ACCO Brands Corp (ACCO) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2005 ACCO Brands Earnings Conference Call. My name is Colby, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Jennifer Rice, Vice President, Investor Relations. Please proceed, ma'am.

Good morning everyone, and welcome to our fourth quarter and year-end conference call. On the call today are ACCO Brand, Chairman and CEO, David Campbell and Executive President and CFO, Neal Fenwick. Following their prepared remarks, David and Neal will conduct a Q&A session.

Our remarks this morning will refer to our results on an adjusted pro forma basis, which includes GBC Businesses in all periods and excludes restructuring, non-recurring and unusual items. A reconciliation of these results to GAAP can be found in this morning's press release. Finally, I'd 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 factors.

Now, I'll turn the call over to David.

Good morning everyone, and thank you for joining us today. 2005 was ACCO Brands inaugural year, and the fourth quarter was our first full quarter of operations. It was a period focused on key initiatives kicked off at the time of our merger to position ACCO Brands for a successful long-term future. In our call today, I will provide an update on the progress that we have made in bringing our two companies together, but first I want to review what I believe are important points for you to take away from our fourth quarter and 2005 performance, then I will turn it over to Neal to review our results in greater detail.

So, beginning with some highlights. For the year, the combined company delivered net sales growth of 3% driven by remarkable strong results within the computer products business throughout the entire year. The growth in Kensington comes as no surprise to us. The business continues to reap the benefits of significant go-to-market investment following restructuring and repositioning over the last several years. We continue to make investments in brand building and innovation to keep this rate of growth growing.

Our newly combined Office Products Business will now begin the same restructuring and repositioning process that Kensington has gone through, and that ACCO World went through in the early 20s -- sorry, the early 2000s. Office Products was down for the year both in sales and operating income, and while we anticipate some strong price initiatives that will discuss in a moment, we did not expect the substantial additional costs of raw materials, freight, and distribution that affected many businesses in 2005 largely driven by higher oil prices.

One factor in the performance of Office Products was the impact of price competition between ACCO World and GBC. The next affect of pricing was 1% negative and more than half of this was in product categories where ACCO and GBC overlap. This price competition was established prior to our merger and was isolated to two categories in which we had significant overlap visual communications and document communications. Importantly, this unfavorable pricing is isolated and adjustable.

Plans are already in place to address this in 2006 and into 2007. Remember, irrational pricing is one of the primary drivers of our merger. The strength and competitive position of the combined businesses that will enable us to resolve much of the negative pricing issues long term and focus increasingly on innovation and brand building initiatives. Additionally, we have already undertaken an extensive amount of analysis on our returns by product SKUs and by customers. This is a similar process to what was undertaken in --

Please pardon the interruption. May I have your company name please? Hello, is anyone on the line? Please make sure your handset is not muted.

. . . in place to either correct the pricing or the cost of these SKUs or eliminate them from our product offering over the next two years. As a result of both of these actions our future will focus on the pursuit of profitable growth.

Office Products bottomline was also impacted by higher raw material, freight and distribution costs. Raw material costs increase were particularly erratic over the last half of 2005, principally in the plastics area. It is our belief that some of these increases we saw at the end of 2005 will abate but will still represent an increase to overall 2005 levels. We are in the process of defining a second price increase in 2006 to recover these raw material cost increases.

Freight and distribution costs were up 12%. Here too, we believe underlying factors have been isolated and will be dealt with as we move forward. We believe fuel prices have now peaked and [analytic] reviews and fixed plans are now completed focusing our efforts for our inventory management, the rationalization of our manufacturing and distribution footprint and the cost effective handling of small order quantities. These are all activities that will drive down our logistics costs.

Despite ACCO Brands slightly lower total company operating performance, our cash flow continues to be very strong and healthy throughout the entire year coming in ahead of even our own expectations. As a result, in January of this year we have already paid down $24 million of debt satisfying our full year 2006 mandatory principle payments.

All in, I would summarize 2005 as a new beginning consisting of many long term positives with some short term manageable challenges, but net, net absolutely confirming our long term view that the newly combined business has a much stronger future. Now I want to spend a few minutes providing more detail and perspective on some of the actions we're embarking on to transform our Office Products Business.

In the fourth quarter we completed our integration planning for 2006. We now have very detailed initiatives laying out how we will realize our $40 million in net cost synergies over the next three years. We have great confidence in our ability to execute these plans. A number of these initiatives are now underway and more will shortly be started.

During the quarter, we also took action to strengthen our management team. Reconfiguring and clarifying organizational roles and responsibilities and adding new leadership particularly in Europe. Since our merger, we have added 10 new senior managers while retaining our strong talent from GBC and ACCO World. With our organizational structure now complete, many of our 90 senior managers around the world find themselves in new roles appropriately suited to their strengths and experience. These are powerfully aligned proven leaders who are driving the key initiatives that will define success for our future.

Additionally, we continue to make significant progress relocating and regrouping our people, so that they are aligned and housed together within our new business unit and functions. Nearly 500 employees have now been relocated and are already working side-by-side in the same offices resulting in quicker decision making and faster action.

We also have made significant progress consolidating our Information Technology Systems a key driver for future action. IT Systems are a key enabler in the consolidation of our manufacturing, distribution footprint, administration and overall lower cost structure.

Prior to our merger, ACCO World had just completed its second year of a four year systems conversion in our U.S. and Canadian businesses to Oracle Software, which today is about two-thirds complete. Throughout 2006, former GBC operations will be brought to the same levels then once both operations are in harmony, we will simultaneously complete our combined U.S. and European integration. We anticipate this final conversion to be complete in early 2009.

We have also completed our planning for 2006 to consolidate and eliminate redundant facilities. We are well on our way [with] these plans into 2007 as well. In the weeks and months to come, we will share information with you about our evolving manufacturing and distribution footprint for the Office Products Business, and I'm sure you can appreciate that we need to communicate these plans with our employees first. But rest assured, there is much behind the scenes activity going on with this important component of our merger synergy story.

Perhaps most importantly during the quarter, we began sharing our vision and plans with our major customers. Their response has been quite favorable. They see our strategy of creating a branded Office Products powerhouse with [fewer] stronger brands supported by innovative products as much aligned with their own strategies. We continue to work closely with them as we implement our changes.

All in, we're very encouraged by everything we see with our Office Products integration. We have now embarked on a review of our commercial business. We will focus on current strategic direction of these businesses evaluating their full potential in developing an understanding of their linkage with the Office Products portion of our business. We expect to complete this review process by mid-year.

Now, as I look into 2006, I anticipate it will be a tale of two halves. The first half of the year will be a period undertaking improvement initiatives and will likely result in negative year-over-year margin in EBITDA comparisons due to the cost inflation seen in the second half of 2005, and we expect the second half to be favorable year-over-year as the benefits begin to flow from our first half projects and our synergy ramp ups.

All in, we expect 2006 operating income and EBIT -- sorry, EBITDA results to be even or slightly up when compared with 2005, with finishing the year at a much higher run rate. From a topline perspective, Office Products excluding any impact of the roughly $75 million in revenues currently under review we expect volume growth to be in line with growth -- with [white] collar employment growth or about 2%. We still anticipate strong mid-teens growth in computer products and modest growth in our combined commercial business.

For the business as a whole, we anticipate low single digit growth, excluding the business under review. Once we get beyond 2006, we expect our operating margins, EBITDA, and cash flow potential to recover strongly as we start to realize the business improvements in cost synergies. In 2007, we start seeing the benefits of improved pricing. The correction of lower margin SKUs, the integration of our Information Technology platform, a more efficient manufacturing distribution footprint and the realization of 2006 raw material related price increases.

We continue to believe that by the end of 2008, ACCO Brands will yield a 12% adjusted operating margin run rate, excluding amortization in intangibles equivalent to the level ACCO World generated in 2004. Beyond 2006, our integration period our long term objectives remain the same. We continue to expect top line growth in the single to mid - in low to mid single digit. We expect to grow operating income in mid to high single digits long term. However, factoring in the synergies of 2007 and 2008 will be above the string rate.

With our combined debt reduction, we expect earnings per share growth in the low double digits. I am just as confident in our ability to date to meet these objectives as I was in March when they were first initially communicated. We have the right synergies. We have the right people in place to drive our business forward, and we look forward to keeping you apprised of our progress.

Now I'm going to turn the call over to Neal, to walk you through the details about the quarter.

Good morning, everyone. As you'll now see in our press release, we have released pro forma financial results with combined ACCO and GBC for 2004 and 2005 and by quarter. We were not able to issue pro forma's before now, because the final synchronization of accounting calendars did not occur until our fourth quarter. We thought it was better to wait rather than issue pro forma's twice. Hopefully, the information will make our results more transparent and the modeling of our business a little easier.

I'm going to review more of the financial details for the quarter and the year. Beginning with net sales. For the quarter, net sales decreased 2% excluding the impact of currency which actually became unfavorable this quarter. The underlying decrease was just under 1%. For the year, underlying sales growth was nearly 3% excluding the impact of currency. The underlying increase was nearly 2%.

Volume increases in Kensington offset declines in Office Products. Office Products pricing was down 1% for the year and volume was flat. Our flat volume, despite nearly 2% growth in white collar employment was the result of share loss in ring binders and storage boxes that offset growth in other categories.

Gross margins contracted about 200 basis points in the quarter and 150 basis points for the year. The primary drivers were the same for the quarter and the year. Raw materials, freight, distribution and pricing. However, the magnitude of the impact was sharper for the fourth quarter, which also included lower volume and adverse mix. The effect of the unfavorable pricing had a minimal impact on gross margin for the quarter and a 60 basis point impact for the year.

The price increases in our commercial industrial businesses and a reversal of accrued rebate levels due to lower Office Product volumes, offset the underlying issue for the quarter. Raw material increases have a negative impact of about 70 basis points for the quarter and about 60 basis points for the year. The raw material component was proportionately more significant for our commercial industrial business.

Sales mix shifts were also an adverse impact on margins, particularly in the fourth quarter for computer products and European office products. And 12% increases in both freight and distribution expenses had a combined impact of 80 basis points on the quarter and the year. The freight and distribution costs were largely confined to Office Products and as David mentioned, we have initiatives that will help us work down our logistics costs over time.

SG&A as a percent of sales, improved 40 basis points for the quarter and the year. Slightly higher ongoing quarterly infrastructure and operational investments to support the new company were more than offset by lower accruals for incentive plan payments. All in, our pricing income declined 10% and OI margins contracted 100 basis points for the year. As such, our adjusted EBITDA declined $22 million year-over-year, with the entire decline in the third and fourth quarters. We anticipate being able to recover the decline and reach our target of a run rate 12% adjusted operating income margin, excluding restructuring and the amortization of intangibles by the end of 2008.

The largest impact on margins and EBITDA was freight and distribution, followed by raw materials and then the unfavorable pricing in U.S. Office Products, which was partially offset by increases of the non-U.S. geographies and in our commercial business. We believe fuel and [resin] prices have now peaked, and expect our planned price increases to recover the higher costs beginning in the second half of 2006. What you are seeing right now is the light that exists before we can recover these costs through pricing.

In addition, the actions we're taking to rationalize pricing or improved costs on low margin or on profitable SKUs should start to accrue benefits in late 2006 and more importantly in 2007. Through the combination of business improvements, pricing, underlying growth and our cost synergies, we believe we will achieve our forecast operating levels.

Now turning to restructuring and one-time charges. We incurred 22 million of pro forma charges for the year, of which 16 million were transaction related. We do expect to incur additional integration related restructuring and non-recurring charges in 2006, likely in the neighborhood of $45 million. It's important to note that these are cash costs so they exclude non-cash write-offs and for free cash flow calculations need to be tax effected.

Turning to tax. You may recall in the third quarter we took a charge of $11 million to facilitate the merger of our operations and the placement of debt in jurisdictions to match expected cash flows. During the fourth quarter, we were able to realize a tax benefit of $8 million as we implemented various tax planning activities.

Going forward, we expect our reported tax rate to be about 37%. We have not yet finished our final tax planning work, but do expect a lower cash tax rate by 200 to 500 basis points initially, but this rate will trend upwards converging with our reported tax rate in about five years.

To [date], we filed a restatement of our prior period financial statement in order to reflect the technical adjustment for accounting for income taxes. The restatement reflects an increase to deferred tax liability of $45 million and increase to taxes currently payable of 6 million and a decrease to stockholders equity of 51 million, to reflect higher deferred taxes applicable largely to identifiable intangible assets acquired prior to 1993.

Importantly, these are all non-cash items and have absolutely no impact on 2003 to 2005 cash or earnings amounts, nor will cash or earnings be impacted in the future. This restatement is to reflect a technical accounting adjustment only, and we have received a waiver from our lenders concerning any potential violations of our credit agreement terms that might be cause by this restatement.

Now I would briefly like to talk about FAS123, the expensing of stock based compensation. Like many other companies, we adopted this new accounting standard beginning January 1, 2006. We will have expenses from the Legacy GBC and ACCO World stock option plans, as well as the new ACCO Brands stock based compensation plan which we finalized in December. We estimate the net of tax impact of FAS123 to be in the range of $7 million or $0.14 per share in 2006.

On to cash flow. Our cash flow generation was strong all year. Since March 15th, the date Fortune Brands announced the spin-off of ACCO and the merger with GBC, we have generated more than 80 million of cash. As such, we reduced our debt and maintained our net debt adjusted EBITDA ratio. Since we are a very strong generator of cash flow and have relatively low capital requirements, our priorities for the use of cash going forward are to fund the plan capital and restructuring related outlays required to successfully integrate ACCO and GBC and to service and reduce our debt. We expect our free cash flow to be positive in each year of our restructuring and with the potential of topping more than 100 million at the end of 2008.

Finally, we have had several questions asked of us concerning the ongoing share ownership of Lane Industries. The Lane family founded GBC in 1947 and that legacy investment is represented by the shares currently held by Lane Industries. Presently, those shares are unregistered and may be sold under Rule 144 or in another transaction exempt from registration. In connection with our merger with GBC, we entered into a registration rights agreement with Lane. Until February 17, 2007, Lane may request that the Company file a Registration Statement to register for resale up to 50% of the shares they owned at the time of the merger.

After February 17, 2007, Lane may request the Company file a Registration Statement to register for resale all or, a portion of the shares that Lane then owns. We have not received a request for registration from Lane. If Lane were to decide to expose its registration rights, then we will select the lead for managing underwriter for that offering. That offering will be pursuant to a Registration Statement filed with the SEC and available to the market.

Now that concludes our prepared remarks. At this time, I will turn it over to the operator to begin the question and answer session.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Hi, good morning. You mentioned a specific issue with visual communications and document communications. Can you give us a sense of what percent of your revenues are accounted for in those two product areas, and when the contracts that you're hopefully can renegotiate will be coming up?

There are included in our Office Products segment. They represent about 40% of our Office Product segment combined.

Got it, and when will contracts be up for renewal there?

Good morning, Arnie. It's David.

Hi David.

Arnie, I think our contracts will probably go through the balance of '06. There will certainly be a big review of SKUs over this period. Okay? So it's not -- this will be a period if you would, of SKU conversion -- SKU consolidation, where we will consolidate with the former offering with ACCO with the former offering of GBC under the Quartet Brand. So my sense is that there really won't be a crisp cut-off. This will be sort of an evolution over the year.

Okay. You mentioned in your prepared remarks David, that 75 million was limited SKUs to limited customers but you also indicated it would take two years to resolve the issue. Can you give us a little feel for why it would take that long to make the decision?

Sure. First of all, I think that that is a period of where we think we can completely adjust this. The process we really go through is this. The process we are going through is taking a look at SKUs which are not performing well. As we take a look at the profitability of our combined businesses, what we have first of all tried to do is isolate specific SKUs where we're not performing well and we really go through a process of saying gee what do we need to do here?

Do we need to increase our pricing? Do we need to reduce our costs or, maybe what we need to do is eliminate completely the SKU from our offering. So depending upon the route we go, it will take different periods of time. Also, this sort of an investigation and look see, I really don't believe the entire process will take us two years, but I think what we are saying here is we want to step through in a methodical way process of sort of looking at those three options for each SKU.

Okay. Two more questions if I can. You obviously -- we in our writing and you have discussed the whole idea of kind of the negative before the positive in '06. Now that we actually have a pro forma number of EBITDA of 432 in Q1 if I've read it right, 441 of revenue and adjusted gross profit margin of 28%. Can you give us a feel of how much lower then those numbers you expect Q1 to be?

At this stage Arnie, we don't wish to give detailed quarterly guidance. We try to help by giving lower term guidance, but as a -- here at the moment we decided that short term guidance was not an easy thing for us to give at this point. We do actually obviously believe that we're going to be down in the first half of the year, and then riding significantly after in the second half of the year. The magnitude of that dip is not something that we have decided to give an estimate of to the market.

Okay. My final question for David. David, I know in our conversations with you you've talked about kind of domino affect that once you take certain actions it leads to many. You've talked about facilities over "the next weeks" if not months and you have the detailed initiatives in place. Can you give us a sense of kind of the benchmarks we as outside investors should be focused on as signs of the unfolding of your restructuring plan?

Well, we'll certainly will be passing along as we go along. I think as we've talked about how we can effectively communicate to the marketplace, I think -- we think a good solid steady stream of press releases as we communicate these events. I think I commented in my remarks that, we care very much particularly facilities and people related which clearly are a big part of our savings. We really want to discuss and communicate well with the people inside of our business before we go outside, but as soon as we can we will. I would tell you this. That closures have already taken place and that we anticipate a pretty active agenda over '06.

Thank you, very much.

Your next question comes from the line of Derek Leckow with Barrington Research. Please proceed.

Thank you. Good morning David and Neal.

Good morning, Derek.

Just a question on your revenue. Looks like you came out a little bit ahead of what we expected for the quarter and wondered if you can give us a geographic breakdown of that growth?

Yes. We actually saw our sales revenue was down in a couple of areas compared to previous trends and one of the most notable ones was in Europe, where we saw a particularly weak December month, and that was for a variety of reasons none of which were individually significantly, but they were all in the same direction and they included the [inaudible] et cetera [accounting] period when our customers were up to their [initial] levels.

I think what we're seeing Derek is, historically in our business we have observed that our customers bought heavily in the year and the fourth quarter. I think the trend in the industry seems very much to be, that as we improve our ability to supply and supply quickly and well, we are just not seeing the ramp ups that we use to see at year end. And so, that has been a growing trend but certainly this year surprised us significantly. Our last two weeks in December were a significant drop-off from where we thought we would be particularly in Europe.

And then a positive note, obviously we had very strong sales in our computer products area which has strong all year clearly. And the other area where we saw a bit of a reaction to the strong price increase we put through, was the commercial industrial area, where since we're the market leader -- automatically since we were the first one to raise prices significantly in the market for an additional increase [that] sometime before the market responds to it.

Okay, and what was the magnitude of that price increase? And then you also mentioned David I believe another price increase that's planned for this year, and what was the timing of that?

The industrial products increase was a 10% increase on laminating film which went through at the end of October.

As far as the work we're doing for [inaudible] price increase in '06, I think one of the things we care very much is to first of all understand and settle out where our raw material costs are going. I think we have a sense of that. I think we are trying to isolate the 75 million. We're not necessarily sure whether they should be price increases or, whether we should be looking at cost reductions or product eliminations. So that's a work in process right now, but we think in the next 30, 45 days will be really coming to a final sense of that and communicating that to our customers.

Okay. And then on -- in press release here on page three, discussing net income of 59.5 million or $1.40 per share and that includes I think 12.5 million or 12.2 million of costs or $0.29 per share. I'm trying to reconcile this with the pro forma results which I appreciate you guys delivering here. I'm not sure if I understand where the difference is. Neal, could you help me with that?

I think the [expiration] you should take [from] the pro forma tables reconciling that to EBITDA should help you. One of the things clearly in the pro forma statement is that the charges have been excluded from the pro forma, and I think that's the biggest issue you probably find in your reconciliation.

Okay, all right. I'll go through that, and then David one comment you made on operating income. I believe you said the percentage would be even to slightly up for 2006. Is that correct?

Yes, that's what we believe at this time. That's correct.

Okay.

And just to add a little color to that if you'd like.

Sure.

A lot of effort going on right now in terms of reorganizing our business. Initiating actions and as we initiate actions there's a real focus on spending activities initiating projects. Clearly, many of the projects that we're trying to undertake six will have a fairly quick results return we believe, and that we think we'll see that into the third quarter particularly into the fourth quarter.

Okay. What is your plan for CapEx next year?

We anticipate our capital expenditure next year being in the region of $60 million, which includes an additional $20 million of capital expenditure related to our integration plans, 40 million of underlying CapEx and 20 million of supplemental related to the integration.

Okay. And where are you in terms of the headquarters infrastructure? It seems to me that you've been hiring pretty rapidly here lately, and I wondered where you feel you are at this stage?

In terms -- just so I understand Derek, in terms of do we think we have a full complement of senior management?

Senior management, as well as other support functions within the headquarters.

Sure, yes. I would say this. I think very early on we have tried to make an assessment of what our organizational structure has been. I alluded to that in my comments. We really put a lot of time into developing clear roles and responsibilities for people. We think we pretty much now have a full complement in place. I think if anything, I think what you should see now is probably a slow attrition over 2006. I really don't see our headcount increasing. We spent a lot of time on it. I'll be honest with you. We've been slow to make radical change in letting people go. I think that what we've tried to do is first of all make sure that we understand and have accessed well the talents particularly coming from GBC and I think we'll now look to see is sort of an attrition over 2006.

Okay, thank you and then just one final question on your balance sheet. You've did a good job here of paying back some debt. Can you talk about where you see your debt level at the end of 2006 and 2007 perhaps?

I think one of the clear things in 2006 Derek is, we have a lot of cash outlays associated with the restructuring and integration of the two businesses, and therefore we do see opportunity to generate cash flow above making those necessary investments back in our own business. But we effectively will judge as the year goes what level of cash we feel we need to hold on on-hand and to what level we can pay down, but there is certainly capacity in 2006 to make an additional debt pay down, in addition to the mandatory 24 million that we paid down in January already.

Okay, thank you very much and good luck.

Thank you.

Thanks.

Your next question comes from the line Reza Vahabzadeh with Lehman Brothers. Please proceed.

Good morning, Reza.

Good morning. By the way, thanks for the financial disclosure. I know it's a lot of work, but it's really helpful.

You're very welcome, Reza.

As far as freight and distribution costs, the 12% increase was that for the fourth quarter or the year?

That was for both.

Okay, and is that something that should continue at the rate in the next I don't know six months, as in the first half of '06?

We definitely are on a decreasing trend rate in that area, but the rate of decrease will be significantly more in second half than in the first half. And so, as we run through the beginning of the year you'll see Q1 looking very much like the trend coming out of Q4. Q2 should improve. Q3 improve, [Q5] improve.

Got it. Okay, and then as far as pricing outside of the laminating products any other pricing actions that you have taken?

The only thing I would add is that this is very much sort of a segment by segment. As you know, our business is composed of multiple --

Sell segments.

Business units, if you would. I know that there's a small increase going through in Q1 in our Office Products area. Again, as I mentioned earlier, there's another price increase we have planned for mid-year. And again this will be very much a SKU by SKU kind of review category by category kind of review.

Okay.

And computer products. The nature of those product categories is that the product price is full every year just like any other electronics product and you come out with new SKUs and new price points.

Perhaps I can make another comment that might add a little more color. I think it's very clear. What we are trying to do here is not have a broad across the board -- not a terribly [frothful] kind of price increase. We are looking very clearly sort of on a SKU by SKU by SKU basis. Now for a business that has 8,000 SKUs or something like that that is a significant activity.

Got it. And then as far as the overall competitive environment, how would you describe that? I know it was very conservative back in '04, but how's it going right now?

I would say this. I would say that there's no question what we're seeing is with our large customers a very strong move to private brand. And as they move to private brand I think that is hurtful to a lot of our competitors. So I think generally in the industry I think we're seeing people -- our competitors struggling and they're very much I think trying to be aggressive in their positions. I think that we are well positioned. We've positioned ourselves as being that premium brand, but it is a competitive environment. Again, I think it just totally underscores the whole direction and vision that we've created for our business. So I think we feel good about where we're going long term. No question about it short term there's good competition.

Right. And then the inventory de-stocking that took place in the fourth quarter saw the weakness in revenues that took place in the fourth quarter and non-U.S. away from the computer products. Do you anticipate that to continue in the first half or is that going to be reversed?

No. I think that particularly computer products is up against a fourth quarter in '04 where they had very strong new product load ins, and so I think actually you should see a level of growth in computer products which is strong in all supporters during 2006.

And what about Office Products?

For Office Products, I think that we have seen an element of customer de-stocking which we saw in the fourth quarter, and I think others in our industry had that same experience. I think that it's too early to tell whether that is something that they will permanently now try and run with lower inventory levels which will be my suspicion as opposed to seeing an uptick in the first quarter.

Yes. If I can just add to Neal's comments there. I don't there's any question that we see our customers viewing asset management as a critical component to the return on capital investments they have in their businesses. I think that they will continue that aggressively and I think again it speaks to the vision and view that we've tried to put together to be able to handle small orders well. To be able to respond quickly at the right products in the right places.

Do you think that in demand as in POS is still reasonably strong?

Yes, we do, we do. Absolutely and I think that that's a function once again of if you take a look at white collar employment that seems to be going along at about the 2% rate here in the U.S. I think generally it's as we anticipated and expected.

What about the UK? It seems like UK has slowed down in recent times. Any comments on Europe and UK in particular?

Well Neal's a Brit, so let me have him answer that.

True my homeland. We're definitely seeing in Europe that the UK is more sluggish than mainland Europe, and as a general comment we are growing on mainland Europe and we're not growing in our UK business.

Thank you, much.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of David Brecht with Columbia Management. Please proceed.

Yes, hi. Good morning. Just had question about cost saves. I know at the time this transaction was done last summer you talked about 40 million in cost saves. How much of that was actually realized in '05 and do you expect kind of the balance to be realized in '06?

Actually during 2005 we actually had to add some cost infrastructure to be a standalone business, and so in terms costs savings we actually had cost increases in 2005.

And so basically the full 40 million plus whatever the added costs in '05 would be?

Yes, we had 5 million of added costs in '05.

So you'd actually realized 45 million in '06 roughly based on original guidance at least?

No. Based on the original guidance that we gave which we remain consistent with the $40 million of net synergies was a run rate saving that we would achieve in 2008, subject to certain re-investments that we would make in the business. We have already indicated that the cost savings will really flow through much more strongly in 2007 and into 2008, than they would in 2006.

Okay. But they would start to kick-in in '06?

They certainly will start to kick-in in the second half of '06, and that's why we have indicated we will finish '06 on a much faster run rate.

Got it, okay.

To be clear David just to add again a little bit of color there. There are many initiatives that are currently underway in our business today, that again to Neal's point really are investing -- money investing management time and energy and we expect that those will have a yield in the third and fourth quarter.

Okay. But at least in the core business then, if you're assuming that there's some sort of cost saves in '06 that will be realized, and then if there's kind of year-over-year flat EBITDA that actually means that core EBITDA is worse in '06 than '05. Obviously, run rate I guess is picking up in the last half of the year.

One of the issues that we've tried to signal is that, we have substantial changes in our cost structure in the second half of 2005. That will continue to impact us through the first half of 2006, before we can close the cycle with the raw materials.

Okay, and then finally the 75 million of revenue that you're trying to deal with that's kind of -- I'm assuming it's positive EBITDA margin. Is that correct?

I don't know that I can say that David. I think there's a mix in there.

Okay. So it's fairly low margin?

Yes, it's for sure it's really low margin.

Is very low margin.

Okay great. Thank you.

Your next question is a follow-up from the line of Arnie Ursaner. Please proceed.

Yes. Can you just freshen up your capital expenditure guidance for '06 and '07, please?

Sure. Our capital expenditure guidance for 2006 is that we will spend a total of $60 million for 2006, which is 40 million of underlying capital plus 20 million of restructuring related. In 2007, we anticipate spending near $50 million. Again, about 40 million plus an additional 10 and in 2008, around $40 million and that should be run rate thereafter.

And obviously it will be tricky to answer given you may be shutting some facilities but, can you attempt to give us some D&A guidance as well?

Depreciation is running at around about $40 to $41 million at the moment depending on where FX rates oscillate to. We see that only moving by about $1 to $2 million because of this additional CapEx in the next few years. So between 40 and 42 million is a good depreciation number. Amortization should run about 10 million, but like everybody you don't actually finish all your purchase accounting until 12 months after the anniversary. That's based on a current view, and then amortization will decline by about 1 million per annum thereafter after 2006.

Okay, thank you.

Your next question is a follow-up from Reza Vahabzadeh. Please proceed.

Yes, Reza

Hello. Yes, hello. I can hear you.

We can hear you to.

Okay. The underlying guidance for '06 guidance on the topline are you assuming positive volume and positive pricing on an aggregate basis?

We are assuming topline guidance in 2006 is positive for both of those attributes, with the absence of what actually transpires with the $75 million worth of SKUs that are under review, and clearly we can't comment at this stage until we've had the detailed discussions of our customers about what their response is going to be regarding those issues.

Okay. And considering the fourth quarter trend line can you reconcile that with your FY06 guidance? The trend line in fourth quarter was obviously weaker than your expectations for the '06 period.

Sure, and therefore what we've indicated is that our trend line is negative as we get into the first quarter of 2006. We indicate the first quarter as being a down quarter. In the overall context of 2006, we anticipate the back half of 2006 being much more strongly positive as we get two things that come together we square the circle on raw materials, and we're able to get some of our synergies to drop through in the second half of '06. So, we anticipate the year as a whole being flat with the second half offsetting or potentially more than offsetting the first half decline.

Sounds good. Thank you.

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Your next question comes from the line of [Brian Brundant] with Highland Capital Management. Please proceed.

Just two quick questions. One, just on the restructuring just to confirm. You're looking at 45 million of cash restructuring costs for 2006 and then an incremental 20 million of CapEx for a total of 65. Is that correct?

That is correct.

And then on our facilities rationalization. Is there any potential to sell assets and realize some cash proceeds, and are any of those kind of reflected in the numbers?

There will be some ability to sell facilities, but not in 2006 year.

Okay, thanks.

Your next question comes from the line of [Greg Woo] with Metropolitan Capital. Please proceed.

Hi Neal and David. Quick question on your guidance for 2008 for the 12% operating margins. Is that -- just to be clear that is EBIT margin, and you have guided in the past to target EBITDA margin. If that is EBIT that would imply an EBITDA margin of '08 run rate of about 14.5%. I just wanted to make sure that we're thinking about that correctly.

You are correct. It's an EBIT margin and the only thing we've excluded from that is any restructuring charges that may still be going through the business at that stage and amortization of intangibles. So you are correct that it will translate into an approximately 14, 14.5% EBITDA margin.

Great. Okay, thanks guys.

Your next question comes from the line of David Berkowitz with MetLife. Please proceed.

Yes, hi. Good morning. Real quickly. In addition to the bank loan waiver on the tax question were there any other waivers or changes to the covenants?

No. There were no other issues with our banking covenant. [It ]really was a very technical accounting issue and as I mentioned to you dated back to 1993, so clearly it didn't impact anybody's view of whatever they lent us money or anything, and it is something we were able to deal with very easily with the banking group.

Great, thanks.

Your next question comes from the line of Alan Ware with Pike Place Capital. Please proceed.

Good morning.

Good morning, Alan.

Good morning, Alan.

Could you tell us more about the process of what happens when you push through a price increase? Are there a series of negotiations and is your intent to push through a price increase for just the raw material costs or do you think there's room to do more than just that?

Sure. I'd be delighted to talk about the process. I think that generally speaking with our Office Products superstores there is sort of a twice yearly window of opportunity. You must understand those folks have catalogues they go out with and they have commitments and contracts et cetera, so we try not to make this a frequent event. That would be the first comment I [make]. But the second comment is I think we are going through a unusual time. This is not business as usual for us. This is a coming together of two businesses so - but the conversations we're having with our customers this time are somewhat leaning particularly in the areas of overlap for us.

So what we're really doing is, we're sitting down with our customers and we're explaining to our customers the product offering that we see. The new set of SKUs. Sort of how we're putting together a new offering that would make sense for them to carry and be involved in. As we do that there are price points associated with those existing and new products. So, that's really the process we go through.

In terms of what would all be included in that. I think what we look at is not sort of subscribing a particular sort of cause like raw material increase. We look at the margin and its like what is the return we're getting on this, and I think that that's how we look at it and view it. And I think that our history has been we are pretty much a low cost producer, and as our costs go up we have a track record of being able to realize those costs and maintain that margin. I believe that we will be able to do the same and perhaps even more so, given the fact that we are now larger and should be enjoying the synergies and benefits of the combined volumes [for] the business. Does that answer your question, Alan?

That helps somewhat. Thank you. Your customers are they -- in terms of the pricing increase are they looking at it? Do they also see it as what your margins are or, are they more focused on the raw material increases?

Well I don't know that they would have exposure to our margins per se.

If we had a sense for what they are.

Okay, well I would say this. I think what they're interested in is being competitive in the marketplace, and what they obviously do is they would take a look at our value proposition. What is the offering that we have and the quality and the ability to deliver and then hold inventory and they have to weight that off against sourcing in China or sourcing with a competitor and that's their decision to make.

Okay. And the last one is, I think you mentioned earlier that your customers are receptive to your positioning of brands and potential reductions of SKUs. Is that correct?

Yes, Alan it's a good question. I think what they're after is reasonableness. I think that a big part of the conversations we're having with these folks is to explain what we're doing and why we're doing and how it all nets out into an offering, and I really believe at the end of the day sort of what they look at and try to evaluate.

Thank you.

Thank you.

At this time, there are no further questions in queue.

Great. Well I guess in conclusion I just reiterate my enthusiasm for the business. I think that we are making great progress, and I think the business has a bright future and lots of potential. We've made tremendous progress through I think the quarter executing against our strategic plans and we're just enthusiastic in our businesses as we go forward into the next quarter of bringing ACCO and GBC closer together. Thank you very much for your involvement.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.