ACCO Brands Corp (ACCO) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2005 ACCO Brands earnings conference call. My name is Andrea and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host, Ms. Jennifer Rice, from Investor Relations. Please proceed, ma'am.

Good morning. Thank you, everyone, for joining us today. On the call are ACCO Brands' Chairman and CEO David Campbell, and ACCO's CFO Neal Fenwick. Following their prepared remarks, David and Neal will conduct a Q&A session.

On this call we will discuss pro forma net sales. Pro forma net sales were derived in accordance with GAAP. Please refer to the financial statements in this morning's press release for information on pro forma results. During this call we may discuss non-GAAP financial measures. Full reconciliations of such measures to GAAP are included in the press release. I would also like to highlight that certain statements made during this call constitute forward-looking information and, based on certain risk factors, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of those risk factors. Now, I will turn the call over to David.

Thank you, Jennifer, and good morning, everyone. Thank you for joining us for ACCO Brands' third-quarter conference call. I would like to start with some highlights from the third quarter. Net sales increased 39%, reflecting the successful completion of our merger with GBC. Our fastest-growing and most profitable business, computer products, continues to post phenomenal results, with sales up 25% for the quarter and 26% for nine months. In office products, where it is most meaningful to look at pro forma comparisons, sales were up 3% for the quarter and 2% for nine months. Our commercial business continues to perform well and in line with our expectations.

Our cash flow was ahead of our projections. We ended the quarter was $62 million of available cash. Overall, our results were in line with our expectations and reflected a continuation of the trends that we have seen earlier this year. Neal and I will both talk more about these results in a moment. I now want to recap a few additional accomplishments for the last few months.

The most obvious of these accomplishments is our spinout from Fortune Brands and our subsequent merger with the General Binding Corporation, our first day of trading on the New York Stock Exchange, and our immediate inclusion in the Russell 1000 and Russell MidCap indexes. These events led to the formation of ACCO Brands, the only pure play supplier of branded office products, a powerhouse in the office products industry.

The new ACCO Brands is built on a foundation of key strengths. These key strengths are as follows. Firstly, ACCO Brands has a core of leading brands around the world. In fact, approximately 85% of our sales come from brands that are either number one or number two market positions. These number one and number two brands set the price umbrella for their categories. The price umbrella we provide enables our customers and consumers of their private brand products to sit side-by-side with our premium brands, category by category, and as such generate more profit for our customers and ourselves.

Secondly, we have significant global presence. Third, we bring a proven commitment to step up the product innovation, effectively introducing new consumer-relevant products that are central to our future growth. Fourth, our low-cost infrastructure is an excellent platform for profitable growth. We intend to leverage this infrastructure even further as we integrate GBC. Fifth, we have strong cash flows, and this coupled with low capital requirements.

Lastly, but most important, we have great people. We fill our organization with A players. A players build industry-leading brands, target industry-leading categories, and service customers exceptionally well. Our people come from a variety of industry experiences. Some have been in the office products industry for many years and know the dynamics of this industry very well. Others bring knowledge from other consumer-related industries.

So for all of these reasons, ACCO Brands is well positioned to capitalize on the long-term growth opportunities in the rapidly evolving and fragmented global office products markets.

Turning to the integration of GBC, we have already moved over 330 salaried employees to consolidated offices, to allow them to be grouped by business unit, to facilitate the integration process. We have closed our first GBC facility in Skokie, Illinois, and the finalization of our integration planning process is going well. We are seeing what we expected to see and have uncovered no significant surprises.

Our integration plans are very much on track, and we continue to expect to realize $40 million per year of net cost synergies over the next three years, a portion of which we plan to reinvest in the business. The synergies we have spoken about relate to the office products piece of our business. In the new year, we will more formally analyze the commercial piece of our business. Any synergies and there will be an upside.

Now, I would like to review the results of the third quarter in more detail. The results of this quarter were very much a continuation of what we have seen earlier this year. Pro forma net sales were up 5% for the quarter and 4% for the nine months.

Stellar growth in Computer Products Group, where sales are up mid-20s and have been fueled by favorable industry dynamics that have increased demand for computer accessories and continued success with laptop security categories. Back-to-school season was particularly strong for Kensington in the third quarter. The business continues to see sales successes from new products such as thin and light portable power adapters, optical and laser mobile mice, Bluetooth mice and adapters, and iPod accessories.

Margins in this segment are also strong, 21% of sales for nine months, which is up from prior year. The strength of Kensington comes as no surprise to us. This is an area of our business that underwent significant go-to-market investment, including defense of intellectual property rights following restructuring and repositioning over the past four years. It is now reaping the benefits of those changes and the strong foundation we have laid. This is now what we have set about to do in office products, with the bringing together of ACCO and GBC.

Office products results in this quarter were also a continuation of trends from the previous six months. The most meaningful comparison here is the pro forma results reflecting the combination of ACCO and GBC businesses. On this basis, they are up 3% in the quarter and 2% for nine months. Over the course of the year, ACCO's Office Products Group has had lower volume growth; but a significant portion of the lower volumes were a result of accounts that ACCO lost and GBC won. Therein lies some of the beauty of our combination.

Margins in office products were down for nine months. This is largely due to some legacy pricing from prior year pricing battles between the stand-alone ACCO and GBC organizations. We believe there is an opportunity for future margin improvement as the pricing strategies of the combined businesses are harmonized.

Aside from the opportunities to rationalize pricing, we believe we have substantial margin improvement opportunities in office products with the integration of GBC. ACCO's office products business makes about two times the margin of GBC's office products business. This is the principal reason why the merger was attractive to us. Based upon synergy savings we have identified, we expect to bring the margins of the combined businesses up to ACCO's level over the next few years.

Turning to our commercial businesses, they continue to perform in line with expectation. Commercial-Industrial and Print Finishing continues to move along with no surprises. Pro forma sales are up 7% for the quarter and 8% year-to-date. Other Commercial, which includes Day-Timer and the direct channel Document Finishing businesses of GBC, also continues to perform in line. Pro forma net sales are up 1% for the quarter and flat for nine months. Day-Timer continues to maintain margins and generate significant cash flow, despite being in a declining category.

In summary, netting together all the pieces we feel that we are off to an encouraging start. We have strong brands with leadership positions in good categories, significant cost savings opportunities with the integration of GBC, great working relationships with our customers, and a management team with a proven and varied experience. So, we're moving our business forward from a position of strength.

Now it's time I am going to turn the call over to Neal. Neal, perhaps you can walk us through more of the financial details for the quarter.

Thank you, David. I will provide some more detail about the third-quarter results, highlight a few reporting changes, and then provide a high-level overview of how you should think about our business from a financial point of view going forward.

On a reported basis, net sales increased 39% in the quarter. GBC accounted for 33% of the growth. The change in the accounting period for our North America, bringing it to a calendar months end close, accounted for 3%. Foreign currency translation accounted for 1%. On a pro forma basis, which we think is the most relevant sales figure to compare, net sales increased 5%.

As David noted, Kensington accounted for the most significant piece of this growth, with a reported increase of 25%. Adjusting for the total (ph) impact of the change in accounting calendar and foreign exchange, the increase is 21%. This segment was unaffected by the merger with GBC.

In office products, on a reported basis, net sales increased 23%. GBC accounted for 22% of the growth; and the change in accounting period and foreign exchange accounted for 4%. As David noted, ACCO lost some volume this year but much of this was picked up by GBC. On a pro forma basis, net sales are 3%, or down modestly adjusting for the change in accounting period and foreign exchange.

Third-quarter back-to-school season was solid in the U.S. office products, in part due to a modest shift in timing from the second quarter, but also due to the strong consumer demand. Point-of-sales results for our products during the back-to-school season were up in the low single digits.

Growth was also strong across Australia, Mexico, and mainland Europe, which helped mitigate the softening of the economic environment in the UK which began in July. While we have seen broad growth across many categories in many countries, lower pricing and volume in our larger markets did offset this growth. But we believe we have the ability to improve this through the combination of ACCO and GBC, as David noted.

Turning to our Commercial-Industrial and Print Finishing business because this is a new segment for the Company and it is not directly comparable to the prior GBC segment, there are no prior-year comparisons at this time. On a pro forma basis, sales increased 7% for the quarter and 8% for the nine months.

This is the area of our business where we are most susceptible to raw material price increases, as it involves manufacturing large roles of laminate for a variety of end-users. But it is also the area of our business where we are most readily able to pass price increases on to our customers. In fact, we will take our third price increase in 12 months during the fourth quarter.

Finally, total Company margins were down year-over-year on a reported basis. The biggest drivers were the lower pricing terms we mentioned earlier, which we believe we will be able to rationalize as we integrate ACCO and GBC. Higher freight and distribution costs, which in part are a continuation of trends seen earlier in the year, also impacted margins. However, through continuous improvement efforts around inventory management and the rationalization of our facilities, we see opportunity for improvement. (indiscernible) freight costs we will seek to reduce or recover through future price increases.

During the quarter, we had about 2.5 million of negative synergies from both the buildout of corporate overhead functions and pre-integration structural changes in our office products segment. These expenses are needed to support the combined ACCO and GBC business, are replace the services previously provided by Fortune Brands, and prepare for GBC integration. These costs will continue from here on out; but we expect some positive synergies to start to flow through in the second half of 2006. I will talk more about synergies in a moment.

We also incurred various non-recurring and restructuring items that impacted earnings during the quarter. In addition to these charges, we incurred about $7.7 million of onetime charges related to our spinoff from Fortune Brands and transaction costs related to the acquisition of GBC. These costs are recorded in SG&A and detailed in the press release.

We recognize this quarter is not the easiest to analyze from a financial results perspective for a number reasons, including the mid-quarter closing of the merger and the inclusion of restructuring and onetime charges. In addition, we did make two reporting changes in the quarter. However, through these changes we will position ourselves to have significantly simpler reporting in the 2006 calendar year.

First, our year-to-date results in the current year includes a cumulative effect of the change in accounting related to the elimination of a one-month lag in reporting by two of ACCO's foreign subsidiaries. This was disclosed in the second quarter as a change in accounting, which had an after-tax increase to retained earnings of $1.6 million. In the current quarter there was a further change, with an addition of 5 days sales adjusting the ACCO North American operations calendar to month end. The net impact was about 10 million favorable on sales and approximately $300,000 favorable on after-tax income.

Second, we have reclassified freight and distribution costs from SG&A, where ACCO and GBC historically reported the costs, to the more preferred categorization of these items in cost of sales. This classification approach is consistent with recommended GAAP presentation and how our peers and customers record these costs. This change was made for all disclosed periods, so it did not impact year-over-year comparability.

Now I want to spend some time on taxes. As a result of a partial reorganization of corporate structures, to facilitate the merger of our operations and the placement of debt in jurisdictions to match expected cash flows, we incurred a significant book tax charge of $11 million during the quarter. This charge pertains to the incremental U.S. tax on certain unrepatriated foreign earnings. This expense may subsequently be reversed in part or in full if proposed tax legislation is passed, or if certain tax planning efforts can be implemented. We will continue to work on getting a more efficient tax structure.

I would briefly like to talk about FAS 123, the expensing of stock-based compensation. Like many other companies, we plan to adopt this new accounting standard beginning January 1, 2006. We will have expenses for the legacy GBC and ACCO World stock option plans, as well as the new ACCO Brands stock-based compensation plan, which we expect to have in place before the end of the year. Because of the new ACCO Brands plan not being in place yet, we are unable to estimate the impact of FAS 123 on 2006. Therefore we will provide an update of this next quarter.

Now let me turn to a few items in our combined financial position. We closed the quarter with $62 million of net case available. This represents the ACCO cash generated from March 15 forward, together with the GBC cash at close. Cash generated by ACCO prior to March 15 was dividended to Fortune Brands. As a result of our strong cash position, we are currently not using our additional line of credit.

Cash usage for combined capital expenditure was $6 million for the quarter and $19 million for the first nine months. Prior to the acquisition, GBC spent a further $5 million. We expect about $40 million of combined capital expenditure for the year in total. This includes GBC capital spending prior to the merger, and is $10 million below previous expectations due to delayed project implementation timing.

Since we are very strong generator of cash flow and have relatively low capital requirements, our priorities for use of cash going forward are to fund the planned capital restructuring related outlays required to successfully integrate ACCO and GBC, and to service and reduce our debt.

Turning to debt, at the end of the quarter we had net debt of $886 million, reflecting the successful financing of the Fortune Brands spin dividend and GBC merger during the quarter. I want to point out that in early October we did flip our $350 million of senior subordinated notes issued under rule 144A into the public market. This was well ahead of schedule. The fixed interest rate on these notes is 7 5/8%.

We also recently did a foreign exchange swap into euros for $185 million, representing part of our $400 million term loan. With this swap we better match our foreign cash flows, together with locking into a more stable and lower interest rate environment.

Now let me provide some perspective on how you should think about the growth characteristics of our business going forward. Longer term, ACCO it is influenced by macroeconomic growth, which at current rates allows us to grow revenues in the low to mid single digits. From a volume perspective, growth in white-collar employment, growth in the number of small and home offices, together with an increase in mobile computing and the increased concern over identity theft are drivers of our growth.

With low to mid single digit revenue growth, and factoring in the $40 million of forecasted operating costs synergies, net of reinvestment back into the business, longer term we expect to grow operating income in the mid to high single digits. I do want to make it clear that 2005 and 2006 operating income and earnings growth will be lower than this. We have stated that there will be negative synergies during the first 12 months of the integration, and this includes the third and fourth quarters of 2005 and the first half of 2006.

We should see positive synergies overtaking negative synergies by the second half of 2006, which will likely result in some slightly positive synergies for the full year. Then in 2007, you will see increasing synergies start to flow through; and the full $40 million will be realized in 2008. We do plan to reinvest a portion of these synergies back into the business; so not all $40 million will drop to the bottom line until we these reinvestments pay back.

We expect about three-quarters of the total synergies savings to be in SG&A, as we consolidate and leverage our shared services groups. This includes areas like facilities and IT across many countries. The remaining synergies will be in the form of cost of sales, as we leverage the more cost-effective supply chain that ACCO has in place.

After the initial negative synergies, and the initial year of amortization expense resulting from the transaction, and excluding equity-based compensation charges, we would expect to generate long-term growth in earnings per share in the low double digits. The difference between growth in operating income and earnings per share will come through deleveraging.

In terms of our longer-term cash flow, we have stated that we will incur an estimated $80 million of cash costs to achieve the forecasted synergies. We will mainly incur these costs during the first 18 months. Through the third quarter, we incurred $8 million of cash costs out of the 80 million. The cash costs will flow through the P&L, which we will call out as either restructuring or restructuring-related costs. Some $20 million will be in the form of incremental restructuring-related capital expenditure, and with the remainder charged against GBC's restated opening balance sheet.

For modeling purposes our underlying CapEx rate should be around $40 million in line with depreciation of the combined businesses prior to step up. However in 2006 we will have an incremental $20 million of restructuring-related CapEx, which is part of the 80 million of cash costs mentioned previously. In addition, in '06 and '07 we will see additional expenditure related to the lower spend now anticipated in 2005.

Intangibles and success at (ph) amortization will increase $10 million from the date of acquisition, decreasing by about $1 million per year thereafter.

One final thing to take into consideration when forecasting our business is the seasonality. Our third and fourth quarters are our strongest sales quarters, due to the fall back-to-school season in the third quarter and the preparation for the changing of the calendar year at holiday season in the fourth quarter, which drives sales for storage organization, Kensington, and Day-Timer products.

That concludes our prepared remarks, so at this point we will turn it back to the operator to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) Derek Leckow from Barrington Research.

My first question is on your gross margin experience in the quarter. It looks like it was down around 250 basis points. I just wondered if you could give us more analysis on that, in terms of what segments were the main contributors to the decline?

Good morning, Derek. It's Neal Fenwick. One of the issues that you will notice in our gross margin is that of course GBC was the lower margin business. So you see a little bit of dilution from the bringing together of ACCO and GBC in terms of reported numbers. The second issue is that we are seeing higher freight and distribution costs, and we are starting to see higher raw material costs flow into the business. Those are the other factors leading to the reduced margin, together with reduced pricing which we mentioned on the call.

So as far as the contributors to that, I guess you said that the GBC businesses are the ones that are down year-over-year.

No, I think the 1.2 note is that ACCO made a higher gross margin than GBC, particularly in the office products segment. Therefore when you bring the two businesses together you see, just by the addition of the two businesses, what appeared to be a dilution.

Okay, so as we look at North American office products, the former ACCO businesses have not lost any margin?

That would be incorrect. We have seen increases in our freight and distribution costs at ACCO; and we have seen negative pricing pressure at ACCO.

Okay, so that reflects the price increase then coming up in the fourth quarter. Would you expect that to offset this decline?

Just for the record, we don't plan to raise prices in the fourth quarter in this segment. It was the Commercial-Industrial Print Finishing Group that will be raising prices in the fourth quarter.

Okay, so pricing won't be changing then anywhere else?

Within the office products segment, traditionally pricing moves in the first half of the year, in both the first quarter and second quarter in different countries.

Okay, great. Thank you. Then the question on the negative synergies that you expect for Q3 and Q4, it sounded like you expected those to be overtaken by positive synergies within, I guess, 12 months. What is the next big piece of the expenditure, in terms of negative synergies that we can expect for this rest of this year? Or for (multiple speakers) sorry, for the next quarter and for first quarter of (multiple speakers).

Sure, for the fourth quarter it looked very much like it did in the third quarter; so I would just assume that that would be a continuation. When you get into the first half of next year, then you will see there is going to be price renegotiation as we harmonize ACCO and GBC. At this point it would be very difficult to predict that, because we are going through those negotiations as we speak.

As you look at those negotiations and look at the volume that we're seeing out of North American office products, I guess what percentage of that business would you consider to be somewhat non-strategic or perhaps business that you might be more inclined to walk away from?

Derek, it is David. Good morning. Derek, I think that is a -- I believe that is a situation that we will go through a bit of a discovery process on. Right now, you can imagine, each of our business units are very much looking at their product offering, their SKU offering, the rationalization of their SKU offering. As they do that, sort of coincident with that and in conjunction with that, there very much is sort of a pricing repositioning and a pricing sort of posturing that is going on right now.

So I think the first order of business in that process is to define what your new SKU offering is, then make sure that you lay out price points that are consistent with that SKU offering and that marry up well with the customers' private brand offerings. I think a big part of what we're doing here is trying to craft, as we noted, as you may have noted in my comments, a price umbrella structure where we are the premium offering. We want to make sure that we position ourselves well with the private offerings of our customers. That is not an easy process, and I think will flow into the first and second quarters of next year.

I guess, Dave, you don't feel like quantifying what percentage that is. But I guess I will assume it is more on the value end of your business.

It's not that I don't want to; it's that I really can't. How is that?

Okay. Fair enough.

It is the fairest. Again it is a process that is category by category business unit by business unit. I think that is how we look at it and I think that is how our customers look at it.

Would it be fair to characterize it, though, as being more in the value side of your business as opposed to your top brands?

It could be, it could be; yes. I think one would kind of common-sensically take that; but I don't want to make that statement.

Okay, thank you very much guys, appreciate it.

Reza Vahabzadeh from Lehman Brothers.

There is a lot of moving pieces here, obviously, from -- I guess as far as operating income on a pro forma basis, taking into account GBC in a full quarter, and obviously the accounting changes, calendar, and so forth, where do you think operating income came out in the third quarter on an apples-to-apples basis?

That is actually a very difficult statement to actually ask -- or to answer; it's an easy statement to ask. I think that one of the problems is that we are still going through the process of determining what all the final pro formas would look like. So at this stage we are not able to publish a full pro forma P&L statement for the combined businesses.

We would intend to do that at some future point when we are able to; and obviously from the point of view of producing the Q, there are a few pro forma results that get put together within the Q. I think it's important to understand, too, that purchase accounting flows into how that sort of net income would appear.

What we attempted to do was show you that for the three months ended September 30, if you effectively strip out the underlying things you see a fairly flat business on the ACCO side, excluding GBC. I think at this point, to try and include GBC would be difficult to answer your question.

Let me ask you it another way. You had actual results last year in the third quarter for period ending 9/30/04 for both GBC and for ACCO. I think based on those numbers, we came up with operating income of $49 million for last year's third quarter and EBITDA of $62 (ph) million. Just on the surface, and there is a lot of moving pieces, but how does your operating income compare to that $49 million? It does seem lower, but again you --?

For the first point, we only had six weeks of GBC (multiple speakers) not the full quarter. The second thing is that there are negative synergies that we have had to incur, which will lower actual reported results. Then from a GBC point of view, there are a combination of adjustments that were required as part of purchase accounting, which again impacts reported results.

Right. But I mean if you had GBC for the entire quarter, do you have any idea of what EBIT would have been, or operating income would have been in this year's third quarter?

Not that I am able to publicly disclose yet.

Okay. The negative synergies were, you said, $8 million in the third quarter?

I said that there were 2.4 million of additional incremental costs that we had to add to the business in order to facilitate the integration of GBC into ACCO, and more importantly to add corporate overhead to replace what Fortune Brands used to provide for ACCO.

Okay, will that $2.4 million continue into the next couple of quarters?

Yes, it will.

Okay. And will the pace remain the same, $2.5 million, give or take, per quarter?

I would assume that.

Okay. Then what was the impact of competitive pricing on your third quarter?

It was negative.

But how much negative?

Again, given the fact that you have to look at the piece of GBC we have got included, and the piece that we would exclude, our pricing was negative in the 1% to 2% range.

Okay. Now will that continue in the next few quarters? Or will you lapse that at some point in time?

That certainly will continue into the fourth quarter. As I mentioned earlier, we would traditionally look at our pricing structures between Q1 and Q2 in different parts of the world; and therefore that is the opportunity to change that equation.

It's David Campbell speaking. I think your last question kind of bumps up with the comments we were making to Derek in terms of the rationalization of our product categories and the subsequent positioning for price level positionings.

Fair enough. Then let me ask another question. As far as total debt, can you just give us the components? Is it basically the term loans and the senior sub?

Yes, that is fundamentally what you have. It is $350 million of senior subordinated notes. You then have a $400 million term loan B, 185 million of which we have effectively swapped into euros. Then you have the remaining sort of $200 million which is debt placed in a combination of pounds sterling to approximately $115 million, and then $85 million in euros which is directly placed in our European operations.

Okay, then on a normalized basis and on a full-year basis, your cash interest expense should run at a what? $55 (ph) million?

That is approximately correct.

Your CapEx this year will be 40, next year 60?

Correct.

What will be your cash restructuring charges away from CapEx in FY '05 and FY '06?

We spent $10 million in Q3; and we approximated that there would be a total 18 million. So there is 17 million to go through Q4 and 2006.

How much of it will be in 2006?

Believe it or not, we are still only sort of 85 days into this transaction and we're still planning some of the pieces of the integration. Therefore I actually could not give you an answer to that question right now.

Okay. What will be your cash tax bill?

Cash taxes are very difficult for us to forecast right now. We are in the middle of a corporate restructuring to try and get a long-term effective tax rate. Therefore, I indicated earlier that people should assume a 37% cash tax modeling rate. At this point I can't give you any guidance that is different to that; although I will tell you that I am working on reducing that.

Thank you very much.

(OPERATOR INSTRUCTIONS) Andy Corito (ph) from Kettle Hill.

I was wondering, could you -- the 40 million of synergies that you expect, that is net of the negative synergies that you are assuming; is that correct?

That is correct.

Okay, could you talk a little bit about some of the opportunities on the commercial side of the business for cost savings?

It's David Campbell, good morning. I would be delighted to. I think as we approached the integration with GBC, what we felt is that in doing our due diligence we really had a clear definition of synergies in the overlap areas. The office products area, that was the overlap area. So what we have done is we have, in the process here, first focused on achieving the $40 million of synergies we have spoken to our investors about.

We really decided to put on the back burner, if I could, put all of our energies into the understanding of the potential that exists with office products; and we just put on the back the commercial piece.

In my comments this morning I indicated that we have provided at this point no synergy estimates for the commercial piece of the business. We will be looking at that in the first part of '06. We really want to do sort of a very thorough review of that business, and see where there could potentially be synergy opportunities.

All of those will be an upside to the existing numbers we have talked about. But we really -- you can only do so many things at one time. We're a great believer of eating the elephant a bite at a time. So we are focusing right now on the synergies that we have communicated to the Street.

Okay, what was the impact of the -- whatever inventory valuation adjustment to GBC's earnings this quarter?

The inventory step up?

Right.

It's approximately $3.6 million.

So without this inventory step up, just for the six weeks GBC would have been 3.6 million higher?

That would be correct.

Okay, thank you.

Nakul Krishna (ph) from Taigavida (ph).

Just two clarifications. One, the 2.4 million of additional charges you talked about this quarter, from new charges that you needed to take for the combined business, is that part of the -- I think earlier you, indicated, roughly I think 10 to 15 million of additional cost in the business on an annual basis. Is that what it is part of?

I am not sure I ever gave a number of 10 to 15 million. I think that I gave a figure that was close to 10 million; and yes, that is exactly what it is part of.

So this 2.4 is, on just a pro forma run rate basis, for the whole quarter with GBC, is that a right number? So just annualize that?

Well, there (multiple speakers) of course we had to plan for GBC before it arrived. So we were actually adding cost base into ACCO, in fact, at the end of the second quarter.

Okay, so that is a pretty sustainable number, then?

Yes.

Okay. Secondly, I think somewhere earlier in the call you talked about a $10 million impact, because of some delayed project. What exactly was that?

From a capital expenditure point of view, I had originally given guidance that our capital expenditure this year would be closer to $60 million; and it now appears to be closer to $40 million. The reason is for delays in some of our IT implementation. We switched around with the sequencing of some certain IT projects. So we're not changing what we plan to spend in total. We're just changing the timing of when it will get spent.

Got it. Thank you very much.

Kevin Seagraves from Fort Washington.

I am still trying to understand. On the operating income basis for the quarter, with the numbers that you have in the press release where you're backing out restructuring and then you're backing out GBC, and there is a 5 million negative variance. Then if I back out of that the 2.5 million of new costs I guess for GBC, is that just a fair comparison? Or is there something else in there? That would be explained by the margin decline (multiple speakers)?

That would be the major way to do it. You will see for the quarter that we're down slightly if you just strip out GBC and you strip out the step up of costs. You will see ACCO is down slightly in the quarter.

That is all related to the margin, the gross margin issue that you guys talked about?

It is predominantly related to that and also some prior-year comparisons which are more -- we had easier prior-year comparisons in the first half of the year rather than the second half of the year, for various reasons, which include some oneoff benefits we had in the third quarter of last year.

Then in the quarter, I guess on a pro forma basis or going forward, did you see anything on the working capital side that you had to carry higher inventories or you had receivable issues? Or do you think you will see anything in the back half or the first quarter into next year that are going to be a use of cash more than what we have seen historically from the businesses?

Part of what you have seen in terms of our cash generation this year is a reduction in the inventories since the first quarter of this year. Seasonally we tend to actually have to add inventory in the third quarter; and then it comes down throughout the fourth quarter as we complete what would be our peak selling season in the third and fourth quarter.

So from an inventory point of view, you generally will see our inventory drop between now and the end of the year; and you will see our Accounts Receivable go up as you get into the peak sales seasons.

Okay, so nothing has changed?

Nothing has changed.

Okay.

We started the year with more inventory than we would ordinarily require. That was actually due to some loss of visibility due to systems implementation changes; and we worked that inventory out of the system.

Okay. Have you guys published, or will you, restated numbers for the other quarters historically, with this change? With the moving the freight and everything from SG&A to cost of goods sold?

Within the numbers that we have shown, we have shown comparable numbers by restating the prior period. What we will be doing as we move forward is, as we get into the final year reporting, is trying to pull together more detailed pro forma information so that we can give more clarity of information. But there are a lot of accounting rules around that pro forma information that we have to comply with.

Okay, great. Thank you.

(indiscernible) From Lehman Brothers.

Actually it Reza Vahabzadeh again. Just one housekeeping item. Revolver availability at the end of the quarter was how much?

We have that $150 million revolver. The only use of that revolver that we have at the end of the quarter relates to LCs that we have issued, which account for about $18 million. Therefore we have the full 132 million remaining available capacity.

Okay, as far as raw material cost, which raw material costs are affecting you right now?

Anything that is energy or oil-based is the biggest issues that we have seen arising. That is why I particularly called that out within our Industrial Print Finishing group, which as you can imagine is very exposed to resin and plastic.

Okay. Then how significant is resin for you as a percentage of your total costs?

No individual raw material is significant for us. We make a broad range of different products in different business units. But generally what I would tell you is anything that is oil-related or energy-related -- and that includes things like paper or ment (ph) and steel -- is seeing upward price pressure right now. What we are unsure about is how sustained some of that upward price pressure is going to be, and how much of it is just a cyclical change that will go down.

Then on the freight and distribution side, what kind of an increase are you seeing in your numbers?

We're seeing that our freight costs are increasing around about 25%.

Okay. Then how significant is freight and distribution cost as a percentage of your total costs?

The total cost represents about 9% of sales; and freight is approximately half of that.

So 4.5% or so (ph).

Yes.

Okay. Then on the lost customer that you mentioned, that may be partly offset by GBC, is that a full offset?

Yes, effectively what happened -- GBC and ACCO were obviously trading against each other. So GBC gained some volume from ACCO. But of course, from a shareholder's point of view, we now own both halves; and therefore it's a pocket switch between the ACCO business and the GBC business.

Okay, and was that a full offset or is it a partial offset?

From a volume point of view it is a full offset.

Okay, but as far as pricing, it is not a full recovery?

They obviously gained the business by being more competitive.

Reza, I'd just go again back to my earlier comments to Derek, in terms of I believe that that whole process is a process we are going through, and really can't respond to yet, but will as we work through '06.

Ladies and gentlemen, this does conclude your question-and-answer portion for today's call. I will turn the presentation back to David Campbell for closing remarks.

Great, thank you very much, everyone. I appreciate your participation and involvement. I hope we've answered your questions well today. In conclusion, I just wanted to reiterate our enthusiasm about the business and our potential for a great future. We have a tremendous progress I think over the quarter, and I think we're really doing a nice job executing against our strategic plans.

As we integrate ACCO and GBC businesses, we see excellent opportunities to drive growth and enhance returns and create value for our shareholders in the future. We look forward to keeping you apprised of our progress. Thank you again for joining us.

Ladies and gentlemen, thank you for your participation in today's call. This does conclude your presentation. You may now disconnect. Good day.