Good day everyone and welcome to the Acme United Corporation's Third Quarter 2017 Earnings Call. Just a reminder that today's call is being recorded. And at this time, it's my please to turn the conference over to the Chairman and Chief Executive Officer, Mr. Walter Johnsen. Please go ahead, sir.

Good morning. Welcome to the third quarter 2017 earnings conference call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read the Safe Harbor statement. Paul?

Forward-looking statements in this conference call including, without limitation, 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 reported net sales of $33.8 million for the third quarter of 2017 compared to $31.9 million in 2016, an increase of 6%. Net income was $1.2 million for the quarter compared to $1.5 million last year and EPS was $0.32 compared to $0.40 in 2016. As I discussed in our second quarter call, we had a shift of much of our back to school sales from the second to the third quarter of 2017, but not enough to exceed last year's [indiscernible]. First aid sales in the third quarter were even with 2016 and we selected a shift to the fourth quarter of a holiday promotion at a large retailer. Camillus knives, food efficient product and Clauss professional tools were flat compared to last year, with weak sporting good sales in the flooded southeast to the three major hurricanes. Our international business increased with Canada growing 5% and Europe 15%. Particular areas of strength were sales in the office channel and back to school. Overall, our business in the fourth quarter looks good, with forecasted growth in first aid, Camillus and Cuda promotions and new Westcott business. The growing importance of online business has impacted our 2017 performance in a number of ways. We've grown our e-commerce revenues in excess of 100% annually for each of the past three years. Our end we are winning in what we believe is our largest open arena for growth both in the US and Europe. However as you know there are many industry wide challenges with online growth. Some of our largest customers of course retail stores reallocated inventory, spun off their international divisions, readjusted their strategies time and again, and shuffled management teams. One of our challenges has been to maintain and grow market shares across all…

Acme's net sales for the third quarter were $33.8 million compared to $31.9 million in 2016, an increase of 6%. Sales for the nine months ended September 30, 2017 were $100.4 million compared to $98.2 million in the same period in 2016, an increase of 2%. Net sales in the US segment increased 5% in the quarter and 2% for the nine months ended September 30. Year-to-date sales were impacted by a soft back to school and a large promotion in the second quarter of 2016 that did not repeat this year. Net sales in local currency for Canada were approximately constant in the quarter and year-to-date. Net sales for Europe increased 8% in local currency for the quarter and 18% for the nine months ended September 30. The sales decrease for both periods was primarily due to new customers in the office and sporting goods channels as well as sales of DMT sharpening products. Gross margin was 36.2% in the third quarter 2017 versus 37.2% in the third quarter of 2016. The lower gross margin as a percentage of sales in the quarter was due to unfavorable mix and an additional warehouse cost. SG&A expenses for the third quarter of 2017 were $10.3 million or 30% of sales compared with $9.7 million or 30% of sales for the same period of 2016. SG&A for the first nine months of 2017 was $30 million or 30% of sales compared to $28 million or 29% of sales in 2016. The increase for the nine months was mostly due to the Spill Magic business, higher variable selling costs as a result of higher sales and increased personnel. Net income for the third quarter of 2017 was $1.2 million or $0.32 per diluted share compared to net income of $1.5 million or $0.40 per diluted share for the same period of 2016. Net income for the first nine months was $4.7 million or $1.25 per diluted share compared to 5.3 million or $1.49 per diluted share in the comparable period last year. Company's bank debt less cash on September 30, 2017 was $38.9 million compared to 33.4 million on September 30, 2016. During the 12-month period, Acme purchased the assets of Spill Magic for $7.2 million and paid $1.4 million in dividends. Additionally, the company generated $3.2 million in free cash flow. We succeeded in reducing inventory in our existing business by $1.8 million or 5%. We expect to generate approximately $4 million in free cash flow in 2017.

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

[Operator Instructions] And we'll go first to Andrew Burns at D.A. Davidson.

Thanks for the commentary and the details. On the revision to the full-year guidance coming down $4 million there's a lot of different moving parts in there in terms of back to school, hurricanes, timing of shipments. Could you maybe prioritize those buckets in terms of which ones are your most meaningful for that $4 million revision?

The back to school was softer than we'd anticipated. And in June when we were looking into the third quarter, we expected a very, very strong back to school online. And we did but we were short. And it was hard to forecast because we've never been in the situation where online sales have been such a big segment, but in fact that's what they are today for us. The hurricane clearly impacted fishing. And then you can imagine it's not just when your house gets flooded in the keys or in Houston, but when people are concerned about the impact of the hurricane coming, I believe they just aren't fishing, they're pulling their boats out and they are leaving. And we found that particularly soft. Now I'm not particularly concerned about that other than we lost that churn during the season because there's a number of good fishing promotions coming up for the Christmas time season and that's in the fourth quarter. But it was primarily the weaker back to school.

And as you look at that and you look at selling versus sell through and the opportunity that you converted into revenue was online sales, did that meet your expectations or was it even capacity constrain in terms of delivering on that side. And conversely in terms of the brick and mortar, you mentioned sell through as being the weakness versus selling. I didn't know if there's any sort of structural destocking occurring there that could be a headwind to revenue.

Well, some people say one of our large customers in the back to school area was destocking. It's hard to know because the superstores have been in such flux that maybe they are reducing their inventory. But we couldn't tell that. What I will tell you is that the online business is very difficult to forecast. And it's doing very, very well, but it puts tremendous pressure both on securing our inventory in an appropriate fashion without air freight, having enough so that when the Monday shows up and the weekend online orders flood into North Carolina that we are properly staffed. And that we have the product in place. These are the challenges that will solve, but they're bigger numbers than we've had in the past and they're continuing to grow. Relative to any structural changes with the online retailers other than the office superstores where there really is flux and there are among our largest customers. And the rest I think was just demand and perhaps our market shares were weaker than we expected.

And then one more and I'll jump back in the queue, but just looking at the margin performance and the near-term headwinds as it relates to this online shift. What is do you think that the timeline to sort of optimizing distributions the need online needs and your longer term do you view the shifts online as either headwind or tailwind structurally to your margin profile.

Well we had a full review last week at our Board Meeting at Acme going over our warehousing and logistics issues and opportunities. And while we've added a lot of things, the software, the new equipment, we're putting the mezzanine in to be past - to the products we posted to the shipping locations. These things are in place and they will have a positive impact as they are executed. It will all be within the next six months. However, this is an ongoing issue because let me give you an example. Our online sales will probably be somewhere in the $15 million range this year, which will be up substantially in excess of 100% from last year. Do we forecast another 100% in 2018? We better be planning for it, but it adds a lot of complexity because how do you forecast customer growth at that level and be reasonably confident that you're making the right decisions. That's what we're working through right now. I'm in Asia this week working with our suppliers. And the reason we are is so that we can shorten that supply chain and get product faster because the demands of this business are putting incredible pressures on the factories and on every single aspect of our distribution chain. The good news is that we have the opportunities to sell. And I believe that the margins probably will be showing improvement as we put these short-term improvements in place. But if we continue to have the kind of work that we're getting, there is also inefficiencies that we haven't even anticipated yet but we're trying to anticipate now.

[Operator Instructions] We'll go next to Jeffrey Briggs at Singular Research.

So the question I have is again related to the online sales. First of all I just want to make sure that I understand how you're defining that. Since we're talking about small packet shipments and film it and stuff like that. My assumption is that when you say online sales, you're talking about direct sales through the websites of the various branch and then fulfilling that to customers. Where you including like say sales directly to other people that are selling online like selling directly to Amazon and things like that. Do you include that in your online sales or is that a separate category because it's more of a distribution sale.

The major online customers that we have are Amazon of course, walmart.com. Those are the two big ones and of course then we've got some of the retailers that have less significant online presence. But between walmart.com and amazo.com that's what's driving both of this.

So, are you guys actually fulfilling those individual orders yourself or do you like work with Amazon distribution centers to fulfill.

Well, we do both. And typically the online retailers are stocking and then we're shipping their high velocity items. And then if they have a smaller item that they're not stocking, but at some point say they want to, they maybe going to us for fulfillment or might be going to another retailer depending on who gets the buy.

So for example like if Amazon is selling one of your products, they stock some of them, but then on other ones you guys are actually packing and shipping individual orders if they're not stocking it?

Perhaps, but it might also be going to another retailer whose got a more attractive price at Amazon than we do. And we have [Technical Difficulty] we prefer to have another retailer do it as opposed to ourselves, but we're backstopping.

But you're actually doing that for like individual items like down to that granularity. Like a customer…

There are minimum orders for shipping and so forth, but the answer is, yeah, we were filling small orders.

So this is just a question have you guys looked into filling - the items that say those major online retailers aren't stocking themselves and you guys are shipping individual packages and stuff like that. Have you looked into, you know, you guys holding your stock in the film and centers, and then when those orders come in, it would actually be your stock, you would own it not them. But then they would still do the fulfillment on this, is that something…

Well we haven't evaluated that. So I really don't - I don't know much about it.

I may follow up with you that - on that at a later date. But also just kind of along the same lines, I also know that you guys like to actually view individual sales on your website and things like that. So if a customer is ordering direct on, whether it's a Camillus website or whatever, when you include the fulfillment and the shipping costs and all that stuff, how does that final margin compare to say if you are selling it wholesale. Is there something you can discuss?

Well, I'm not going to break it down to that level, but it's profitable and you can imagine very, very high margin and then there is shipping and handling and there are minimum orders. But if we had a simple model, which we aren't able to have, we'll be back to the days we had shipped the pellets at a time through the wholesaler. That will change.

And we'll go next to next to Jeffrey Matthews at Ram Partners.

I have another question to follow-up on the online shift and that is, how does your balance sheet and capital structure need to adapt? I'm wondering if you - your - it didn't happen this quarter, but I wonder if over time, your accounts receivable shrink, because online tends to pay faster or not and I would also think your inventories would grow because it sounds like you need to have more stock on hand. I don't know, but that's my question.

Well, the inventory clearly will grow as we're anticipating growth in certain of these segments, particularly in first aid and the reason is because the first aid kit will have anywhere between 50 and 200 components. And if one of those components is out of stock, then you can't ship the unit. It's not quite that simple. You can sometimes substitute, but by and large, if you don't have a bag for a first aid kit, you're not going to ship or you don't have eyewash or one of the key components. So we are putting a lot of emphasis on some of the higher velocity components and adding more inventory. In the Westcott and Camillus lines, where we're bringing products in from Asia, clearly, you've got a long lead cycle and you've got to put a little extra inventory in there. You have to. It is going to be Black Friday between that and Christmas time. What I'm hearing from Amazon is it's going to be so active there may not be enough trucks in America to carry all the products that are going to be going to delivery. So you've got to plan for inventory. And these are exciting opportunities, but wow, it's complicated. On the accounts receivables, very few of our orders are actually coming in on credit card or that kind of thing, relative to our overall size. Most of it still is going to say an Amazon or Walmart.com for fulfillment, although we do have some of the small orders. And they have typically the same terms that any of our other big ones do. So I don't expect accounts receivable to change much. I do see inventory moving up. In the DMT business, in all of our first aid area where we can produce and get turns out, that actually is very responsive to online and also in that category. So that helps us in being responsive, but it's the long lead cycle with Asia, really something that we're working on and that's why I am in Asia right now right.

Right. And then along those lines, you talked about you've got to shorten the supply chain and you're working really hard on that. Does that involve bringing more of that production back to America?

No. It doesn't. It might mean some of our suppliers hold safety stock in their own facilities that we don't own, but that's available for shipment. It may mean more commonality of parts, so that they can also be more responsive as we put orders in. There are things that can be done, but bringing things back to the US that we currently have in Asia, I don't see that happening because of - we're there for a reason and the costs are very, very attractive, relative to US production.

Okay. And then finally just you and I have talked about this a lot and that Rocky Mount purchase was kind of a grand slam home run in hindsight. Do you need something similar to that on the West Coast, given all these issues with supply chain and online orders and everything or not?

We have the First Aid Only facility in Vancouver, Washington, which is outside of Portland and it's a very, very nice facility and it's being used for a state right now. There's not excess capacity to be doing substantial warehousing there, although we have a team of people there that, if we wanted to, there is a fair amount of expansion, warehouse expansion being done around the Port of Portland. So we might look at that, but I think our footprint is fine right now.

We'll go next to Richard Dearnley at Longport Partners.

You mentioned first aid being flat. I guess, it's been flat for a couple of quarters now. Does that tell me that the compliance kit business has basically saturated the factories and the trucks and whatnot? And so with now, just a replacement of the component business.

No. I don't think I would draw that conclusion at all, Dick. And what I think happened, but I don't know this, but September sales in first aid were also soft and we expected with the hurricanes that that would be kind of picking up. Fourth quarter first aid is very, very active. And it's new business that we're winning as well as orders from like the American Red Cross and FEMA and those are extraordinary, but that's occurring as well. But that first aid business is a very, very good business and one that in the long term will be growing nicely for us we believe.

And that long term growth will come from where, because the compliance business I would think people have pretty much complied at this point.

Oh, yeah. Well, we're gaining in the, I guess, the VAN [ph] business, we've got a fulfillment app that's unique in the industry that's being very, very well received by distributors like Grainger and Fastenal and Staples and others. And that area gives substantial savings to industrial America which are using VANs right now to get their products, typically on the order of 30% to 40%. It's not saturated at all. It's about $1 billion segment and we're sitting at 50 million.

Okay. And then the Walmart was in paper today - yesterday about putting a Lord and Taylor site on their Walmart.com site. Have you considered a site on Walmart or Amazons sites for Camillus Cuda, et cetera.

Well, I didn't read the article. And the answer is, maybe, it's a good idea, but I am just not familiar with it. Maybe, some of our marketing people are doing that. I just don't know, but I'd be happy to get back to you on it.

Did you feel any - now that Cintas acquired G&K, if G&K's revenue is going to run off, did you feel that or will that happen fourth quarter, first quarter, assuming they're going to supply themselves.

I don't really want to get into the kind of detail you're asking, Dick, relative to customers.

And the gross margins generally being down, do you think the online business over the next year or two is causing a step down generally from the 38-ish percent margins you've been running.

Yes. And the reason that's happening is because of the warehouse and efficiencies, which are included in the cost of sales.

And is the - you mentioned - does that account for most of the decline for third quarter to third quarter?

Yes.

[Operator Instructions] And we'll go back to Andrew Burns.

Thanks. Just some quick follow-ups. In terms of the commentary regarding 2018 and the 8 million in new committed business, just wanted to understand sort of the definition of that, so that's new incremental programs that are slated for '18 and not replacing old programs or, meaning, that's if the rest of the business was flat, if that's all new incremental program.

Yes. That's exactly what it is. It's business that we didn't have before and it's just incremental.

Okay. Thanks for the clarification. And then just a follow-up on, I believe this earlier question, just the cadence of new smart compliant boxes going into the system, is it possible to characterize the trend there over the last couple of quarters and what you see going forward?

We're seeing, that's a good business and it's growing. Smart compliance is, when you look at it for the year, we'll be pulling the entire first aid business' growth. It's good.

And we'll also go back to Jeffrey Matthews at Ram Partners.

Hi, Walter. Two follow-ups. One is, on Europe, your European business looked pretty good. I wonder if - how the shift to online over there is developing. It doesn't sound like it's as dramatic as in the US, but where is that and how are you going to handle that over time?

Well, the Amazon business in particular in Europe is growing very quickly for us. It's not of the same magnitude as the US, but our teams are working together, both our online teams in the US as well as in Europe and Canada. The overall impact appears to us to be behind where the US is by several years. But Amazon will be our number one or number two customer in Europe this year. It's making an impact.

Do you have more, is there more risk of big buck guys over there going completely or is it sort of the same?

They've already done that. The superstores - my commentary earlier about changes in management, changes in strategies, changes in international business, that's been in flux over the past few years. The shifting of inventory from one place to another and then changes in product managers and maybe there isn't a product manager and that's that world.

Right. Okay. And then my other question is on just CapEx, what does CapEx look like for this year, 2017 and I know you haven't made any forecasts for next year, but do you have a sense of whether - I would assume it's going to be higher just because of all the technology spending you're doing, but I don't know.

Paul, why don't you address that?

So this year, we're expecting CapEx to be $2.9 million. That compares to 1.8 million last year. We had some significant purchasers this year, especially upgrading some manufacturing equipment for the DMT business. For next year, at this point, barring any acquisitions impact, I would think it'd be similar to this year.

And we'll go next to Steve Chick at Yucaipa Companies.

I just wanted to clarify on the guidance for the year implies a pretty good level of growth for the fourth quarter. If I have my math right, I know it's a 20% in topline, and actually even bigger growth rates for earnings. And so I'm wondering if you could kind of speak to that and if that's kind of consistent with the trend that you're seeing today and really where the strength is going to come from coming into the fourth quarter?

Yeah. Steve, you've done a good math and that forecast does show growth in the fourth quarter in excess of 20% on the top line and substantially more in earnings. And I can tell you that at this point, we're confident in that. The growth is coming from first aid in a pretty sizable way right now in this month. We're seeing strong online sales. We've got promotions with Camillus knives that are in excess of $1 million of new business. We've got Cuda fishing tools with promotions as well as some things for Black Friday to some of the online retailers. Paul, what am I missing? There is a bunch of new business here. We had a shift of a major retailer of first aid that went into the fourth quarter and that's moving out now. Paul, what else is there?

I think you captured it all there.

Yeah. But there's a buildup that's identifiable and so we have a high confidence in the fourth quarter.

Okay. Thanks. That helps and it's good to hear and then Paul, what tax rate you're assuming for the year and the quarter specifically, just on the, if I can get my math right.

I think for the year, I think at this point, we're at around 25% and we're expecting approximately that for the year.

And gentlemen, there are no additional questions at this time. I'll turn the program back over to you for any additional or concluding remarks.

Well, so, no further questions and this call is complete. We thank you for joining us and look forward to sharing our year-end results, including updates on the way we're fine tuning our operations to accommodate the growth of online sales and we'll do that in February. Goodbye and have a good day.

And ladies and gentlemen, once again, that does conclude today's conference. Again, thank you for joining us today.