Europe, while unwelcome and substantial, will not last forever. This is in essence a very simple business, with clearly proven demand and success in the US, and should translate well to the European economy once they get the formula right.

    It is hard to see a lot of downside from here, since the European losses seem to be about as bad as they can be, meanwhile the domestic operations are still strong. The company has no problem showing excellent profits while they tinker with Europe, and the stock seems to be valued as if Europe will never add any value and will always show losses. So, probabilistically speaking, there is very little chance of downside, a good chance of upside, and some chance of extraordinary upside.

    Management has never made any indication of putting the company up for sale, but I believe they would make an excellent acquisition, due to their simple "pure play" business, cash flows, and ability to support leverage.

    Q1 update:

    - European losses declined from ~$220K to ~$185K. Admitted that they were "derailed" by European losses last year.
    - Demand for the new iPoint pencil sharpener is strong and they anticipate strong results with it in Q2 and Q3 (based on orders they have already received).
    - Estimated EPS for the year will be $1.25. This puts them at a forward P/E of about 11.6.
    - The demolition of the Bridgeport property is complete, but there are tenants paying rent and providing about $170K of free cash flow. They are looking at options for developing the property. Development may cost $140-170K.
    - Bought back $400K of stock during the quarter "in the 13.90's", and have 100K shares remaining on the authorization.


    Catalyst

    - Discontinuance of European losses (which have already improved in Q1 2007), either through success or by discontinuing those operations, and simply value being discovered, this is a rare cheap stock in this market

    Messages


    SubjectMoat
    Entry06/04/2007 01:19 PM
    Memberrii136
    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?

    SubjectRe: Moat
    Entry06/04/2007 03:24 PM
    Memberoscar1417
    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.

    SubjectRe: Moat
    Entry06/04/2007 04:14 PM
    Memberrii136
    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,

    rii

    Subjectquick questions
    Entry06/05/2007 03:35 PM
    Memberdj927
    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.

    Subjectre: quick questions
    Entry06/06/2007 09:45 AM
    Memberoscar1417
    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.

    Subjectthanks
    Entry06/06/2007 03:23 PM
    Memberdj927
    for the idea and the well thought out response to my questions

    SubjectOscar - how is the industry s
    Entry06/07/2007 11:39 AM
    Membercanuck272
    Oscar -
    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.

    Subjecteurope industry
    Entry06/07/2007 01:26 PM
    Memberoscar1417
    >>> 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.

    Subjecteurope decision
    Entry06/14/2007 12:01 PM
    Membercarbone959
    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)?

    Subjectre: europe decision
    Entry06/14/2007 03:41 PM
    Memberoscar1417
    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).

    SubjectUpdates
    Entry09/07/2007 09:30 AM
    Memberoscar1417
    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
    "Going gangbusters"
    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.

    SubjectRecent acquisitions
    Entry09/25/2007 11:32 AM
    Memberrii136
    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?

    thanks,
    rii

    SubjectRe: Recent acquisitions
    Entry09/25/2007 04:18 PM
    Memberoscar1417
    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
    over-the-counter medications."
    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.

    Subjectupdates
    Entry12/04/2007 01:38 PM
    Memberoscar1417
    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.
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