ACCO Brands Corp (ACCO) 2006 Q4 法說會逐字稿

Thank you for your patience, ladies and gentlemen, and welcome to the Fourth Quarter 2006 ACCO Brands Earnings Conference Call. My name is Candace and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the presentation over to your host for today's conference, Vice President of Investor Relations, Miss Jennifer Rice. Please proceed, ma'am.

Good morning, everyone, and welcome to our Fourth Quarter Conference Call. Following our prepared remarks, we will hold a Q&A session. Before we begin, I must highlight that our remarks this morning will refer to our results on an adjusted and pro-forma basis, including GBC's business in all prior-year periods and excluding restructuring, nonrecurring and unusual items. Our reconciliation of these results to GAAP can be found in this morning's press release.

In addition, in order to provide meaningful discussion of the underlying results, we will reference comparable results, which exclude from adjusted results the impact of currency translation and incremental management incentives. During the call, we may make forward-looking statement. 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.

Thank you, Jennifer, and good morning, everyone. Earlier this morning, we announced our financial results for the fourth quarter and for the full year. And I am pleased to report, on an operating basis, we grew both our top and bottom lines in the fourth quarter, demonstrating once again, our ability to achieve steady progress each quarter in improving sales and earnings.

We made great progress throughout 2006, doing exactly what we said we would do. We accelerated our strategic repositioning and operational integration of our office-products business. We continued to invest for future growth in our computer-products business and we dramatically reduced our debt. Additionally, we worked to simplify and streamline our business model, transforming ourselves into four new, distinct product-focused segments, connected by a global shared service infrastructure. This business configuration will be our foundation for growth going forward.

We selected a leader for our document-finishing business and we upgraded our leadership in Europe. Our business now has greater clarity, focus and leadership. We ended this year significantly better positioned than we started, and we expect this steady progress to continue in 2007 and '08. Let me speak briefly on each of the areas of accomplishment. Within the office-products segment, we accelerated our integration efforts in North

America and successfully brought all of our business units onto a common infrastructure. We now have one sales force, one information-technology platform and a rationalized manufacturing-and-distribution footprint. In North America, we truly are operating as one company. In July, we successfully raised prices on selected North American product lines. Our fourth quarter results show the impact of these price increases. Our inability to increase prices on long-term GBC contracts was a drag on our North American office-products business through 2006.

But in January of 2007, we implemented price increase on these products as well. We should begin to see the benefit of this price increase build during the first quarter. In Europe, we have invested in the long term. This strategic choice was largely responsible for a $23 million decline in operating income over the year. However, we believe the results will be a stronger office-products business and a great foundation for growth.

In the last quarter's conference call, I discussed the opportunities that we see in Europe and the importance of standardizing Pan-European pricing to create a level playing field for our customers, as well as a competitive advantage over local and regional competition. To recap, the European office-products industry is undergoing significant change. Our largest customers are evolving towards Pan-European structures and demanding Pan-European products. We are transforming our business to stay ahead of their needs.

As we go down this path, we will incur costs to improve our systems, close outdated manufacturing-and-distribution facilities, and move to a Pan-European pricing structure. We also must develop and market products that consumers across Europe will value over local and regional brands. This transition will take the better part of two years. But at its completion as we exit 2008, we will have eliminated nine distribution centers, integrated multiple sales organizations into one Pan-European group, collapsed 12 IT systems into one, and created a product offering with approximately 70% common SKUs across Europe.

We also are excited about our long-term potential for our Kensington Computer Products business. In 2005 and 2006, we've made strategic investments in Kensington's go-to-market activities and we saw them pay off in several areas, including strong sales of iPod accessories and a completely revamped security-products offering. We maintain our belief that Kensington can grow its revenues at a rate of 15% a year or higher. We will continue to expect to see a solid operating performance.

We also see strong possibilities for top-line and bottom-line growth in our newly created commercial-laminating group and document-finishing group. We believe our proprietary products in laminating films, our commercial-grade laminating equipment, in conjunction with a global footprint and the best-known brand in the industry, gives us a significant edge in the fragmented commercial-laminating marketplace.

We intend to accelerate our investment in laminating technology, as well as in sales and marketing initiatives. We also see opportunities to reduce costs in this business by improving supply chain and applying our shared-service model to our commercial laminating-solutions group. We believe our document-finishing group has even greater potential. Effective January 1st of this year, we brought together our document-communications and document-finishing activities from three of our previous segments to create a more sharply focused $500 million business.

We believe there is a significant opportunity to provide simple, more easy-to-use products in response to the proliferation of color printers and photocopiers in the workspace. We expect to drive higher margins and growth through increased innovation that can be leveraged across all sales channels. Document finishing will also benefit from lower operating expenses as it migrates to a shared-service model and adopts a new supply chain.

We've recruited an experienced leader for this business, [Chris Kirkhoff], who has spent most of his career at Hewlett-Packard, a pioneering company in imaging and the print industry, and he's gotten off to a very quick start. Let me also note that we have substantially reduced our debt during this year. During all of 2006, ACCO Brands repaid more than $155 million of debt, including $55 million in the fourth quarter alone. We will continue to reduce our debt in 2007, as well as make the necessary investments for growth.

Finally, before I discuss our 2007 and 2008 outlook, let me address one important question that may be on your minds, and that is our January 2007 price increase. As we have mentioned, throughout 2006, our ability to raise prices was impeded by several customer contracts, executed by GBC prior to our merger. These contracts were not only irrationally priced, but prevented us from recovering our raw material cost increases since 2005.

While this issue was isolated, because of contract commitments, we have not been able to address this situation until now. As of the first of the year, we have raised prices on a number of SKUs and eliminated others because their margins were unacceptable and price increases were not warranted. These are the kinds of products that are more appropriately [Asian-sourced] and private-branded by our customers. As we eliminate these unprofitable SKUs, we've further sharpened our focus on selected office-products categories that are less vulnerable to private label and where innovation and brand building matters.

Now, looking forward, we continue to believe that we will achieve an adjusted-operating- income-rate margin of 11%, exiting 2008. In 2007, we will see the benefits from our July '06 and January '07 price increases within the office-products group. We'll also see more integration synergies drop to the bottom line, particularly as Europe improves coincident with making new investment in our document-finishing and commercial laminating solutions group.

For the full year, we expect strong double-digit EBITDA growth, which will translate into the range of between $230 million to $240 million. I remain very enthusiastic about our future and I hope you will share my enthusiasm as we transform ourselves into a terrific group of businesses.

And now, let me turn the call over to Neal for a closer look at the numbers. Neal?

I will now review some key financial highlights. On an adjusted basis for the quarter, gross margin increased 180 basis points. SG&A as a percentage of sales also increased by 250 basis points, mainly due to the expensing of equity incentives, higher annual management incentives, which were particularly low in the fourth quarter of last year and a small increase in our investment in Europe, leaving operating margins 70 basis points down for the quarter.

However, excluding the impact of currency translation, incremental equity-management incentive charges and exited businesses, adjusted comparable operating margins increased 20 basis points. This is the second consecutive quarter with increased growth margins and should give confidence for the steady, long-term improvement of operating margins as we work through the SG&A investment cycle.

Improvement in gross margin was largely due to the strong operational performance of our North American office-products business. Our computer-products business also contributed, but not as strongly as we anticipated. For the year, raw materials and freight and distribution had an 80-basis-point and 30-basis-point impact on margins, respectively, and thus far, have been partially offset by 100 basis points of pricing, excluding the European price realignment.

With the flow-through of the January 2007 price increase, which on a gross basis, should approximate to 150 basis points, we have continued to expect our pricing to offset the cumulative impact of increased raw materials and freight through June of 2006. We are seeing continued cost escalation around plastics, metals and packaging, which we are looking to offset through a combination of finding alternative sources, substitution of materials or further price increases.

During the quarter the company booked restructuring charges of $19.1 million and associated nonrecurring charges of $6.2 million. Today, we announced the closure of our largest manufacturing plant located in Nogales, Mexico. This accounted for $16.4 million of the charges. Approximately 53% of the total restructuring charges and associated nonrecurring charges for the quarter are non-cash related.

All in, adjusted net income, excluding charges increased to $27.3 million or $0.50 per diluted share, compared to pro forma adjusted net income of $24.3 million. Excluding incremental after-tax long-term compensation expense of $2.5 million or $0.05 per diluted share, current year adjusted net income was $0.55 per diluted share, compared to $0.45 per share in the prior year. This represents a 22% increase in earnings per share.

Now turning to our segments -- office products' pro forma sales increased 2% in the quarter, with the year flat after adjusted for currency and the exiting of non-strategic business, which reduced sales by $21 million in the quarter. The impact on sales for the year was $27 million. Office products, excluding Europe, grew in all markets with a net sales increase adjusted for the comparable items just noted of 2.6% -- 1.4% from price and 1.2% from volume. This was offset by a decline in Europe, though we had lower average selling prices.

As noted in our January the 17th press release, we had expected Q4 volumes to be higher as a result of an anticipated [buy-forward] of products ahead of our January price increase. This buy-forward did not occur, and instead, we saw a very normal fourth quarter with some rebate-driven balancing by our customers at overall levels very similar to last year.

In analyzing customer point-of-sale data, it is clear that our major customers who supply POS data continued their sharp focus on managing inventory levels. Having adjusted for our own non-strategic product exit, we saw inventory levels decline year-over-year by nearly 3%, even though our comparable sales to them increased. Their inventory [debt] turns, therefore, have increased. We believe, therefore, that the underlying demand for our products remains normal.

Importantly, we did put through the January price increase in US and Europe, which we believe was appropriate and necessary to recapture the cumulative impact of raw-material inflation, which for some US categories, had disadvantaged us for the past two years. Turning to office products' comparable margins -- they increased 90 basis points in the quarter, driven by North America. In understanding office products' performance, it is helpful to understand that we saw substantial progress and improved results, excluding Europe.

Operating income for the office products, excluding Europe, increased by $6.5 million for the quarter and $14 million for the full year, mainly in North America. Europe was a significant investment, and our operating income there fell by $2 million in the quarter and $23 million in the full year. Therefore, in total, office products' adjusted income, excluding non-comparable equity and amortization, declined by $9 million for the year.

Progress in North America was clearly driven by synergy savings, which were partly offset by raw-material inflation exceeding our ability to offset these costs with increased prices. In 2007, we continue to expect continued progress with synergies in North America, and we'll see our European operations improve throughout the year as they sequentially collapse the duplicate infrastructure into our new business model. Both markets will also benefit from increasing prices in January to offset previously experienced cost inflation.

In terms of sales, we had previously said that in 2007, we would see an incremental reduction of about $40 million in North America sales. We have now identified an additional $30 million of revenue from products that do not fit our Pan-European distribution model. We will also exit these products in 2007, increasing the 2007 sales impact to $70 million. Therefore, we expect office-product sales to decline as we prune back business that does not fit our long-term model.

We expect a quarterly impact of this $70 million to break down as follows. Roughly $25 million in the first quarter, $18 million in the second, $19 million in the third, and $8 million in the fourth. It is worth remembering, that while headline sales volumes are adversely impacted by this decision, operating income is not significantly impacted. Furthermore, working capital can be redeployed to more profitable uses.

Now, turning to computer products -- after exiting, sorry -- after adjusting for foreign exchange and exiting of our cleaning business, which had about a 2% impact on the fourth-quarter growth rate, computer-product sales increased 11% for the quarter and the year. The growth was slightly lower than our long-term growth expectations due to the strong shifting in Q4 of distribution channels in the United States, where our sales unexpectedly declined.

Outside of the US, we saw very substantial growth. As a result of this slightly lower than anticipated Q4 volume, full-year sales for computer products were below expectations and operating margins came in at 19%, below our anticipated 20%. We continue to believe to long-term growth rate of this business is around 15%, as our new products continue to be well received in the marketplace. I believe that we are likely to see a continued impact from the US market channel shift and the remaining $3.5 million impact from the exit of the cleaning business during the first half.

Full-year operating margins should continue in the high teens, reducing slowly toward the mid teens over the next six years, driven by the growth-mix impact we've discussed previously. For our industrial-and-print-finishing segment, on a constant currency basis, we saw 3% growth in sales for the quarter and the year. Margins were lower for the quarter, due to continued fluctuations in resin prices. But for the year, comparable margins are still up by 80 basis points.

The other commercial segment saw sales growth of 3% for the quarter and for the year, adjusted for currency. Margins for this business segment are always strong in Q4, when the Day-Timer business makes almost all of its full-year profit. As David mentioned, our cash flow for the year was very strong, with $155 million of our main facility being repaid, together with nearly $3 million of local facility redemption.

We started the year with a strong cash balance and used $40 million of this for debt reduction. Our working-capital management also improved. Adjusting out restructuring and purchase accounting reserves, our underlying operating working-capital-to-sales ratio improved from 17% to 15%. And this accounted for a further $40 million of our cash generation. The remainder of our cash generation came from operations -- net of restructure and cash investments.

Our tax charge for the quarter once again reflects unusual items mainly, a $7 million valuation allowance. Underlying book tax rate for the year would be around 31% and cash taxes for the year were $20 million. For 2007, we now expect a book tax of around 34%, with cash taxes around 20% for normal operations. While in total, we did finish the year slightly lower than we expected from an EBITDA perspective. The fundamentals of our business are intact.

The reasons for the shortfall in EBITDA -- namely, the lack of the pre-buy in the US office-products area, which we hoped would offset the continued investment in the European office products, and the lower Q4 volumes we saw in US computer products together with small continuation of raw-material price fluctuations were mainly, in our opinion, timing issues. We do not expect to finish 2008 at a different place as a result of these items.

Now, I will turn the call back to the operator to take any of your questions.

[OPERATOR INSTRUCTIONS]

Our first question will come from the line of Arnie Ursaner of CJS Securities. Please proceed.

Hi. Good morning.

Hi, Arnie.

Can you just freshen up, if you would, your '07 CapEx and expected D&A, please?

Yes. That hasn't changed, Arnie. So for 2007, our capital expenditure assumption is $65 million and our assumption on restructuring pre-tax is about $50 million.

And D&A, please?

Depreciation around $40 million, amortization around $10 million, amortization as stock expense, around $19 million or $20 million.

Great. And a simple question regarding your price increases, while you mentioned you got pretty sizeable -- you mentioned you got price increases in January. You didn't quantify them. I guess the simple question is, were they, in your opinion, sufficient to fully recover you dramatically higher cost that you're looking at as you to into '07?

What we said, Arnie, was that we anticipate the growth yield of those price increases across the whole business to be around 150 basis points. And they recover the raw-material inflation that we had seen up until June 2006.

Right. But post June '06, you had some pretty substantial price increases that were implemented on your raw-material costs and you have lags due to your contracts.

That is true. And so what we -- that's particularly occurred on things like zinc, which has fluctuated a lot, and resin. Resin mainly impacts our laminating group. And there, they have the ability to pass on price fluctuations relatively real-time. It's not like our office-products group.

And zinc, which impacts our office-products group mainly is an area where we are looking to change our product specs in order to get out of the use of that product. In fact, we believe we can drop something like 75% of our use of zinc, and therefore will not be looking to recover that as a price increase, more as a product substitution.

Okay. I just have a final question, if you would. You mentioned in your prepared remarks that you had some rebate-driven balancing that impacted Q4. Could you expand on that a little bit, and perhaps, explain how that might impact '07, if you don't mind?

Yes. Fundamentally, the way our industry works is that all of our customers receive some form of growth incentive, and therefore, they look at where they think they're going to achieve at the end of the year. And so, some customers buy down if they are not close to achieving the next threshold so that they can have a better start to the next year. And those who are close to achieving the next threshold buy up to achieve it.

And so different customers will go up and down at the year end and the impact on us is, obviously, what the aggregate is. It's a small impact on our business. We've deliberately sought to make it that. And in total, the impact on our business this year was very similar to the impact last year. Therefore, the impact in Q1 will be the same. And in our view, it's very normal.

Thank you, very much.

Our next question will come from the line of Bill Chappell of SunTrust.

Please proceed.

Good morning.

Good morning, Bill.

First, kind of on the December quarter -- is there any way to quantify what you were expecting in terms of sales for price increases in the month of December? Because it looks like, I guess, from my original number, you were not too far off on the sales front. You must have expected a pretty big windfall in the last couple months from -- in front of the price increases.

Sorry -- go ahead, Neal.

Yes. There were two factors that really impacted us in the fourth quarter. The biggest issue was the price-increase effect. And obviously, what tends to happen in our experience for those things is that people tend to buy-forward on, particularly, what I'll call our leading items, which tend to have a higher margin and also a high marginal-profit impact on the business. Therefore, you get quite a leverage effect.

The second issue that we had was the computer-products area, where you can kind of reverse back into the [mats]. Had we seen the underlying 15% growth and the operating income, you can effectively calculate the two aspects quite easily.

Okay. And then, I mean, is it fair to say that SG&A was kind of being spent in the quarter, expecting that number, and when it didn't come through, that's the main reason why the margins were compressed?

Well, the gross margin expanded. The operating income was affected by SG&A. And the biggest impact on SG&A was, in fact, not having the same impact we had in the fourth quarter last year. So if you look at our business for the fourth quarter, one of the things that happened last year was that we reversed a large number of management incentive accruals. This is unrelated to equity incentives. And the impact on the fourth quarter of last year was very favorable.

We called it out as a fourth-quarter event in last year's conference-call script. This year, our North American operations performed admirably well, and therefore, at normal bonus levels. And therefore, the year-over-year impact on our business is about $4.5 million of additional management incentives.

Got it. And then, when you look at the price increases that you pass through -- I mean, I understand that they've gone through the there's -- as you've -- have you seen more push-back from Europe versus the US or certain retailers, or is it still, I mean, kind of a work-in-progress right now?

It's David, Bill. I wouldn't call it a work-in-progress. I would say this, that throughout'06, the conversations took place there was -- as very best we could to give communication to our largest customers that were being affected the most as to what we saw. I think, in my comments, that you might have picked up the notion here that we have been very focused and very selective about where we've passed the price increases on.

I think what we're doing in eminently reasonable. There have been some items used that, frankly, we just don't think that we should be supplying. We think that our customers should go to Asia for it. Those, we haven't even tried to pass on prices. We've backed off. So I think, if you could sort of really -- if there was a real transparency here -- I think what's being done, at least from our perspective, is pretty reasonable, pretty balanced.

My expectation is that it will be understood. I don't think there's any question that there will be some of our customers taking it a [little bit] hard at their mix between private -- the private label on our national brand. Where all that will end up, I'm not sure, but again, I go back to the reasonableness of it. I think we'll -- I think it will be accepted. I think this will flow through well.

Okay. And then, just two housekeeping items -- is there any rough estimate of what you're expecting for interest expense in '07? And then, I didn't quite catch the tax rate. Did that change from -- you were expecting kind of an effective tax rate in the 20s. Is that now a lot higher for '07?

For '07, Bill, our cash tax, we still expect being around 20%. Our reported cash-tax rate will -- for normal items, will be about 34%, which has increased by about four points.

Okay. And then, on interest expense, are you expecting further debt pay-down this year or should we just model off the fourth quarter?

We are expecting further debt pay-down during 2007, but obviously, we will have to judge that depending on the timing of our restructuring dollars and CapEx dollars and it's obviously going to be a lot lower than we did in 2006.

Okay. But I can at least start modeling off of the fourth-quarter number?

Oh, absolutely. We plan to reduce each quarter, not add to.

Okay.

The -- for us as you probably remember, the cash quarter that gets tight for us is the second quarter, when we have a lot of inventory build prior to back-to-school. So, basically, you should see a debt reduction in Q1, three and four. We -- there's not a lot of expectation for Q2.

Great. Thank you.

Our next question will come from the line of Bill Schmitz of Deutsche Bank. Please proceed.

Great, thanks. Good morning.

Good morning, Bill.

Hey, I just have a couple of questions on the sales base. So, another $70 million of SKU rationalization -- is that done after 2007?

Bill, it's actually not enough. Now, the $70 million we had already announced. The $40 million -- the $40 million was a continuation of what we started in the US this year. The extra $30 million is related to our European operations. And part of what that will help you to do is actually understand what's happening to what we call the long-term base of the business, which, otherwise, would be rather opaque to you.

And in terms of, "Is that done?" -- I think there's one other area that we're still working through, which is our document-finishing business, where we just have a new leader who started in that business. And we see that as a great growth business. But I think it's fair to say that he needs to have a look at what he's inherited before we can say we're done.

Just to add to Neal's comments -- a comment that was in Neal's remarks earlier -- that while we're backing away from some of the sales from SKUs, I'm not sure that that's going to have a significant effect on our bottom line and on our earnings.

I think what we are doing here is sort of, again, purging the business sort of sequentially, of areas or SKUs which aren't really contributing. I think the first area that we've really focused on is North America. We're rolling out. We're getting into Europe. Europe is, as I've said, is a much more fragmented basis. There's some issues there.

And Neal touched, again, on the third area. We now have a new leader. We have a new configuration around our document-finishing business. I'm sure those folks -- I mean, I would encourage those folks to really take a look hard and only focus and grow those areas of our business that we can have a good return on.

Okay. And the reason I asked the question is, I know you still have the 11% operating-margin target [leaving] 2008, but is that going to be off of a much lower sales base, so the dollar amount of operating profits will be, roughly, maybe a little bit higher than it is right now?

I think from my perspective, what you will see is the underlying core business of our business grows faster than people, perhaps, have perceived historically, where we've struggled to grow -- to appear to grow, because of the number of bits of business that we've discontinued.

So I would not change the growth estimates that we have given out before. We've tried to give out the underlying growth estimates for the different segments many times. We stick by those. What you need to do is just adjust for this additional $30 million of exit from your base number.

Understand, Bill, too, we are increasingly, as we are communicating to you, spending more on sales, more on marketing initiatives. I think that all of those -- that expenditure is a growth investment. We are really changing the mix of our SG&A spend, really trying to focus much more on a strategic spend, on a go-to-market spend, much less on the administrative distribution, IT kind of -- that kind of spend in SG&A.

Yes. I'd also make one other little follow-up, Bill, which is in the fourth quarter, the business we exited, being the Perma storage business -- it was a little like our Day-Timer business, it made all of its money in the fourth quarter and made losses in the other three. So you might get a disproportionate view of how profitable that discontinued business was if you just look at the number we've called out for the fourth quarter.

Okay. So the dollar amount of operating profit leaving 2008 will be up significantly from the dollar amount leaving 2006, even excluding the SKU rationalization?

Of course.

Okay -- just because I -- if you keep shrinking the sales base and you have 11% operating margin, obviously the dollar amount of operating margin will decrease a little bit as well.

I understand. And that's why we've already issued a bit of guidance for our 2007 EBITDA assumption. You can see in real dollars that it's going to be up significantly.

Okay, great. And then, just on Kensington, why do you have confidence in the 15% top-line growth rate, because there's so many moving parts there that are out of your control. I mean, iPods stop becoming cool -- no one buys them anymore -- that business goes away. Like [that], in this quarter, Dell has a pretty disappointing holiday season and then you lose that business. So, I mean, it seems like there's a lot of macro factors in that business that you really have no say over.

Well, I guess that's one way to look at it, Bill. I guess, from my perspective, I would say this: There is no question it's kind of a fast-paced area -- much more fast-paced that some of the balance of our office-products business. However, notwithstanding, if you take a look at how that space is populated by the kind of people who do it, there are lots of folks who grow at very, very nice rates.

There's no question that things come into -- sort of the product lifecycle is a little bit different. It's quicker. It's shorter. It's faster. But, golly, we've been in that space for a number of years now. We feel very comfortable that we can grow that well. I think just more recently, sort of some of the sort of the slower end of growth on that range is really, again, focused on a channel-customer issue that we're dealing with.

I was just out at Kensington, visiting them. I was very impressed with how our guys have done excellent sort of analysis work and understanding who -- which one of our customers represent what percent of the throughput of that industry, and are really targeting our sales efforts on those high-velocity customers. When they do that, when we look at that, when we analyze those numbers, the kinds of numbers of growth we're talking about are quite realistic.

Okay, great. And then just one final housekeeping follow-up. Is that 34% tax rate sort of the tax rate and perpetuity in your model?

We received an adverse tax opinion just prior to closing our quarter, which is why we had to make the valuation reserve. What I would say to you, Bill, is at the moment you should assume that, but I need to revisit some of our tax-planning strategies in order to become more effective. And so, that's what I'm going to be doing between now and the next quarter to see if I can improve on that number. But, yes, you should assume that for the moment.

Okay. I said that was the last question, but I have one more that just came to mind. How is the out-of-stock situation at the big office or supply retailers, because it seems like they're pushing inventory pretty hard? I mean, at what point do they just have to stop and say, "These are the turns and there are going to be these turns and we really can't improve them much anymore"?

Well, if you look at what I called out from our POS, the turns haven't improved that dramatically. They cut their physical inventory in dollars by around 3%, and obviously, with our sales growth on top of that, their turns did improve. But if you look at where they've improved, and they tended to improve them in the categories where there was room to do that improvement as opposed to across the board. And so, they get pretty good turns out of our products already.

Okay. And [that effect] hasn't been a problem yet?

Well, I would say no, Bill. Neal sort of just touched on an issue there. I think category by category, our customers' ability to turn their inventories varies greatly, and again to me, this is one of the strengths of our model. I think that we talk a lot about investing significantly in IT systems and distribution.

We believe that the returns customers get on our lines are quite acceptable in terms of our ability to very quickly respond and get shipments and product there. So not only do they make a good profit because their inventory turns can be very, very high because of our distribution model.

It's part of our added-value mix that we provide them.

Great. Thanks, so much.

Our next question will come from the line of Rick Weinhart of BMO Capital. Please proceed.

Hi. Good morning, gentlemen.

Good morning, Rick.

A couple questions -- first, a follow-up on the price increase or, I should say, it sounds like a lack of price increase negotiated in -- for the back half of 2006 to recover those raw-material costs. You mentioned moving away from zinc, if possible. I'm just wondering -- that sounds like a -- more of a long-term strategy. Have you begun that process, and if so, do you have a rough idea of when we'll start to see products that are going to be using lower-cost materials?

Yes. We began that product during last year, which is why we didn't feel it necessary to go out for another increase around those products. And we will be done with that process by the middle of the year. The reason it takes a few months in order to be able to make those changes is because, quite often, you're having to move from one vendor to another because you're handling different materials and you often need to create different molds and tools. And so, that's why it's a time-consuming process as opposed to a very quick process.

Okay. So it sounds like middle of next year, you'll recover what you expected to recover from raw materials. It's similar to what you've gotten from a price increase anyways.

Correct. And it's impossible to know what will happen to raw materials. All you can do is react to them.

Sure. Okay, thanks. And second question, just on the -- just to confirm some cash-flow numbers here. You -- I've got about operating cash flow coming in around $85 million to $90 million for -- or, excuse me $115 million to $120 million this year. Is that roughly what it was?

I suppose the easiest way to just look at that is to say that in total, we paid down $158 million of debt. $40 million of that came out of cash reduction. And therefore, the balance is clearly the cash we generated in the business through reducing working capital and operations.

Okay. So it sounds like you had significantly more free-cash flow, at least, than what I was looking for for the year -- from just a couple months ago. I'm wondering, was there anything significantly that changed in the working capital that you hadn't expected earlier?

The big significance is really the power of getting onto common IT systems. They're big enablers of change. And so, the fact that we were able to get our North American systems up early, the real beneficiary in the year was cash.

Okay. And then, related to that, your inventory levels have been moving up just modestly versus sales this year. I would expect at some point, though, you would -- that would reverse as you're consolidating. Do you have an expected timeframe when we'll start to see some leverage over that inventory?

Yes. You're right to pick that one up, Rick. That should be our opportunity next year. Just two things that really drove that, one, obviously, there's a little bit of FX that takes inventory up year-over-year . The second one is, we had obviously planned to sell a little bit more than we did, and so we ended up with more inventory than we expected. And so that, coupled with the big projects that we have ongoing for distribution during 2007 mean that inventory will be slow to come down during 2007, but it is definitely something that we're looking to reduce.

Okay. Thanks. And then, my last question -- related to the announcement on the plant closing in Mexico. I think that's a new announcement, correct? I don't think -- I think we were at 100% of the plant closings, previously, were announced?

Correct. This is part of the additional $20 million that we previously announced. It's the first big announcement that's part of that.

Oh, I see. Okay. Okay, great. All right. Well, thanks very much. I appreciate it.

Our next question will come from Seth Basham of Credit Suisse. Please proceed.

Thank you. It's Gary Balter and Seth. I'll start off. Just following up on the question you just asked, we assume that you're going to have a good start to the year, given we didn't get the price increases -- or, people didn't buy. But taking that even a step further, given what you saw from a lot of the retailers, which are more concerned now about inventory management, it seems, than near-term gross margins, have you thought through future price increases and the impact? And, have you adjusted your modeling to assume that you're not going to get the bump in sales ahead of price increases?

Generally, we've tried to avoid distortions in our sales base. And in fact, we spent a lot of time between my arrival in the US and today changing our rebate model to really reduce the rebate-buy impact on our business at the end of the year. If you went back to kind of when I got here, it used to be a big number. It used to be, like, $40 million of additional sales would come through in December, and then you'd be starved in the first quarter. So we did a very good job of eliminating that.

Our beliefs here was that the price increase would trigger that event again. And it obviously, was not an average price increase of 150 basis points. That is the average for the whole business. But it was particularly, A) in office products, and B), in North America, and C), in only selected product areas. So it was relatively big enough to have caused some buying ahead.

The -- normally, we would not be tied to contracts that GBC blessed us with, and we would expect to have small and incremental price changes over time that would make it not too much of an effect.

Yes. Gary, if I could just add to that, I would absolutely echo those last sentiments that Neal just articulated. And that is that I think what's -- I think what we're going through here is a rebalancing, an adjusting of bringing two businesses that have merged into line.

I very much agree with Neal. I think that a well-run business, typically, doesn't have big lumpy bumps and jumps in their pricing. I think that our desire here with our customers is to manage this -- managing our pricing and material increases as close together as we can to get sort of smooth and continuity in terms of -- instead of big jumps.

And just to pick up your other point, Gary. You said, Q1 will now [be] better. Yes, it will. We had originally assumed that what we would have was a pull forward at the end of the year, which would have made Q4 look better, but would have left a hole in Q1. And although we would have better synergies in the price-increase flow-through in Q1, we would have had a big volume shortfall.

Now, we would anticipate normal volume. We do, therefore, expect to see positive progress on the bottom line in Q1. And in fact, the end of Q1, the only thing that will make us in a different place is not the volume impact. It's the fact that we saw the channel shift in Kensington. And that's the bit that will take us a little bit longer to compensate for.

And you're doing a great job in all that -- managing the businesses. And keep that up. I don't know if Seth had any --

Yes. I have a couple other questions.

Okay.

Just to clarify, do you expect any other price increases to come through in 2007?

Again, Neal alluded to the fact that it's really a function of materials and raw-material costs -- what we see in raw materials. I would say this, we -- going back to the comment I made to Gary, we do not want to be put in the situation where we're sort of not passing through cost increases and they build and accumulate, and then, a major adjustment is required some point down the road.

I think that we will monitor very closely what we see in material costs over the balance of the year and respond as necessary. To go back even further in the conversations, we've said that aggressive programs are underway to take raw materials that seem to be highly affected with price increases, like zinc, out of our products. We're trying to -- we're trying to almost build in a stability into our material costs. I think that will also help in the future from big adjustments taking place.

Yes. My big concern, Seth, is packaging suddenly ripping away. And it's been the one area where, so far, we've been able to push back when we've found other vendors who will supply. It tends to be an industry that's characterized by overcapacity.

So one tries to push prices up and you can get an offset somewhere else. So if we can continue to maintain that, we'll -- we probably can continue to manage through-pricing quite well without needing another increase in '07, but if packaging takes off, then that would be an area where I could see us having an issue.

And not to beat this -- not to beat a dead horse, but I think it's a very good question. Quite frankly and honestly, it's been conversation that we, here, have been having in the business with our operating units. And that is, that one of the things that our businesses need to have -- all of our businesses need to have, is a clear pricing strategy as to how we do that. I'll be quite honest, I think that we're -- I think we've got good thoughts, but we're still formulating that niche of our businesses.

Got you. And secondly, if you can, just give us a more-clear road map in dollars. Looking at 2007, you're expecting about $33 million or $43 million in adjusted EBITDA improvement. How much of that is from price increases? How much of that is from synergies? How much of that is from other operational improvements?

In terms of pricing, I called that one out. I said we expect 150 basis points over the whole business. So that's approximately $30 million of gross price increase that we're anticipating coming through.

Obviously, the $50 million question, you already asked, which is, "What's going to happen to raw materials during that period of time?" And we expect to suffer some attrition from raw materials at the beginning of the year, particularly around zinc, until we can get out of our usage of zinc or change our usage of zinc.

And so there will be a little bit of offset from raw materials, but the big driver that's going to come through for 2007 is going to be pricing coupled with synergies. And synergy is particularly -- the area to expect to see positive synergies pop through in '07 is Europe. Europe was an area where, at the end of the year, we were effectively at our worst point in our transition cycle for Europe.

So if you imagine two waves going through the business, the first wave is North America, where we are already seeing the positive side of synergy come through in North America. Europe is at the worst point in its cycle as of the end of the year. And until we can begin to collapse the duplicate infrastructure, that will continue to be a drag on our numbers, and obviously, we have a transition plan throughout 2007 on that point.

The only caveat that I would put to that is when you're talking absolute dollars -- Neal's talked about a $30 million increase on price. I think it is fair to say that we would fully expect our customers to be reviewing and looking -- "What's private brand? What's national brand?" -- as they put their mix together for their consumer.

And so, these price increases could spawn some people to review. And perhaps, they'll reconsider on some volume. So, that all needs to sort of get worked through the system.

Okay, fair enough. Shifting to the Kensington business, do you expect a big shift in distribution channels for that business going forward?

Do we expect a big shift in distribution channels? No. I think our issue, I would say, was a single issue. It was a single customer issue that we experienced in '06 and I think that as we review, as we look at our whole channel strategy and structure, I think we look to sort of augment and expand upon customers that we already deal with to pick up that gap.

So that's the shift I would see. I think that's very much a US-shift. I don't think it's so much Canada, Mexico or Europe-related.

Got you.

[Does that] respond?

Yes. That's perfect. Just a couple other small housekeeping questions. Corporate expense in the quarter was up $50 million, I think. What was driving that, and how should we think about that in 2007?

The biggest reasons it was up in the quarter is in the fourth quarter of last year. We reversed the management incentive accruals that were in there.

Okay.

And so, this year's run rate is a good example for what it will be, plus a little tiny bit for normalization of incentive levels, which, obviously, will lower this year.

Okay, thank you.

Great. Thank you.

All right, thank you.

Our next question will come from the line of Reza Vahabzadeh of Lehman Brothers. Please proceed.

Good morning.

Good morning, Reza.

Good morning.

In terms of the top line outlook for 2007 -- I know retailers are focused on inventory management. I mean, is your 2007 guidance -- does that incorporate an additional year-over-year decline in inventories at retail similar to 2006?

Yes. We've been experiencing a slow improvement of our customers on their inventory turns for a long period. In fact, it was much more dramatic in the early 2000s than it is today. It's really reaching the point where it will continue to improve, but it's improving at significantly smaller increments each year.

So we assume a similar impact on next year as we saw this year. And a lot of it is driven by them buying people. So as they [glomerate] other people in the channel, so they become more efficient at managing their back end.

Right. As private label gets more scale, and possibly, in more categories, are you concerned about price gap versus private label and just private label's cost efficiencies allowing to -- for them to pull down pricing, and therefore, creating downward price pressure on your products in the same category?

Excuse me, Reza. I was chatting with -- somebody earlier asked the question about pricing, and I made the point about developing a pricing strategy and not wanting to see big changes in our pricing further -- to [be] continuity. I think that's one part of it. I think you're just raising the other part. And that is, that, "Okay, so it's not only our prices to our customers, but then, how about, how does it flow through in terms of our customers' prices to the consumer?"

I think it's all really one issue to take a look at and balance off. I think we are absolutely focused on where the -- there are [certain] consumer price points that are going to be important product line by product line, category by category. I think that a lot of the extra time and money and spend that we're putting in place into our business units relates to the analysis of this and understanding of this. I think that, to a large part, it's very much how the consumer responds and what consumer price points are.

So, I think we are becoming much more like what you see in grocery, what you see in hardware. I think you are alluding to an affectation of the kind of reality of the world we're going into. So I think -- I wouldn't say that we are concerned, per se, but I would say that what you're speaking to is absolutely kind of the areas that we are spending more time to develop clarity and understanding, appreciation. Okay?

Okay. I appreciate that.

Yes.

And then, on the -- on just a housekeeping front -- I'm sorry if you mentioned this before, but cash restructuring charges in 2007 are going to be how much?

What we've actually said -- our cash spend on restructuring is going to be about $50 million.

Okay. And that's in addition to the 65 of CapEx?

That's correct.

Okay.

Now, in terms of charges, our charges will actually be lower than that because we have significant charges that we have taken in 2006 that will be cash spent in 2007. I think it's more useful for people to understand the cash impacts, which is why I try and give those out.

I see. Okay, and that's helpful. And then, accounts payable seems to be meaningfully higher than prior-year levels in terms of dollars and in terms of days. And the same thing really goes -- applies to accrued liabilities and accrued expenses. Can you touch on that quickly?

Accrued expenses is entirely different. [Both] are driven by restructuring, accruals, so the entire increase is [that] one issue. Accounts payable is partly a function of us changing business model and partly a function of us getting more efficient. So as we move to more of an outsourced model, what you will see is accounts payable increase in size. Partly, that offsets a bit of a tendency to have a longer supply chain, which drives inventory up, but that's why we have to learn better systems to keep that coming down.

The second issue is that we have basically used our leverage in accounts payable to drive better terms into our vendors.

Right. I mean, you're [up] to almost ten days this year versus last. And I'm just wondering, is that a continuing trend, or are you reaching the peak on that?

Well, as we continue to outsource more --

I see.

-- you will see that trend continue to increase.

Thanks, so much.

Okay.

Our next question will come from the line of [Milan Gupta] of [Southpoint Capital].

Please proceed.

Hey, guys. Can you just quantify the -- how much of the working capital contributed to the $55 million of debt pay-down?

In the quarter, I can't give you that. But for the year, I called that out. It was about -- it was just over $40 million.

That was the cash portion?

That was the cash portion, yes.

How much was -- ?

It was another $40 million. They were two 40's.

Oh, okay. Okay. And the $30 million of products that you guys are taking out of Europe -- could you just elaborate a little more on the nature of those? Are those products that are losing money? Are they products that are going more private-label. If you could, just elaborate on that.

Milan, what we've had here is we've had Europe functioning very much sort of on a country-by-country-by-country basis. And so what -- SKUs or products that will be offered in Germany, we [leak] to Germany -- the same with France, the same with Italy, the same with Spain. What we are trying to do here is create an offering where, as we've said, about 70% of the SKUs are in common.

So what we're really doing is purging things that, A) are low margin, B) are country-specific, and maybe even country-specific to the point where some of these products might have an okay margin, but frankly, there's no upside for growth or expansion. And so we're trying to replace those with product lines that really -- and SKUs, really -- that are not just Pan-European. I would suggest to you that, ultimately, we'll be global.

Again, look at the real support costs of those products. And the fact that we're able to drop nine distribution centers across Europe implies that you have to have a lot more SKU efficiency. And so, what you have to look at is the real cost of some of these local products. They're really on a fully allocated cost basis, where you look at what drives cost. [They'll] make money.

Right -- the broad business model.

Right.

Yes.

Got it. And the last question. Just, could you talk -- we're about a week from the midpoint of the first quarter. Could you just talk about how that's running in terms of maybe getting the price increase, or maybe some of the buying that you didn't see in the fourth quarter?

We are seeing normal volumes come through in the first quarter, which are, obviously, being shipped at the new invoice prices.

Does that mean you're running ahead of last year?

What we had anticipated was to run significantly below last year. We're not seeing that.

Got it. Thanks.

Good. Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn the call back to the speakers for any closing remarks.

Well, thank you very much, Operator. Well, I appreciate your involvement, and all of the questions, and interest in us. I hope that over the course of the conversation we have demonstrated that we truly believe there's a very bright future for ACCO brands. Thanks for joining us.

Thank you for your participation, ladies and gentlemen. Have a great day.