ACCO Brands Corp (ACCO) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the First Quarter 2006 ACCO Brand Earnings Conference Call. My name is Sharon and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Jennifer Rice, please proceed.

Good morning everyone and welcome to our first quarter conference call. On the call today are ACCO Brands Chairman and CEO, David Campbell and Executive Vice 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 including GBC's businesses in all periods and excluding restructurings, nonrecurring 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 statement made during this call constitute forward looking information and based on certain risk factors, our results could differ materially. Please refer to our press releases and SEC filings for an explanation of those factors.

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

Thank you Jennifer, and welcome everyone. We are pleased to report our first full year as a public company has started on a promising note. Revenues grew across all of our business segments in the first quarter and our underlying sales increased 6% including the results for GBC for 2006. Once again Kensington Computer Products Business led our way with an 18% underlying sales growth. We also saw an upturn in sales from our office products group despite potential distractions from significant merger activities.

The consolidation of our North American office products sales organization has been completed and is an early success in our integration. Recently I have spent time with a number of our larger customers in both Europe and North America and I am encouraged from what I am hearing. We believe out customers are giving our new sales organization high marks. They are also complimentary on our order fulfillment rates, which have improved remarkably since our merger began back last August.

I'll have more to say about our merger integration momentum, but let me first talk about our operating results. As we expected, operating income and margins declined. Our news release issued earlier this morning provides greater commentary on this decline. These results however are consistent with what we told you at the end of last quarter when we said that 2006 would be a tale of two halves.

During the first half of 2006 we continue progressing synergy initiatives in our office products integration, as well as addressing many of the cost inflation issues that began to affect us starting in the last two quarters of 2005. While we're seeing negative margin and EBITDA comparisons in the first half of 2006, we expect the second half of 2006 to become favorable as the benefits begin to flow from our first half projects and our synergies start to kick in. the sales growth we saw in this quarter and the aggressive stance we've taken on integrating our office products business gives us continued confidence in our outlook for our future.

Since the beginning of 2006 we have moved decisively to integrate our business operations and to rationalize our brand structure. We recently notified customers that the Quartet Brand will be our sole brand for presentation board products in North America. Our Boone Brand is being phased out, simply put, Quartet is a stronger brand than Boone and this decision is consistent with our announced strategy to go to market with fewer, stronger brands.

Over the last few weeks we have informed employees and customers of 9 plant closures or facility consolidations in North America and in Europe. These actions will ultimately account for approximately 40% of the total net cost synergies expected from the integration. These closures and consolidations will help simplify our business, drive down transportation expense and substantially reduce our cost of goods through better utilization of current facilities and outsourcing.

In the second and third quarter earnings release we will include additional facility announcements that we have not yet communicated to employees and customers. Finally, before I turn the call over to Neal for more detailed analysis of the quarter's results, let me touch on three other points. Now that the office products integration is well underway, we have begun the process of reviewing our industrial and commercial businesses. We'll provide and update on that review when we've released our third quarter financial results.

Also, it is important to note that in the first quarter we have paid down nearly $50 million in debt. We believe that the best use of our available cash is to continue to pay down outstanding debt. Finally, I'd like to reaffirm that our view of the long-term performance of the business is unchanged. We remain positive and optimistic. Our press release provides a great deal of information on our integration activities to date which should demonstrate to you that we have the management team, the processes and the sense of urgency required to complete a successful transformation of our businesses. Let me just remind you that while the work is challenging we have done this before and we can and will d o it again.

Now, I'll ask Neal to provide a closer look at the quarter results. Neal?

Thank you David, and good morning everyone. I will quickly review some of the details behind our numbers. Starting with a key headline. Strong cash flow. We had another quarter of strong cash flow performance enabling us to pay down nearly 50 million of debt in the quarter as David has indicated. The [good loss] strong cash flow generation, we anticipate being able to further reduce our debt later in the year and the more significantly in 2007 and 2008. We expect to reduce our net leverage from about 4 times EBITDA today to a ratio in the low 3s or high 2s in 2008.

In addition to funding integration activities, paying down debt is our priority for use of cash over the next few years as we reduce our leverage, we gain more flexibility under our covenance, our acquisitions, share repurchase, or dividends, whatever proves to be the best driver of shareholder over the long term. Turning now to our income statement. Pro forma sales growth was 3% year-over-year in the quarter. On a local currency and constant calendar basis, underlying sales growth was 6%. Volume growth and price was favorable across all of our business segments.

Included in table in our press release that pulls out non-comparable items so you can better understand our underlying results. I'll refer you back to that table on page four of our press release, as I will now speak to the underlying results. Beginning with gross margin, as expected our gross margin contracted. Adjusting for items effect and comparability, the underlying year-over-year decline was 200 basis points. The decline was largely due to higher raw material and freight costs. As we get further into the year we anticipate that the year-over-year differences in raw material costs in particular will ease and more importantly, as pricing continues to catch up with the higher costs, we expect margins to improve as we exit 2006 and even more so in 2007.

What you are seeing right now is the lag that exists before we can recover these costs through pricing. The total impact from higher raw material costs was 110 basis points. Increased freight accounted for 80 basis points of the decline. In addition, there was about 100 basis point impact from adverse customer and product mix and manufacturing variances. However these items will partially offset by a 90 basis point benefit from favorable prices.

SG&A as a percent of sales was basically flat, down a modest 10 basis points. However adjusting for the incremental expense related to the new long term incentive plan and required expensing under FAS 123R, which had a 40 basis point negative impact, underlying SG&A expense was actually 50 basis points lower. The improvement was driven by cost synergies and lower, and short term incentive compensation across. Which offset our planned investment and infrastructure and operations investment to support the new company.

All in, operating income declined 8% and NOI margins contracted 50 basis points. Adjusting for the items that effect year-over-year comparability the decline in operating profit was closer to 14% and the margin contraction was 80 basis points. This decline was largely attributable to the higher raw material and freight costs discussed earlier. We did incur $9.6 million of restructuring and restructuring related non-recurring charges in the quarter. Net of tax that would be 6.3 million. Reported net income was a $100,000 loss. Down 14.7 million from the prior year. Mainly due to interest and restructuring charges. On a pro forma adjusted basis, net income actually increased 3.3 million to 6.2 million or $0.11 per share. The underlying increase was due to improved volumes in prices as well as lower interest taxes and other expense.

In summary, our quarter came in about where we expected. We had good top line growth and our bottom line continued to be impacted by short-term transition and the lag before pricing catches to higher interest costs. We do continue to anticipate full year EBITDA in 2006 that is approximately comparable to 2005 levels. But again, we expect the first half of the year to be down. Which means we still expect a year-over-year decline in Q2 and then improvements in the second half of the year accelerating from Q3 to Q4.

Operating margin and EPS will be impacted by additional long-term incentive compensation expense. We think a more appropriate way of looking at the long-term incentive compensation expense for us is to include restricted stock and performance shares, which are a significant component of our new incentive plan in addition to stock options. Therefore our guidance now reflects the total incremental incentive compensation expense, not just the portion associated with FAS 123R. Incremental total compensation expense for 2006 is $10 million net of tax. Or 15 million pretax, or $0.19 per share.

Turning to our longer term objectives as David noted earlier, there also remained - which also remained intact, to a combination of business improvements and underlying growth, pricing and the recovery of higher raw material costs in addition to the realization of the $40 million of net cost synergies. Therefore we expect to bring the whole business back to the active level of 2004 measured on a comparable basis. Therefore we anticipate exiting fiscal 2008 at a 12% adjusted operating income margin. Excluding amortization of intangibles and FAS 123R expense. If you were to include theses items, the 12% would be closer to 11%.

We continue to expect our free cash flow to be positive in each year or our restructuring with 2006 being the lowest as a result of higher CapEx at about 60 million and about 45 million of cash restructuring charges, but improving strongly in 2007 and 2008 with a potential of topping more than 100 million at the end of 2008.

Now that concludes our prepared remarks. At this time I will turn it over to the operator to being the Q&A session.

Thank you.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Reza Vahabzadeh from Lehman Brothers.

Reza Vahabzadeh it is from Lehman. Good morning.

Hi Reza.

On gross margin Neal, sorry you went a little bit fast for me. You said raw materials was 110 basis points?

Correct.

Great. Another 80 basis points?

Correct.

I'm sorry, 90 basis points?

Okay, 80 basis points.

And then [placing] was positive 90?

Correct.

Okay, did I miss anything else?

Yes, we had two other factors which was a slight adverse mix of customer and product and also manufacturing variances. As we start to rearrange where our products and manufactured, one of the short term impacts that you get is a run down in some of the operating plants which yield adverse manufacturing variances which account for about half of the adverse mix effect that we saw.

Okay, that's essentially fixed cost absorption right?

Correct.

Now on customer and product mix, can you elaborate on that?

Effectively we've seen a trend over many, many years Reza where the big customers continue to take market share at the expense of smaller customers. And that effectively gives us a negative pricing dynamic overtime, which is consistent with our last 10 years of business.

Reza, I agree with Neal, I think that's absolutely right, but I wouldn't necessarily think too much on an aberration on one quarter, I think that what Neal is saying is a continued trend but I would just - there are - we do see sort of year end - oftentimes customers buying or not buying to meet rebate targets, so one can be confused if you look too hard the first quarter.

Now staying on the sales topic, the sales seem to be strong in office products everywhere but US and UK and then you had inventory de-stocking again I guess in those markets, would you elaborate on the reasons for sales strengths everywhere but US and the sales weakness and UK please?

Sure Reza, be happy to do that, I think that one of the first things I would say is w spoke about the reorganization of our sales organization in north America and while we're not speaking to it, there are some changes now going on in our European sales organization. While I think that that is a good process to go through, it's a necessary integration process to go through, it does take a little bit of focus away from the ongoing sales so I think that that's sort of something that I would attribute to. Neal you've got a further comment.

Yes, we mentioned the end of Q4 that we'd seen de-stocking coming through. We saw that continue into January and then February, March seem to have returned to a normal level. So clearly our customers have taken the opportunity to improve their inventory holding partly as a response to our improved delivery performance.

And do you think right now inventory de-stocking is over with for the year?

I think really, as Neal said, it's been very much of a long-term trend. I think it will abate over time and I think if you reference the stock turns of our customer, you'll see that they're improving they're doing a much better job of managing their inventory. To me that's an indicator or a leading indicator for us that we'll be seeing that abate.

I think really the other point not to lose which we fight in the previous conference call was that we did lose some share in our storage and organization business and obviously that will continue until it annualizes out.

This will be what -?

[Inaudible] in the UK and US.

And that will be annualized in the third quarter?

Yes. A little bit annualized in the second and most of its in the third quarter, it disappears.

Right and then on the cost side, could you share with us your outlook for the key costs that effect your gross margin, what you expect on those issues?

What you're seeing today in our P&L is a lag effect, because we have forward contracts with our suppliers and because we have inventory. What is running through our P&L today is basically what happened six to nine months ago and so there is still a rising raw material cost impact that is coming through our P&L account. Offsetting that is - although we raised prices in the first quarter, there is a better flow through effect that you get in the second quarter than in the first and then again we're looking for an additional price increase in the mid year to offset this rising raw material issues.

Can I just - maybe Reza if I could just underscore that last comment from Neal. We're - our industry like other industries is seeing big fluctuations in a lot of the base raw materials, particularly petroleum clearly. I think one of the new things - one of the things that I would say is different about the way we're approaching this is we're really shortening the window in which we look at our pricing, review our costs and historically because of stability of costs, we kind of looked at this perhaps once a year or so. This now is very much a pretty crisp 6-month cycle we're looking at.

Right. But having said that, the cost outlook that you touched on that might abate or placing might catch up. I'm only a little confused because fuel costs/rate costs appear to be rising here in April and early May and so I wonder, when you catch up with rising fuel costs and freight costs in the second quarter, will you catch up with that in the third quarter or?

Well if you look at freight in particular, you'll see that the impact of freight on distribution our Q1 is actually equivalent to Q4. And that's partly because we've been able to get some synergies out of combining the distribution and freight operations of ACCO and GBC.

I see.

So we've been able to have some offsetting in the freight line for getting more efficient effectively.

We also - so that line I feel is less of an issue as we go forward, it's the raw material line that I see is increasing still.

Right. Okay, lastly just housekeeping items. Cash taxes for the year?

We mentioned previously that we are still finalizing our cash level.

Oh, okay.

And that we gave an indication that they will be - cash taxes will be in the 32 to 35% range. We know we're below the 37% normal rate because of the international restructuring that we've done. I'm still working to get to the lower end of that and it takes time obviously to put cash strategies in place of taxes.

And then working capital, should that be a source or are you neutral?

It should be neutral to a source depending on what - see the underlying working capital is improving but there's an overlay of the restructuring that we're doing where we have to build some defensive inventory. So depending on the timing of some of those burn offs of those defensive inventories, you can see some swings in inventory which make it a little bit difficult to predict. But underlying we continue to improve working capital control.

thanks very much, and by the way again, thanks for the disclosure and the press release.

Thank you.

And your next question will come from the line of Arnie Ursaner from CJS Securities. Please proceed.

Hi good morning. First question I have is on the computer products side, obviously its showing excellent growth and you're investing for the future, but you had a pretty big margin decline, what should we expect four margins from this segment on a go forward basis?

Yes good morning Arnie. We believe very strongly in this business and we've reinforced the growth that we're getting by making some significant investments in the go to market side of the business. So a little bit of what you saw was that increase of investment that picked up in the third and fourth quarter. You'll see that run through until that annualizes out when you get into the third and fourth quarter of this year and then that extra growth that we're driving from this investment you'll see drop through to the bottom line. So we have no different guidance to that which we've given previously, which is that we see this as a good fast growing, high return business and we just decided to put the accelerator down on the growth side of it.

And Arnie if I could just add a little bit of color, its David. Couple comments I'd make. I think the Kensington is quite aggressively looking at introducing new SKUs, about 15% of their base they'll be adding to this year. In addition, I think in the last half of '05 we've added significant people over 20 people to our new product development and our engineering area, we are doing the same in the first half of this year I believe as well. So there's a significant investment going on in the innovation and growth side of that business.

Okay and I know your strategy David has always been fewer but stronger brands and you've taken some actions already in this quarter, can you perhaps discuss other areas where you have either overlapping brands or where you believe one is dramatically stronger than the others and actions we might expect there over the course of the year?

I think Arnie I would choose to answer it this way, there is no question that we are really reviewing what we have, what we today - back last August we had something like 30 to 35 brands. We've communicated we want to reduce that to substantially, I think we've communicated today how we're dealing with the Boone Brand. No question there are other brands under review but those are decisions that I think will affect employees and facilities etc. as well as our customer base. So I'd just rather not comment on it other than to say that it's absolutely a fundamental and aggressive part of our reconfiguration.

Question I have on the integration efforts. One of the things I know you had to do was improve the systems in both, in general binding to get them up to speed and consistent with yours. Can you update us on how much has been spent, where we stand on this process and I noticed virtually every announcement you made today occurs in - late in the third quarter. I'm assuming one of the things holding back the implementation of your more aggressive plan is systems. So could you update us on that please?

That's a very good memory you have in fact systems as a gating item to a lot of those transactions. And so what you'll see during the second quarter and at the beginning of the third quarter is a significant amount of systems work going on. So we actually on May the first merged our Canadian office product systems in August we will merge our US office products systems. And then as we get into the third quarter we'll merge a lot of our European continental systems. So they are the gating items to a number of these transactions and the timing is of course no surprise and what we have to do is work around our own seasonal issues like back to school for some of these implementations.

Okay. Have you attempted to quantify the costs of duplicate facilities that you have to run until the systems integration goes in?

Yes, its part of the 40 million of net synergies. Obviously from an expenditure point of view you'll see a lot of capital expenditure that we'll go through in the second quarter related to systems.

Okay, so most of the severance expenses are yet to occur, can you give us an update on Q1 headcount and what actions have been taken so far?

I'll be happy to Arnie, I think that at this juncture we have seen, since December, since the end of December about a 2% reduction in our headcount at this point. Obviously al to of the things we have announced today really will affect that and accelerate that.

I think its important to understand that most headcount cant come out until you can either merge processes or merge facilities and so those 2 things are the thing that really opens up the synergies dropping through to the bottom line.

I know you guys are fanatical about cash generation. Is Q1 unusual as a period or might we be able to see those kinds of results in Q2 as well?

No Q2 tends to not be a strong cash flow generator for us. We tend to have to add inventory tour system just before the seasonal back to school period. So I wouldn't anticipated a great positive cash or Q2. We also will have lot of spend around capital for the IT systems and also around restructuring dollars going through.

Thank you, very much.

And your next question comes from the line of Derek Leckow from Barrington Research. Please proceed.

Thank you. Good morning.

Good morning, Derek.

Question on the brands and products portfolio. You talked about the consolidation o f one particular brand here and you talked about the investment of 20 additional new people in new product development and engineering.

That was just in the Kensington area alone.

Just in Kensington. Wonder if you could quantify for us the investment dollars that you're putting into this effort at this point?

If you look at our Q1 results, they dragged by about $6 million of additional investment. So about 2.5 million of that is the additional costs of being a stand alone company and about 3.5 of it is the additional costs we've added to really drive future go to market activity and or add people to help bring together things like IT areas.

So you've pretty much, you've gone through I looks like the office products area and looked at the pricing strategies and you put those in place already. Would there be additional pricing that you think, efforts put in place later in the year?

We were already in discussion with our customers Derek about an increases in the third quarter and we have also started discussions about increases in 2007 related to the contracts that we cant change in 2006.

Right. Anything else you can tell us? Give us some more color on the lag issue you brought up about the way that these contracts kind of roll of and the new ones come into play.

I really don't think there's nothing-new there Derek. I think that the cruel reality is that we, with the GBC addition, we inherited some contracts that our commitments to our customers. We are very anxious to be a - to have a good relationship with the customers, to respect those, to maintain those. We very much want to move them forward as soon as those commitment periods are done. We are having ongoing conversations with our customers about that so I think there is very open dialogue in the conversations with the customers about this.

On the quartet business, does that affect the comparability when you take out a brand and take out, I suppose, product SKUs from last year. Can you talk about the comparability there?

I mean in the short term, it has some impacts like it will create a little bit more of the inventory for our business. We saw some of that in the first quarter as the charge. We regard that as business as usual. Its part of our own housekeeping as opposed to something we like to pull out. And at the end of the day we look to play, as we've always said, in the premium end of the market and so pushing the more premium brand and consolidating around the stronger Quartet Brand makes absolute sense for the strategy.

Okay. And last quarter you talked about your review of approximately $75 million of product lines that were sort of not in that top category, That were in sort of the middle or lower end product lines. What's the status of that?

I would just say its sort of continuing very much along the lines we communicated. I think we have isolated it, the sort of low contributing, low performing parts of our business. A number of alternatives are being looked at. Do we raise price on these items? Do we look to resource to reduce cost on these items? Is it a combination of the 2? Do we look to consolidate from 100 SKUs to 12 SKUs? Just all options are on the table and I would suggest that for each 1 of those - for the different parts of the business, each one of those options is being looked at there.

Okay, so it's more of a process, there's not really a specific?

Yes, I think that's a good pay to articulate it.

You'll probably see more impact of that in 2007 than you will in 2006.

Okay. And then just new product introductions, what percentage of revenue do you - or what, do you - can you quantify some of the goals that you have for new products this year and then I guess on a go forward basis. What sort of a percentage should we expect from new products every year?

Yes, that's a good question Derek and I would say that if you took a look at where ACCO finished prior to the merger, we were running close to the 30% mark. I think that for the next couple of years that will be a high target. Clearly a lot of the focus of our folks are very much on consolidating and bringing together two offerings that have overlapped. I think that that's really the important thing and the consolidation of facilities, just all of the things that we've been talking to.

I think that it is fair to say, and I don't mean this in a negative way, but I think that the GBC business was clearly focused on cash flow and paying down their debt. The new product development pipeline there is a little bit empty so we need to accelerate that up. I think ultimately we want to get back to the kinds of numbers that we were at prior to the merger though.

Well thank you. That's it for now. Congratulations and good luck.

Thank you, sir.

Thanks, Derek.

Thank you and your next question will come from the line of [Alan Weir] from Pike Place Capital. Please proceed.

Good morning, can you hear me?

Yes, good morning Alan.

HI, how are you?

Good. Could you comment on the restructuring charges? I think you said there was 45 million of cash restructuring charges this year, is that - how do you anticipate that going forward? I mean in '07 and '08.

At the moment we anticipate taking most of the restructuring charge rate to the office products business through six and seven and whilst you'll see the positive effect of those running to 2008, we would anticipate having the charges out of the way by the end of 2007 to all material respects. And obviously the bulk of them is coming through 2006 because that's where a lot of the charges get taken even if some of the activity there continues into the beginning of 2007.

Have you given a total restructuring charge anticipated for the combination of the years?

We have. We indicated that that would be about $45 million worth charges coming through this year and a further 10 million coming through in 2007.

Okay, that's the 15 million I think I saw from somewhere else.

Right, and then in addition, obviously there's the additional CapEx load that you're seeing come through as well in 2006 and 2007. It was about 60 million of spend this year on CapEx.

Another question on private label. There's been a lot of discussions and concerns about the big box retailers and what they're doing in the private label business. I'm assuming your outlook for that has not changed but can you give us an update of what's going on there?

Sure. I mentioned in my comments Alan that I had spent a fair amount of time this quarter with some of our senior customers, both in Europe and in North America. I think one of the topics was how we see ourselves positioning. Our brands, vis a vis the private brand offerings of the - of our customers.

Lots of discussion and I think that very much to the majority of the customers we spoke to, I think the feedback that I was getting was this makes perfect sense. This is exactly what you see in other industries, this is what you see in hardware, this is what you see in grocery. It is kind of inevitable that this is again what you'll see here in office products. So we very much see ourselves positioning ourselves as the clear national brand in the categories we participate in. we believe there is good space for the private brand folks, those will be the two pieces or the two brands that succeed, the folks who are in the middle are in that number three, number four and number five kind of position. I think we'll have difficult times. I think both of our customers, with our customers and ourselves would agree with that kind of thinking.

Okay, good. Have one last question on the commercial business. I see you disclosed in your release that you're going to give us update at the end of the third quarter, but can you give us some color on - you've had a chance to look at it now. Other than the cost savings opportunities. Can you give us an outlook on - seems to me that this is a pretty good business and you could grow it over time. I mean is that what you're thinking right now?

Oh, I think we're optimistic. I think we really are. That - I wouldn't disagree with your statements. I think that again, if you look at GBC's activities over the past five, six years, those folks were consumed with paying down their debt and dealing with their debt. As I mentioned earlier, there really wasn't a lot of investment in new product development in the pipeline. We think one of the areas that got affected the most was the commercial and industrial side of that. Consequently I think we want to take a very good look at the opportunities and potential, should you be able to invest in these businesses at a good level.

I think one of the things we've seen is an early success. We've introduced a product over the quarter by the name of [ProClip] that has really been coming into the commercial business. I've actually, I will share with you, I actually made a 10 bound copies of a presentation on their binding machine, on their auto bind machine. And you know it's a good machine. It really is. This is a great little system. I'm very optimistic. I think that we need to just get a good assessment of if we invest time and energy and money into the technology, what kinds of products that we could flow out of these products.

So I think that's the opportunity, now how do we structure it? I think that that's really what we're looking at and really quantifying the potential of those opportunities.

And Alan, that's what we said we would come back when we do our third quarter conference call release, because although we have begun the having a look at this business, as you know we are great studiers of things and so we are in the middle of a process at the moment using [Bayne Consulting] to help us study this business. And its something that we like to take a lot of time over to make sure we get and answers right with the management who runs it.

Great. Well it's encouraging to see the growth in the business for the quarter and congratulations.

Thanks, very much. Thank you.

And our next question comes from a follow up from Reza Vahabzadeh from Lehman Brothers.

Hi it's Reza Vahabzadeh again.

Hi Reza.

The pricing for the quarter you said was roughly 90 basis points. Should the rest of the underlying sales growth x currency was all volume I suppose right?

Correct.

Okay, and pricing appears to be to have basically been generated almost entirely in the two commercial segments and not much in office products. Is that accurate?

It is but its also important to understand the international dimension of office products. So what you actually had was prices rising in the US market and prices falling in some of our international markets as a response to the weakness of the dollar.

And so I think several things that you have to understand is that for a lot of countries where they import a lot of stuff from the far east, the dollar's weakness has made certain things cheaper and that tends to get reflected in markets.

I see, okay. And then as it related to the working - as it relates to the private label issue. As private label penetration and shelf space increase in the US and Europe for that matter, would you anticipate participating as a player in the private label space first of all, and secondly, would increased private label space create overall price deflation for the category including some of your brands.

Well I think fundamentally we view ourselves as a branded office products manufacturer. So I think it is fair to say that while we do supply a very limited private label offering that that's really not the thrust of our business and so I don't think we really believe or see that that will be a material or major thrust of what we do. I do believe that as private label begins to sort of reach a balanced, more balanced point in the industry, I do think that that will probably bring sort of a level of price stability both to the national branded products as well as the private branded products. Does that speak to your issue?

Yes, it does.

Good.

Thank you.

Thank you and your next question will come from the line of [Scott Johnson] from [Spring Street]. Please proceed.

Good morning gentlemen. I have two questions. One, your volume was up in the first quarter is that your customers anticipating price increases?

No, I think it was a combination of factors, first of all obviously it was lead by the very strong growth in Kensington again. What we also saw in some of the other businesses was a little bit of a response to what happened in Q4. If you were on our Q4 conference call we mentioned that the industrial business which raised prices significant in Q4, saw a lot of people reduce inventory for a period of time, hoping to find the raw materials weren't going up elsewhere and when they failed to find that obviously they then returned and replaced their normal inventory level. So you saw good sales growth in the industrial businesses that return to normal. I would say if you take the two quarters together you get a more normal trend line.

And then again we also saw a very strange continental Europe December, which we reported. And we saw that return to normality again if you take the December and January months together they make more sense than the December one on its own did.

Okay, and lastly, with regards to CapEx. Are you guys still budgeting roughly 40 million for the year?

No, we've always given guidance that our '06 spend will be closer to $60 million of restructuring and our '07 closer to 50 million. And thereafter it will return to around 40 million thereafter. The reason is we have some additional CapEx associated with the brining of the 2 businesses together around IT and facilities.

Okay so the CapEx number you guys gave in the press release of $5 million, how does that?

That's 5 million for the quarter.

Correct.

Yes, and so as I mentioned earlier on the call, we have a lot of IT spend going through in the second quarter and in the third quarter, we have a lot of facilities work going on as well as we did into the third and fourth quarter and so that's where you'll see a real back end spend to the timing of CapEx.

Okay, okay thank you.

[OPERATOR INSTRUCTIONS]

And we have a question coming from the line of David George from Deutsche Bank. Please proceed.

Hi, I was just trying to get a sense for the value of your brand. Have you don't any work relative to how people perceive your brands or customer loyalty relative to brands in the office products just versus other consumer products companies and really how you communicate with the customer the value of your brand and the relative value proposition, relative to the private label?

That's a good question and very much a timely one given the fact that we have a number of brands and we're looking to sort through and make decisions on which we keep and which we don't. So absolutely those activities are going on, have gone on to be able to, in a non emotional, quantitative way, to be able to assess the familiarity and comfort people have, also the persona or the personality associated with various brands.

We have not talked about that sort of publicly but clear that is a significant activity before you would undertake the elimination and consolidation of brands.

Is it something you could talk a little bit about right now, what you're findings are in a general context? I'm just trying to get a sense, because as you look at your company, obviously you position yourself as the branded office products company and how do you give an investor comfort that there is value in being a branded office products company?

I'm not exactly sure how I can respond other than the fact that I would say that of our leading brands, like Swingline and our Day Timer brand, our Kensington brand really do have relatively high recognition. I would say this, I would say that though the way that we have communicated and shared with folks the evolution of our business, we see ourselves, we see our industry rather, as sort of an evolving consumer products industry. I think that over time, with given a good solid base, overtime as we invest in these brands I think we can improve and enhance the value of these brands.

I would just say to you, just like my comments earlier about sort of investing in new product development being lacking historically. I would suggest to you that investment in brand in our company has lagged. This is an important area as we change the ratios of our business, I think much more of our SG&A spend is going to be an investment in new product development, brand development, just the very area that you speak to.

Okay, great. Thank you.

And your next question will come from the line of [Greg Coolers] from Metropolitan Capital Advisors. Please proceed.

Hi guys, good morning.

Good morning, Greg.

I just had a quick question Neal, regarding - and I know Arnie touched on this, systems integration. Just to better help me understand the timing of that. If you foresee that not being any sort of impediment or being relatively completed in time for the back to school and if not, with - these things can take time. Do you foresee that perhaps your cost structure or costs at this back to school season would be higher, materially higher, just helping me to better understand how that works because I know that typically systems integration can cost significantly more than you expect and take sometimes twice as long, thank you.

That's a good question Greg, I'd saw we had done a lot of these in the past and we know how to manage them in the first point I would make is that we actually will ship most of back to school on the old systems and make the cut over right at the end of the back to school shipping season. So for us of course, we ship to our customer supply chain before they ship out and therefore our wave of back to school is earlier than their wave of back to school.

The second point I'd make is that you obviously work with your customers when you're doing something like this to get them to take orders slightly earlier and take some of the demand off you when you cut over. And then the most important thing of all is that we're not going to a new system. We're taking GBC to the existing proven ACCO system. And that takes a huge amount of risk and concern out of our systems migration like this.

That's great. Good. Thanks so much guys.

And our final question will come from the line of Arnie Ursaner, CJS Securities.

Hi couple of follow up question if I can. I know you have some options that kicked in in the quarter, what was the end of quarter, fully diluted share count please?

Well because we were in a net loses position the fully diluted shares, there is no dilution that gets applied in the quarter and therefore effectively it becomes a very strange calculation. If you could get it on a pro forma basis, it would be about 54.1 million.

Perfect. Thank you. Second question is, no one seems to have asked, but if you are now building in an incremental 10 million of expense for compensation into your EBITDA guidance, in a sense, aren't you in fact raising your operating income by 10 million or so?

The option expense is a non-cash item and therefore doesn't affect EBITDA. It will affect our operating income and its part of the reason that while we were matting through how FAS 123R actually would work for us, it's by the way we were giving EBITDA guidance rather than operating income guidance. There are some very strange things in FAS 123R about how it accelerates in initial years etc. that most people are working through at the moment.

My final question is one that I know you don't control but I figured I'd at least ask. The Lane family has clearly sold blocks in somewhat of a perhaps disorderly manner in the past. Have you been able to try to work with them in perhaps getting a fully registered deal to clean this up in a much more orderly manner?

Well, again Arnie, you're right. I don't think that that really is something that we can sort of speak to other than the fact that there is no question I think that just from the Lane - from the actions of the Lane family, they have sold stock and I think they're following this closely.

I would make one other point Arnie, which is that their loss of stock was all fully placed. I think that there was some other activity going on in the market at this same time as they made their announcement, which I think made people think it was a bit more disorderly than it was.

Okay. Thank you.

Well great. Thanks folks. In conclusion I just wanted to again reiterate our enthusiasm for the business and the future potential. I think we've made tremendous progress over the quarter against our integration of the office products business, and we continue to see excellent opportunities to drive growth and enhance return and create value for shareholders in the future. Thanks very much folks.

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