ACCO Brands Corp (ACCO) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 ACCO Brands earnings conference call. My name is Lauren, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Jennifer Rice, Vice President of Investor Relations.

Good morning, everyone, and welcome to our second 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 business in all periods and excluding restructuring, non-recurring, and unusual items. Our reconciliation of these results to GAAP can be found in this morning's press release.

I'd also like to highlight that certain statements made during this call constitute forward-looking information, and based on certain risk factors, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of those factors.

Finally, I would like to point out that we did post an update of our second quarter Office Products integration activities to our website in the Presentation section. Its summary of activities is included in our press release. Now, I'll turn the call over to David.

Thank you, Jennifer, and welcome, everyone. I'm pleased to share that our top line results for the second quarter demonstrate continuing strength in our core businesses. Underlying pro forma sales were even with prior year but up 2%, excluding some transitory issues in our European Office Products business. Our Kensington results were less robust than we had seen in recent quarters due in part to the decision to exit our Computer Cleaning Products category. However, we remain confident in the long-term prospects for this business. Neal will provide greater details in a few moments.

Operating income and margins were down as we had forecast mostly due to planned investments in our business with material and freight cost increases and volume declines in Europe. On the plus side, we are taking major strides in our integration of our Office Products business since our last earnings call, this morning.

We also announced the divestiture of our Perma storage box business to better focus our portfolio on branded products. We have agreed to sell our Perma business to Fellows. This business generates about $30 million in annual revenues. For some time, we have used Perma as a non-strategic asset with low returns. We believe Perma fits much better to Fellows' portfolio of products. With the combined exit of Perma and Computer Cleaning Products, we are in the process of shedding more than $40 million in low-margin, non-strategic business.

This morning, we also announced the closure, or downsizing, of an additional 12 facilities. This brings our total number of announced closures to 21. Yesterday, we announced plans for a significant expansion of our Booneville, Mississippi manufacturing distribution center. Our Booneville facility is well located in Memphis, an important transportation hub. This expansion will provide us significant supply chain efficiencies. We are creating a state-of-the-art distribution center that will speed our order delivery cycle to our customers by 30%. In addition, we will permanently close two manufacturing facilities in Illinois and Mexico and relocate some of that manufacturing to Booneville. This will substantially improve our freight cost and position our products closer to our customers.

We have now successfully integrated our information technology systems in the U.S., Canada, and Mexico, creating a single customer [facing] and financial IT platform for our Office Products business. This action on its own will generate considerable infrastructure cost savings, going forward. Additionally, it will significantly improve our ability to manage the entire supply chain from raw materials to the delivery of finished goods, allowing us to dramatically shift our SG&A spend into more strategic, go-to-market activities.

In Europe, where our integration efforts are designed to lag those of North America, we are restructuring the business to more closely reflect the consolidation that's taking place amongst our customers. Instead of being focused on individual countries, as we have in the past, we are rapidly moving to a panned European model. This will enable us to streamline our brands and product offerings and move to a shared service model and better align our distribution and sales organizations with the needs of our customers. The long-term benefits of this restructuring are offset in the near term by higher-than-planned SG&A costs.

To date, we have announced actions that account for approximately 85% of our expected integration synergy savings. Overall, we are pleased with the pace of our Office Products integration activities and remain highly confident that we will achieve the expected financial targets we have set. We are also enthusiastic about our future opportunities in our Commercial business. We will discuss these opportunities further when we release our third quarter earnings. However, I can share that we have already identified a number of possible linkages between our Commercial and Office Products business.

Our integration efforts have not gotten in the way of our new product development initiatives. To the contrary, we have introduced many new products, this quarter. Kensington has led the way with 20 new products launched in June. This includes new lines of notebook locks, carrying cases, mice, and wireless presenters. Kensington's commitment to new product development remains on track. 25% of our sales has been from SKUs introduced in the last 12 months, 33% from SKUs introduced in the past 15 months.

In both our GBC Commercial business and Office Products group, we have introduced the GBC ProClick Pronto binding machine. This is the first automated machine that both punches and binds documents. The ProClick Pronto uses the patented ProClick zipper spine, allowing documents to be edited after they are bound. Early customer reaction has exceeded our expectations.

Within Office Products, we've also launched a variety of stapling, binding, and storage products designed to stimulate strong back-to-school sales. Even more important, we have a number of exciting new products in development. We will be introducing these products to our customers and consumers during the third quarter.

Before I turn the call over to Neal, let me address an issue that's been getting a lot of discussion, these days. That is the penetration of private label products in our industry. We agree with our customers that private label is here to stay, but we believe there will be a healthy balance between national brands and private label. Private label penetration will be strongest in commodity-type categories. However, we believe high-innovation categories will be dominated by one or two national brands, the private label presence, and a few high-volume SKUs. It is these high-innovation categories that we have targeted. This is a point I think many industry observers miss.

Let me restate it - ACCO Brands participates in a relatively small number of select office products categories that are less vulnerable to private label penetration. Since the year 2000, we have selectively exited a number of product lines where private label dominates. We continue to review our portfolio for opportunities to improve our profitability by shedding low-margin businesses, such as Perma and Cleaning. In fact, by the end of this year, we will have divested ourselves of nearly a quarter of a billion dollars of these low-performing businesses since I joined the business.

As a branded office products leader, we are making strategic investment in new product innovation, strong consumer brands, and go-to-market initiatives. Since January of 2001, we have filed 265 patents, globally. This is a run rate of about nine patent applications per month. 85% of our sales come from products that hold the number one or number two position in their categories. Our brands, themselves, are an enormous source of competitive strength. The GBC, Kensington, and Day-Timer brands are recognized, globally. The Swingline brand is synonymous with stapling, punching throughout North America.

Additionally, we are in the process of consolidating 22 European regional brands into four strong panned European brands. This will solidify our competitive advantage in the European marketplace. In an environment where the number two, three, and four brands are increasingly under pressure from private label, the strongest brand in our category is a key priority. And to the extent that our products are truly innovative and that we achieve low-cost position, I believe our brands not only protect us from private label competition, they support our customers' private label initiatives.

In short, we believe that national brands and private label will profitably coexist in office products as they do in so many other industries. We intend to be the branded office products leader in our selected categories, which generates substantial margins, and we are happy to let our competitors fight over other brands.

Let me end my comments by restating my confidence in our ability to achieve our full year adjusted EBITDA outlook compared to 2005 and I will be happy to take any questions, following Neal's comments. Neal?

Thank you, David, and good morning, everyone. I will review some more of the details behind our numbers, beginning with our segments.

Office Products pro forma net sales declined 2%. We saw a decline in European operations. However, excluding Europe, Office Products sales increased 1%. The decline in Europe is primarily in retail channels in the UK and also due to unfavorable pricing throughout Europe. We do expect price increases in this business in the second half of 2006 and in 2007.

Office Products margins were down nearly 250 basis points. The decline in operating profit margin is attributable to European operations where we had unfavorable pricing, coupled with increasing commodity costs and lower sales in retail. The decline in operating income is also due to the investments in SG&A to transition the European business from a country-based structure to a panned European structure.

We had approximately $3 million of added costs for the quarter and $6 million on a year-to-date basis. Transforming to a panned European structure will better align the ACCO Brand's business model to provide enhanced panned European coverage at lower long-term costs. Over the past few months, we have also placed new leaders in key roles in Europe. These people have led this type of transformation before for another group of industries. These changes, new leadership, price increases, and a more efficient model are expected to yield improved European results in subsequent quarters and through 2007.

With the exception of increased interest costs and transitional items in Europe, underlying Office Products trends are improving. We're implementing price increases and introducing new products. We have also substantially improved working capital trends with all key elements moving in the right direction.

Turning to Computer Products - as David noted, our growth in Computer Products was a bit lower than our long-term growth expectations for this business, coming in at positive 4%. Part of the reason for less robust growth was the exiting of the Cleaning category, which is a low-margin commodity, at the end of last year. This accounted for about 5 percentage points of low growth in the quarter.

The growth rate was also impacted by one-time de-stocking actions by two major customers. This accounted for about 4 percentage points as a slower growth rate. However, most of the slower growth rate was experienced in April and May while June returned to a more normal mid- to high-teens sales growth rate.

We're expecting high single-digit growth in the third quarter due in part to an extremely tough comparison in the prior year when sales grew 27%, as well as the impact from exiting Cleaning. We are expecting a very robust fourth quarter, this year, as we return to a more normal seasonal pattern for this business with Q4 as the strongest quarter rather than Q3, as it was last year.

Computer Products operating margins after adjusting for SFAS 123R declined to 15.7% from 24.8%. The underlying decline was due primarily to a change in product mix, higher product costs, and planned increased strategic expense in sales, marketing, product development activities that have a greater percentage impact in this slow quarter. These investments were about $2 million for the quarter and about $4.5 million, year to date.

We continue to anticipate strong profit in the third and fourth quarters from the continuation of strong sales growth in the seasonally large quarters and with the annualizing of the increase in marketing and product development expense. All in, we see adjusted operating margins of Computer Products of about 20% for 2006.

Our Commercial business has performed in line with our expectations and we continue to see both favorable volume and profit. Our Other Commercial segment margins were impacted by prior year period reserve adjustment, making for a difficult second quarter comparison, so they're reviewed on a year-to-date basis. Adjusted operating income is comparable to the prior-year period.

Our corporate costs reflect the stepped-up costs associated with our becoming an independently traded public company, again in the second half of last year. This is roughly $2.5 million for the quarter or $5 million, year to date. All in, adjusted operating income declined and margins contracted 380 basis points for the quarter.

Importantly, for the first six months of the year, half of the decline in adjusted operating income, excluding SFAS 123 expense intangible amortization, was attributable to our own investments in the business, such as Kensington's go-to-market activities, the change to our European model, and stepped-up corporate costs. To date, these investments are greater than the synergies we've achieved. We do believe the operating expense investment into the business will generate their own payback in subsequent quarters.

The remaining decline in operating income is largely attributable to the lag between our ability to raise prices and the escalation in our commodity and freight costs. Net effect of both predominantly appeared in our Office Products operation.

For the total company, higher raw material costs had a 70 basis point impact on gross margins for the quarter and a 90 basis point impact, year to date, with freight and distribution having a 50 basis point impact in the quarter and a 60 basis point impact, year to date. These were offset in the quarter by only a 40 basis point favorable pricing and 70 basis points, on a year-to-date basis. I'd like to emphasize that we believe that Q2 is the trough with the most significant imbalance between interest costs and pricing. And as we get into the third quarter and more so in the fourth quarter, we will see more offset from the second half price increases, as well as less severe year-over-year differences in costs, although our costs are still rising.

One other notable item that had an impact on gross margin was a one-time $1.8-million operating charge we took in the quarter. This was in connection with our planned investment in the U.S. distribution network, announced yesterday. The charge was the result of our intent to accelerate the liquidation of slow-moving inventory. This adversely impacted gross margins by 40 basis points.

Turning now to adjusted net income, it was $3.3 million, or $0.06 per share, compared to $11.8 million, or $0.22 per share, in the prior year quarter. Current year did include $2.1 million, or $0.04 per share, of incremental long-term compensation expense and $0.6 million after tax of incremental intangible asset and amortization. Excluding these impacts, the underlying decrease in adjusted net income reduced the operating profit declines in Office Products European operations and in Computer Products, as discussed, and higher raw material and freight costs. These factors more than offset small favorable synergies and lower interest taxes and other expenses.

The lower effective tax rate in the quarter was due in part to the mix of foreign versus U.S. earnings, but the bigger driver was the benefit of $2.3 million of lower taxes, resulting from changes in tax laws that came into effect in May 2006. As a result, the adjusted year-to-date tax rate is 20% versus 53%, last year. We do expect this to continue to benefit us for the year, and as such, are revising our expectations for the effective tax rate to be about 23%. For the next few years, we anticipate an effective tax rate of approximately 30%. The cash tax rate will be a little higher than this in the current year, about 28%, given the different taxing paid for some of the restructuring charges and close to the effective rate going forward for the next couple of years.

In summary, we believe that our second quarter was the trough. We continue to expect operating improvement from this point forward, moving slightly positive in Q3 and accelerating from Q4 onward as synergies exceed reinvestment and with the benefit of partial second half price increase. We also expect a strong second half in Computer Products, as noted.

On the cost side, we will benefit from [inaudible] the high corporate costs, the initial stages of our increased investments in Kensington for the market efforts, and much of the investment in our new European structure, as well as the initial increases in certain raw materials and freight costs.

Moreover, as a result of the successful completion of the IT integration in the U.S., we now should see more synergies earlier in Q4 than previously expected. These items all give us confidence in our ability to generate full-year adjusted EBITDA comparable to the 2005 adjusted level. Our adjusted operating income and EPS will be impacted by additional long-term incentive compensation expense and amortization of intangibles, so these will be down year over year. We adjusted EBITDA for these items so it is not an impact at that level. The effect of this expense on EPS for the year is an incremental expense of $10 million, or $15 million pre-tax, or $0.19 per share. The total cost for the year is $20 million, or $0.24 per share.

Before moving on to Q&A, one last item I want to discuss is the situation with Lane Industries, our largest shareholder, as this is a subject we've received a lot of question on. 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 but may be sold under Rule 144 or in another transaction exempt from registration. Should Lane desire, they may request the company file a Registration Statement to register for resale their shares in a second re-offering. We have not received a request for registration from Lane. However, we have communicated to Lane that we would be willing to facilitate the second re-offering when and if they desire to do so.

With that, I will now turn it back to the operator and we'll be happy to conduct a question-and-answer session.

[OPERATOR INSTRUCTIONS]

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

Hi. Good morning.

Good morning, Arnie.

The first question I have is, David, in the last conference call, you mentioned approximately $70 million or $75 million of revenue that you, in a sense, were notifying customers were unacceptable to you and you were in the process of renegotiating some of that with them as the year went on. Can you update us on that, please?

Sure. Let me first of all say that that $75 million does not include the Perma piece that we announced, this morning, that we disposed of which is low-margin business, as well as the Cleaning piece that we announced - the Cleaning Product category. So, the $75 is above and beyond that.

As we look, right now, this is an ongoing process for us as we sort of sift through this but as we take a snapshot of where we are, today, it looks like we've identified about a third of this business that is unacceptable margins that we see no bright future for and will probably exit. Two thirds of that business does look like we can either improve our costs or improve our pricing position or a combination of the two and that we will continue to work on and try to progress. Hopefully, we'll be able to transition and evolve that into a profitable position. The benefits of this really will start to affect us in 2007 and 2008.

Okay. One very quick question on Perma - can you disclose what you anticipate getting in sale proceeds? And I'm assuming, given your aversion of debt or that you'd like to pay down debt whenever you can, I assume the proceeds would be used for that?

Yes. We are reluctant to make any disclosures about the price we got for the business.

Okay. My follow-up question - one of the absolute - I know you love the analogy of the aircraft of an air controller who has to manage the process and watch the planes coming in and out.

Right.

And one of the most critical parts of that process for you was getting the IT systems up and running. I know you had done Canada, earlier. Can you update us on how Canada went? It also sounds like you've hit the switch already in the U.S. and given your view that you anticipate getting the synergies earlier in Q4. It sounds like things are perhaps even better than you thought they would be when you hit the switch. Can you comment on that, please?

Sure, you bet. Indeed they are. I think the thinking was this - what we basically viewed was Canada as something of a beta study. I'm sure I'm insulting some Canadians, here, but it's a smaller business. It's a business where if you're going to undertake IT and process change because it's a relatively small business, it's a little bit easier to get your hands around. We did that earlier this year. That has gone well. We worked through that. It was based on that confidence and learning, a lot of our U.S. folks [inaudible] used that as a beta site and a learning site. On Saturday, this last Saturday, we turned our systems on, here in the U.S., and that has gone very well. I don't want to claim victory too early.

Today's Thursday - Saturday, but after five days, you have a pretty good sense of how things are going. Things are going well. We're very pleased and I think you're exactly right. We believe that this is a bit of a, well a very important event for us in terms of this now allows us to be able to execute many of the planned projects we had. It's sort of like a lead domino in a whole string of dominos. This really is a critical lead domino that we think we've knocked over well. This kind of opens up the flood gates here of where we go.

Okay. Yes, we look forward to seeing you at our conference. Thank you.

Sure. Thank you.

Your next question comes from the line of Bill Chappell with SunTrust Robertson Humphrey.

Good morning.

Good morning, Bill.

Good morning, Bill.

Just a couple questions. I guess first starting with Europe - did you see any net benefit from currency? And I guess how would - ex-currency - how would those sales look?

Two important things on currency to understand. There are two aspects to currency. One is the impact, the translation of results, and it was very neutral for the second quarter. It had been adverse in the first quarter. The bigger impact for now is at the moment on currency is that it is causing further escalation on commodity costs within Europe because of the forcing that they do in Asia, which is predominantly in U.S. dollars. And so, it's a lot of what's causing the extra commodity cost increase in Europe that we're seeing versus the U.S.

Is there any idea as you look toward what drag the European business will have on total sales?

Bill, maybe if I could just chat a minute. I care that we do a good job of kind of articulating what we see going on in Europe. We have a vision for our business and that's a Global Products business unit base, sort of Consumer Products business that operates on a global level. North America really has, today, the structure that we want and really has over the past year as we've gone through this integration.

Europe has not had this structure. Europe, very much, was somewhat of a country based, almost a set of country [inaudible], if you would, where we had - every country in Europe seemed to have its own distribution, own sales, really own set of SKUs. We had 11 different IT systems, which amazes me. There are 22 different country brands. So, what's going on in Europe right now is we're trying to take it sort of out of the this country-based structure and really try to warp it into very much more of what we have here in North America. A Consumer Products base structure that is really centered around the business units.

I think the first and really into the second quarter - this has been a major step for us. It's been disruptive but I think it's a good thing. I think it's a healthy thing. Clearly, we see our customers absolutely consolidating in Europe. We need to stay in tune with our customers. We need to look like a reflection of our customers. And I think by making the changes we've made, it's a lot of sense. We need to have common new product development and common SKUs. Not only panned European but also they have to be similar and look like what we have in North America. The reason for that is we want to have standardized new product development. We want to be able to take our common products [inaudible] common source.

None of this will happen without the real focus here on reorganization of the business. So, I really see our - us going through a transition period there. I think we'll see our sales enhance and improve. I agree with Neal's comment that second quarter has been a very important quarter for us and it's really sort of moving us through.

As far as the sales are concerned, what I look for is really the pricing issue that we have. Again, 11 different systems, many different countries. I don't think we have sort of a crisp enough, a focus enough yet on our pricing. This is now coming through. We have some price increases coming through, mid-third quarter, and again, this focuses on the end - or on January of 2008. So, I really think that is what I look for to see flowing through, both in Europe and in North America.

Okay. Well, thanks for the color on that. I guess switching a little bit to the inventory de-stock, this quarter. Maybe help us understand how much of that was a surprise? Are we done? Do you see other categories being hit for the rest of the year? And then, if it was a surprise, is the added synergies in the fourth quarter kind of helping you be comfortable with the full year guidance?

The inventory de-stocking was restricted to the Computer Product channel and there's really two customers that [inaudible] - two major customers in that channel. We do view that as a one-time event. I think that we, ourselves, saw very robust growth last year during our category, sort in the 20%. This year, we believe growth is more in the mid teens. And so, we're seeing the market adjust to a slight slowing in that category.

And also, from our point of view, one of the other things that we've done is the exit of Cleaning, which was a very low-margin business, and therefore, doesn't have a lot of impact on the net results. It gives a little bit of distortion about what's happening to the underlying growth of our core product category. We also believe it's [inaudible] the third and fourth quarter that we had substantial additional growth coming in that category based on new product launches that we've made, offset a little bit by the Cleaning erosion. But as we indicated, we anticipate a significant, more profitable second half because we annualize the step up in costs. And therefore, take a leverage of the extra volume on [inaudible].

Okay. And then, just finally for housekeeping, can you - do you disclose the financial terms for the divestiture? Or I guess the annual sales space for the Cleaning business?

Frankly, they're not material but we will use the pricing that we did get in order to make an additional tax. And obviously, you know the Cleaning business is something that we have exited as opposed to divested of. So, effectively, there what you've got is - it's worse than capital return.

Gotcha. But I mean on a representing annual sale that was maybe $10 million, $15 million?

Correct. And you will see that impacted in the second fourth quarter into the first quarter, next year, for that annualized event.

Perfect. Thanks a lot.

Your next question comes from the line of [Masim Dahia] with Lehman Brothers.

Good morning.

Good morning.

You talked about raw material costs in Europe affected by currency. But generally speaking, what's - could you share your thoughts on what you are seeing around raw material costs? And when do you expect pricing to catch up?

We've been in a situation where raw material costs - raw business really started to rise in the second quarter of last year and you see that a little bit in the impact of raw materials, year over year, on us. In Q2 of this year, it was less than it was in Q1. It's not that raw materials are not continuing to go up - it's that we started seeing the effect, this time, last year. And you'll see that even more so in the third and fourth quarter.

What we have coming through in July, also in the U.S. and in Europe, is an additional price increase. We're just really trying to catch up on cost increases that we saw during last year. What we then have is a more substantial price increase coming through in January and then is when we anticipate actually catching up with raw materials.

And could you maybe quantify the two increases?

Our intention is to recover those increases. So, since we've given details on what they are, you can [inaudible].

Okay. Thanks. Switching to Europe, has anything changed, fundamentally? Or has the market conditions improved? Or the improvement you expect in the back half or early next year, is it more because of pricing?

You know, I really don't think the issue is market or market activity. I think the issue is internal to ACCO. I think the - as I was talking, earlier - we are going through changes and evolutions as we put these two businesses together. I think the issues there really are our issues. As it relates to pricing, I would just say that, again, as you can imagine - with 11 different systems and a country-based structure, it is taking us a little bit of time to get a clear sense of our costs, getting a clear sense, therefore, of pricing and positioning and moving forward with our price increases.

Just to repeat what Neal has said, we are seeing - we will see third quarter price increases in Europe. We will also see January '07 price increases in Europe.

And lastly, you talked about getting some synergies in the U.S. earlier this year than earlier you had earlier. Could you quantify how much of - how much synergies do you expect, moving forward through this year?

This was the third point I was reiterating, the earlier guidance we gave. We explained that we would have net negative synergies through the first half of the year and that they would turn into net positive synergies as we went into the second half of the year. And overall, that they would be about flat for the year.

With the ability to pull forward some of the IT-gated items in North America, we now see net synergies for the year as a whole being slightly positive, but not materially so. We're talking about it a [inaudible] low number. The more important thing is that the second half of the year, they are significantly more positive as we have to square the year, having that [inaudible] first half.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Troy Harteinstein with RG Capital.

Hi, guys.

Good morning.

It sounds like things are all moving in the right direction and I guess you mentioned that you're highly confident in the financial targets that you have laid out, but it seems to me that there's a possibility that as we kind of move down the road the next couple of years, there's a real chance that you'll be able to exceed those. Does that seem like a real possibility?

Well, Troy, first of all, I agree with your first comment. I think that we are feeling good about where we are, particularly just getting behind us some of these changes in Europe, as well as the big IT move here in the U.S. Those are all really important, good [inaudible] for us.

That's a little premature. I just really don't want to talk about - I mentioned that in our third quarter call, we will absolutely be - we're going to provide better color, better clarity on where we are right now. I would go back and reference the linkage opportunities between our Commercial and Office Products business. I think we spent some time there. I think we like what we see. We just need to take time and be thorough as to how we quantify that and what we communicate, going forward.

So, yes, I'd say we're optimistic but I think it's a little bit early for us. I think we'll certainly have better answers, [inaudible] answers in November.

Okay. Fair enough. Thanks, guys. Good luck.

Thank you.

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

Good morning.

Good morning, Alan.

Hi. My question has to do with - Dave, could you tell us more about how these pricing discussions, the process of how they're done? I mean, let's take for example, Europe - are you telling your - are you signaling to your - do your customers know, now, that they're anticipating a price increase in the third quarter, as well as January '07 and the magnitude of those increases? And also, quite naturally, they're reluctant, you'd think, to want to pay you guys more. But is it a discussion that has to do with raw material costs and do you quantify what those are to them so they understand why you're passing those through?

Sure, I can - I'd be happy to talk about that. The process is very much one where it is in everyone's best interest to communicate very early in advance what intentions are. That not only is good for us in our planning and in our ability to speak to you and plan our visits. It's also important for our customers to be able to - for them to be able to reposition. So, to answer the first part of your question, absolutely conversations are going on right now. Absolutely, people are understanding the order of magnitude.

What we do, Alan, is it's not an across-the-board kind of increase so your prices won't go up 3% or 5% or whatever it is. It's very much sort of a SKU-by-SKU review. I think one of the things that is important for us right now is reconsolidating our volumes across Europe and then reconsolidating across the world, globally. We are trying to get a very clear sense of what our costs are. We want to be reasonable and we want to be well market positioned as we put through our price increases.

I think that - I'll share this with you. We have not had a situation where we had gone to our customers and basically our customers have said, "No, we won't have to take that cost increase." I think the price increases that we have come to our customers with are reasonable, fair, balanced, and logically based. And I think that they basically understand that.

There is contractual situations that we have with our customers that we've talked in previous conference calls, but basically, we're locked into the pricing levels in '06. We have already communicated that those are being changed in 2007. I think our customers understand that. Frankly, I think our customers believe that we have taken a reasonable position in our pricing.

So, I don't know if that gives you the kind of color you need.

That answers my question. I appreciate it.

Good. Thank you.

Thank you.

Your next question comes from the line of Greg Pooles with Metropolitan Capital Advisors.

Hi. Good morning, guys, and good quarter. David and Neal, I just wanted to know - sort of building on what Arnie had indicated in his question regarding your systems - informational systems integration, but also sort of drilling down into what you guys are doing with your physical and logistical integration and closing down some distribution centers and rationalizing the combined business. How confident are you guys that for this back-to-school season, you'll really be able to hit the ground running and not have any interruptions and really be able to sort of exploit the peak of your selling season? Thanks.

[inaudible]. If by this back-to-school season, you mean sort of what's going on right now, that really has already shipped. So the whole supply chain sort of issues, we are really shipping in June and July. Our customers are then inventorying and getting it out to their stores in July and August for sales. There have been no issues, this year, at all. As a matter of fact, this has been, frankly, one of our sort of smoothest years that we have had. I guess it's interesting. It's one of those rare realities of life that when you're making a whole bunch of changes, when you're changing your systems, and you're integrating companies, I think you get sometimes so focused that you often times do a better job than you normally do. It gets more attention and I think that's the case, this year.

Fantastic. Great. Thanks, guys.

Your next question is a follow up from the line of Bill Chappell with SunTrust Robinson Humphrey.

Yes, just two quick follow ups. Did you quantify or could you quantify what the cash restructuring charges will be for this year?

Yes, we haven't changed our guidance on those so we were anticipating cash restructuring charges, $25 million to $50 million for this year.

Okay.

And we anticipated a capital expenditure of around $60 million and that includes the announcement that we made, yesterday, about the distribution facility.

Perfect. And just - and you might've already done this - an update on what you're seeing on the retail environment for kind of the second half of the year and kind of how that's baked into your outlook?

Maybe I can take that. I think that really we see it being sort of pretty much as we have in the first half. Retail is about half of our business. I think that pretty much steady as she goes. I really don't see too much change there.

Great. You haven't seen any real kind of economic sluggishness hit the - hit your environment?

No.

The real driver of our business, Bill, is the business-to-business industry and that fundamentally is driven by what color employment that we still see continuing to rise.

I think it's true, also, if I could just add this, Neal - that we - as I was alluding to in my comments, really are trying to focus our business around more higher technology categories, premium account categories. I think if we take a look at our Kensington offering, it's really not kind of so back-to-school or anything. It's much more of a b-to-b. I think what we've done with the introduction of our ProClick Pronto - that, again, is sort of a commercially-oriented product. But the [inaudible] of technology - those tend to be more commercially oriented.

Great. Thanks.

Thank you.

There are no further questions in the queue. I will now turn the call over to David Campbell for closing remarks.

Well, thank you very much. Again, in conclusion, I just wanted to reiterate my enthusiasm for the business. I think we're on a right track and we feel very good about it. I think we made good progress over the quarter and I'd just like to take the opportunity to thank those folks in the business who invested. Thank you all.

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