ACCO Brands Corp (ACCO) 2007 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the first quarter 2007 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 Investor Relations, Ms. Jennifer Rice. Please proceed, ma'am.

Good morning, everyone, and welcome to our first quarter 2007 earnings call. Following our prepared remarks, we will hold a Q&A session. Out of courtesy to others, we ask that you please limit yourself to one question.

Our discussion this morning will refer to our results on an adjusted basis, excluding restructuring, nonrecurring and one-time items. A reconciliation of these results to GAAP can be found in this morning's press release.

Please note this is the first time we are reporting results for our new business segment. Refer to the 8-K filed in March for our 2006 and 2005 results by quarter in the new segment format.

During the call, we may make forward-looking statements, 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. Our first quarter results demonstrated further progress at ACCO Brands. Our adjusted gross margin increased by 200 basis points, continuing a trend that began in the second half of 2006. We are now realizing substantial benefits from price increases implemented in 2006 and in January, as well as ongoing merger integration synergies. We continue to make additional investments to drive long term growth, which has increased our SG&A spend. Gross margin improvements will be the leading indicator of our success this year. Our gross margin performance of our Office Products business, in particular, is encouraging evidence of our progress.

We are well positioned to deliver sales and operating profit growth across all four of our business groups. In the meantime, we expect each quarter's results in 2007 to reflect the continuing success of our integration efforts within Office Products. These strides will be offset in part by the continuing need to invest in all four of our business groups to unleash their growth potential. Within Office Products, which represents 50% of our business, we are seeing strong performance. Price increases have been implemented. And, although we are experiencing volume declines, these were from a slower March and customer inventory adjustments.

We are particularly pleased that our North American visual communications business has executed a significant turnaround. As you will recall, this business has historically suffered from fixed pricing and underinvestment. In the quarter, visual communications benefitted from increased prices and plant closure savings. We expect to see this business continue to perform well during 2007.

Our European operations are working through the transition of their business. For the quarter, gross margins were up following price increases. This improvement was offset by increased spending associated with their transition activities. Infrastructure investment is needed and will continue to be a drag on results in the first half. Year over year savings are expected in the second half.

The Document Finishing Group, which now accounts for 30% of revenues, is being reorganized as a global business under a new president. Net sales declined 3% in the quarter. This business has been in decline for some time due to previous underinvestment in our product and development pipeline. Here again we are seeing gross margin improvements, driven largely by pricing. The planned investments in SG&A have offset these improvements. The outlook for this business remains strong. We are a market leader, and we see substantial opportunity in the marketplace. We continue to expect a positive year.

As expected, the Computer Products Group had a slow quarter, but our future confidence remains high. The shift if U.S. distribution channels in the fourth quarter continue to the first half of this year, offsetting our progress in international markets. We believe the second half of 2007 will be a stronger one for Computer Products. A number of new SKUs were launched at this year's Consumer Electronics show, and we expect them to gain placement in the seasonally stronger second half due to back to school and the holiday season.

Results from the Laminating Solutions Group were also lower than expected. As a market leader in laminating films, we are subject to price actions by competitors seeking to gain a foothold in this category. During the first quarter, we lost market share to low cost imported film, causing a volume decline of nearly 8%. As part of our 2006 strategic review of this segment, we have already identified the need to reduce costs by improving supply chain and better leveraging our shared service model. We need to accelerate these plans now that we have seen an increase in competitive activity. We still remain positive on the long term potential for Laminating business, given our strong distribution model and high market shares.

Before I turn the call over to Neal, let me remind you that our first two quarters are traditionally our smallest quarters in terms of revenues and earnings. I believe we continue to make steady progress on our Office Products and European initiatives. Strong performance is also expected in our Computer Products business, bolstering the second half of the year. Our Laminating business is still working through its options, and I will provide more color on how we see our small segment impacting our performance in subsequent quarters.

As we have reconfigured the way that we group our business, there is certainly lots to do. But we are executing well, we remain confident in our progress, and we are capable of making midcourse corrections where required. The strong performance of our Office Products demonstrates our ability to progress our merger integration. We've built a strong business structure and strategy that is focused on the long term, and I am confident that we will make our targets that we have set for ourselves.

Thank you, David. I just have a few additional details to share, so I'll be quite brief. Reported sales declined nearly 5% to $445.9 million. During the quarter, we identified certain customer program costs totaling $1.7 million that were not appropriately accrued in prior periods. Therefore, we recorded a one-time adjustment during the quarter which reduced net sales and pretax income by the same amount. On an adjusted basis, net sales were $447.6 million, a decline of 4.5%. After adjusting for currency, the impact of the exited business and the one-time adjustment to customer program costs, underlying sales decreased 3%.

The real news this quarter is the continued substantial improvement in gross margin. This is the third consecutive quarter of gross margin improvement and continues to give me confidence of the steady long term improvement of operating margin after we are able to work through the SG&A investment cycles that we now have underway. The improvement in gross margin was largely driven by the price increases implemented in Office Products and Document Finishing, coupled with cost synergies partly offset by negative volume in all segments.

Importantly, we did put through the January price increase in the U.S. and Europe, which we believe was appropriate and necessary to recapture the cumulative impact of raw material inflation, which, for some U.S. categories, has been a drag on results for the past two years. For 2007, we expect continued synergy progress. In particular, you should see our European operations improve in the second half of the year as they sequentially collapse their duplicative country-based infrastructure into our new centralized Pan-European business model.

Turning to SG&A, as expected, SG&A as a percentage of adjusted sales continue to be up year over year, as we invest in future growth and business model changes. SG&A expense increased by 200 basis points, which offset the gross margin improvement. Longer term, these investments will create sustainable returns by fortifying our competitive position while reducing long term G&A. SG&A as a percentage of sales was higher for all segments due to lower sales volume, particularly in Laminating Solutions and Computer Products.

All in, adjusted operating margins were even with the prior year. Our expectations are for improvement each quarter going forward, as we have an easier comparison to the second quarter and expect increased performance in the second half from Europe and from Computer Products.

In terms of product [exit], recall that we said there would be approximately $75 million of non-strategic business that would impact our 2007 results. 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.

Due to our segment realignment, some of the exited business affects the Document Finishing Group in addition to Office and Computer Products. Let me break down the impacts of the exited business for 2007 by quarter and by business segment.

While we had previously estimated a $75 million impact, some of our customers continued buying these products into 2007, so we won't see the full $75 million effect until next year. This year's impact is now expected to be $70 million. In the first quarter, the impact of business exits was $20 million. Of this, $16 million was in Office Products, $3 million in Document Finishing and $2 million in Computer Products. For the second quarter, we anticipate the total impact will be $17 million. Of that, $16 million will be Office Products and $1 million Computer Products. For the third quarter, we expect the total will be $21 million, $18 million in Office Products, $2 million in Document Finishing and approximately $1 million in Computer Products. In the fourth quarter, we believe the total will be $12 million, with $10 million in Office Products, about $0.5 million in Document Finishing and just over $1 million in Computer Products.

Turning to one-time charges, during the quarter, we booked restructuring charges of $0.7 million and associated nonrecurring charges of $6.8 million. Restructuring and nonrecurring charges for the quarter were principally related to the integration and transition costs, including costs to assist in the planning and management of these activities.

Our lower tax rate for the quarter reflects the realization of tax credit from repatriated earnings. We continue to expect an adjusted effective tax rate for the year of 34% and an adjusted cash tax rate of about 20%. We're still awaiting the outcome of our UK tax appeal that may influence our book tax rate going forward.

All in, adjusted net income, which excluded charges, increased to $6.5 million, or $0.12 per diluted share, compared to adjusted net income of $6.2 million, or $0.11 per share.

Finally, looking at some balance sheet items, our debt levels increased modestly at the end of the quarter as a result of short term needs to fund working capital, capital expenditures and restructuring. Overall, we still expect to reduce debt in 2007 during the second half. But, as previously noted, the reduction will be less than we achieved in 2006 due to the planned capital expenditure and cash restructuring costs this year. We continue to expect our debt to EBITDA ratio to improve in 2007 and 2008 and for free cash flow to be in excess of $100 million in 2008.

Now I will turn the call back to the operator for your questions.

(OPERATOR INSTRUCTIONS). Our first question will come from the line of Mark Brady of SunTrust. Please proceed.

Just a couple questions here; in for Bill Chappell. Can you just talk a little bit more about the distribution shift in the Computer Products segment? I'm not sure I quite understand that, so if you've got a little more color on that, it would be great.

Sure, Mark, I'd be delighted to chat about that. What we're really talking about here is major customers. I don't certainly want to name names; I think that would be inappropriate. But this is a general shift that we're seeing. Some of our biggest customers that we have relied on significantly for their volume are readjusting their business. They're changing their business model and going through some changes. This is an event that is a U.S. event, and it has continued, really, now from the fourth quarter of last year ongoing.

So what we are seeing then is the need for us to sort of readjust our distribution. What we've done is we've taken a good hard look at who are the principal players in the distribution channel. We are looking to realign ourselves and make sure that we are positioned well with the players who will demonstrate and be able to give us significant volumes. So that's really what's taking place there.

So you still expect that segment long term to be a 15% grower, then?

Yes. We really do. I think that, if we take a look at what we see broadly in the channel, we see good growth. I think that when we take a look at our product development activities, we've invested significantly in 2006 and now in 2007 and in really expanding our new product development capacity and capability. We see a lot of the new products that we're introducing-- I think the accepted level-- in the recent Consumer Electronics show. We presented our products and had a lot of buzz and a lot of good feedback. So I think that we like the space. We like the margins that we see in the space. And we think this is a good opportunity.

We're also seeing, by the way, still continued solid performance all around the world, and this really is in Europe, Canada, Mexico, Australia. We're seeing good turnover and good volume here. We see this as being a U.S.-related distribution activity.

Okay. Thank you.

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

Just to be clear, when you say some of your customers have shifted their business model, are we talking about that they're not selling these kinds of products, or are they going to different brands, private label? I'm not sure what you mean by changing their business model.

Well, I think what we're saying here is that there are store closures taking place. There is consolidation, we think, in the technology area. It's really specific to the computer channel. I hope I had made that clear. I think Mark's earlier comment related to that. So that's really what we're speaking to.

Okay. And you think that the overall demand for these types of products is relatively intact; they're just in the wrong part of the channel?

Yes. I just think it's relatively intact. Again, I think that this is a global business, Reza, and that's how we look at it. So I think what I would say is, again, certainly internationally, we are seeing good (inaudible) and things being constant, solid demand for this kind of product. I think when we take a look at other players in this space, we see them, I think, going through similar kinds of things. But, basically, believing in having solid businesses. I think we still feel very good about this space and are continuing to invest in it.

I see. Thanks. Then, in terms of volume trends, excluding your SKU rationalization products that you have volunteered to get out of, where do you think your volumes came out at this quarter, and how do you think volume trends will work out this year?

I think it's worth remembering a couple of things. First of all, Q1 of 2006 was actually a tough comparison. If you go back and look at it, you saw we had 4.6% growth in Q1 of last year, which was a little higher than we would normally get. What you then saw was, really, a fairly normal January/February and then a very slow March for us, which we believe is more of a timing issue rather than indicative of the long term trend. In fact, we've seen already that April has rebounded strongly. So I think it's important to understand that what we've seen in Office Products and Document Finishing is not really, in our opinion, indicative of any long term trend. The issue is in Computer Products, as we've explained already. It's something that we can do little about in the first half of the year. So it will remain depressed until the new product cycle comes through in the second half. Fundamentally, I think that's a good color on the volume trends that we saw.

Right. And do you expect any-- or did you experience or do you expect to experience any inventory adjustments by retailers this year or this quarter?

We believe that that was one of the drivers of the slowdown that we saw in March, particularly. We can see POS inventory - our customers' POS inventory in the United States period over period. Even adjusting for our own exits, it was down more than 5%.

I see. Thanks much.

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

I was kind of looking at the consensus sales numbers, and it looks like about 4% organic, if you take out that 70. It's kind of the number that people are looking for. Is that the number you need to hit the EBITDA target for the year?

We knew that this year was going to be a challenging year for growth because of the exits that were concerned. We also very much anticipated this being a stronger second half/weaker first half year as we get sort of various positive momentums in place behind our growth. But we're anticipating slightly less growth than that for the year as a whole.

Okay. So can you just give us directionally what you think like-for-like organic growth should be?

Yes, and it depends how you define organic growth. I'm talking volume, excluding price. Obviously, we're going to pick up a couple of points from price, and I would anticipate a couple of points from volume this year.

Okay. Got you. And then just on the gross margin trends, it was pretty great this quarter, obviously. Will those kind of trends continue throughout the year?

We believe that they should be sustained through the year, predominantly because what you have is three separate factors that come into play. First of all, you've obviously got the recovery price increase, where we play catch up on substantial raw material backlog over a couple of years. Then what you'll see is, as the European model starts to come into play, that will start to influence our freight and distribution cost in the second half, offsetting, let's call it, the [lapping] of the July price increase, which otherwise would tend to offset. So we anticipate that kind of improvement over the year and, also, in the first quarter, a little bit of a depressant as we work through what I'll call kind of the excess zinc cost in our system.

Okay. Great. How much transparency do you have into the "plan-o-grams," the trading off of the catalog pages into the back half of the year? That's probably being sent now. I was just curious how your outlook is.

The one area that it's very much under transition still is in the Computer Products area. That actually gets reset in the May time frame, and that's when people make their selections for back to school, college and Christmas, which is that peak season. Office Products is a pretty set plan-o-gram already.

Okay. Are you getting incremental shelf space?

Generally, I would say that we're keeping a constant-- shelf space would be the best way to describe it.

Maybe I can just answer that. I think, as we see private brand continue to be an issue, I think that, from our perspective, particularly in the Office Products, we are seeing a further segmentation between the national brand and the private brand. So it's really sort of following the trends that we believed that we saw and that we see in other industries, and that is that more and more it's really coming down to a national brand and the house brand or private brand.

Right. Thanks very much.

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

A simple question, if you would; you have a lot of moving parts. Can you perhaps give us a feel for-- I almost want to use the word "losses" you'll have in Europe this year-- and what sort of swing we should expect in the back half of the year.

It's interesting, actually. If you look at Europe in the first quarter, what you actually see is gross margin going up in Europe because of the price increase that we put through but with the full-year effect of the ramp up in SG&A that we had last year. So what you'll see in Europe actually is a neutral position quarter over quarter, which you saw in the first quarter continue in the second quarter, but with the third and fourth quarter then showing positive drop through as we start to get the SG&A under control in Europe in the back half of the year.

Okay. A question for David. Commercial Laminating seems to not be consistent with your view of leading brands, given that they're now being negatively impacted by lower cost imported products. Is it fair to say that, if this continues, you wouldn't view this as strategic?

Arnie, I think that-- Being quite candid, I think this was the single thing in the quarter that really caught us by surprise. We had done an analysis and review back in the fourth quarter of '06. As we did that, there's no question that we saw that there was the need to deal with our supply chain. We actually produced high speed films in the west suburbs of Chicago, not necessarily a low cost location. We have been putting plans together to deal with the supply side, sort of Asian sourcing. I think from what we have seen in the first quarter that we feel that we need to accelerate that activity. There's been a lot of-- in March and so far this month, there's been a lot of activity in terms of redefining and relooking at how we can deal with that.

I think before I would say this is not a strategic business for us, I think we need to finish that process. I think, as I mentioned in my prepared comments, we just need to understand this better over the next 30 to 60 days - what our options are. And we'll be forthcoming with you in terms of the sense of how we can look at repositioning the supply side of this business.

Overall, though, this is more of an industrial business. It's worth understanding that we do have a very high global market share, and there are some very high favorable demographics in the way that this market is shifting from wet laminating to thermal, which we like, together with the brand name is very well established within that channel.

A final question for you, Neal, if you don't mind on first quarter net sales. We're basically looking at a $23 million or so decline year over year. You gave us a number, if I heard it right, of $20 million directly related to the exit of low margin business. We also have the one-time item of $1.7 million related to the one-time item. So I'm trying to get a better feel for how much-- one of the surprises for me is I would have thought you would have gotten a much better benefit from currency in the quarter. So I'm trying to look at revenue and adjust it for currency, if you will.

Sure. Currency was worth about $13 million in the quarter, as a positive. And, obviously, what we saw was a negative volume, which was predominantly driven out of our U.S. operations, both in Office Products and in Computer Products and in Laminating Products. So the U.S. was the market that had a very short March.

You mentioned April rebounded substantially. Can you perhaps quantify or give us a little better-- expand on that a little bit?

I'd prefer not to. What I was trying to say is that, as we've explained before, our business can often have a lot of fluctuations around quarter end. And it's very easy to assume that one month results are a trend. And my experience of a long time in this industry is they're not. What I was trying to do is give some comfort that we did see a rebound in April, and, therefore, it goes to my believe that people are changing their ordering patterns and inventory holding according to what they're seeing in the market.

I agree with that. There is no question that we're seeing our customers absolutely become far better managers of their inventory and focus on the quarter performance.

Thank you very much.

Our next question will come from the line of Derek Leckow of Barrington Research. Please proceed.

You answered part of my questions on the volume declines. But if we could touch on the trends here, I wonder how much of a role do you think price increases may have played? If you could talk about that by business segment, that would be helpful.

Sure. It's a good question, and it's something that we follow closely. I don't believe that, really, anything that we've seen was affected by our price increases. If you sort of take a look at the quarter, we had pretty reasonable January/February. March was really the weakest month, and I think it goes back to just the comment that we were just making - that order patterns we see from our customers are increasingly focused around the performance of their inventory management. So I think that we have really done a good job over the back half of '06 and then in January of '07 of really leveling the playing field. I think both in Europe, where we had some price differentials between countries, and I think that we've talked last year about some of the long term contracts that we were locked into. I think we've now rebalanced those. So I think what we have here is a pretty fair balanced kind of comparison if you look sort of between customers, between countries, etcetera. So I think what we're doing is going to a balanced situation, sort of not creating a big jump here in prices. We just don't-- we just think we're pretty fairly configured now in terms of price, and I don't think that that's really affected our volumes in this quarter at all.

Okay. So you're happy with the prices here, and we probably won't see any additional increases going forward in this year, at least. Can you just comment on when do you think the reported sales figure will be reaching positive territory?

Again, you're asking me to sort of speculate into the future a little bit. I'm not sure I feel too comfortable with that. But I would say this. I think that we are reconfiguring our business. One of the things we haven't really talked too much about, folks, is about the effect of this re-segmentation that we've done in our business. That's far more than just an accounting thing or a reporting thing. I think that that's really-- the business managers and the presidents of the various businesses are-- now have a much more well defined and well focused business. I think they're getting into promotion activity and inactivity to drive sales. I think that will sort of flow through over the balance of the year. I think there will be real positive benefit, both from the ability to manage SG&A expense and to grow and promote business within their categories with this.

So I suppose the best way I can respond to you is that we see that sort of flowing through at an increasing rate over the balance of the year.

I would just add one bit of color to that, Derek, which is that I would anticipate the Computer Products and Laminating issues continuing in the second quarter. So they will obviously be a bit of a drag on our ability to grow in the rest of the business.

Again, Derek, Laminating is something in the neighborhood of 8% of our turnover. Kensington is about 12% of our turnover. So, again, if you quantify this, this is the 20% of the 80% of our business.

Okay. Very good. Thank you very much.

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

My first question is n the PC business, the computer accessories. You've talked about some new products coming in the second half. I'm wondering about your renegotiating with different channel partners or looking at new channel partners. What kind of time frame should we consider to be-- when you should be able to realign that biz?

I think that we've-- As I mentioned in my earlier comments, we presented a lot of new products at the Consumer Electronics show. I think we believe that they're had some pretty favorable response. We're right in the middle of that process, as Neal alluded to. That's a process that, right about this time of the year, there's a lot of [toing and froing] going on in terms of people look at our new offerings. So we're just now sort of working through how we'll be positioned there. So my expectation is, really, I think we'll see some (inaudible) in the second half of the year from the new products that we've introduced, and, also, we're really focusing on some new customers there and looking for better penetration. I think that's sort of yet to be determined. I think the second half is really going to be the defining element there.

Okay. My next question is probably for Neal. On the SG&A increases we're seeing, as we look to the next couple quarters here, is there a point where you think we'll be on a dollar over dollar, year over year dollar increases? We'll start to see this flatten out and perhaps actually decline this year, or is that kind of an '08 event?

Well I think there's one other thing to understand, and that's the impact of FX on dollars. So what you actually see is about a $3 million increase in SG&A because of FX, which was actually about half of the dollar increase that you see. That obviously normally should be offset by increased gross margin, etcetera, etcetera, except, as we understand at the moment, our European business is a bit unbalanced. So we don't quite get the offset one might like.

In terms of dollar spend, the one area we're going to add more dollars to as the year progresses would be the Document Finishing area, but that would be offset by declining dollar spends in Europe in the second half of the year. So, net/net, I would anticipate us still seeing SG&A up in the second half of the-- sorry-- the second quarter and coming down in the second half.

Just to add to what Neal's saying, we have been-- as we have re-segmented our business groupings, we have also been very active in terms of defining roles and responsibilities as to what should be an activity that takes place in the center, in the shared service area, as well as the business units. Obviously, as we move activities to a shared service basis, we think that we can do that more efficiently and lower SG&A. So we've been very aggressive. We've used [Bain] to work with our presidents and work with our shared service people to really come up with a pretty effective game plan. That's been taking place in the last quarter of last month and the first part of this year-- or the first part of this quarter. So that's really sort of now just wrapping up. The game plans are getting put together. I think we can be fairly aggressive as the year proceeds into the back end of the year (inaudible).

Okay. Thank you. And my last question is on the European business. I know that one of your larger customers had recently talked about moving to more of a Pan-European presence with their suppliers and vendors. I'm wondering now, as you're progressing in that process yourself, are you starting to see-- or, perhaps, when would you start to expect to see benefits from that kind of consolidation?

I think we're seeing the benefits right now, to be frank. I think that a lot of what we're putting in place is time consuming, and we're incurring expense. But there's no question that there is a simplification going on in our business. I think the simplification will lead to (a) lower costs for us long term and (b) our ability to grow and grow well. Europe is a very significant market. Our customers have been in that market for a period of time. I think that what we are doing in conjunction with their efforts will be quite effective. There are more European-based customers there that I think are seeing and looking at what we're doing and, I think, are quite encouraged and positive and believe that we are doing good things to position our business well with them. So I think we're going to see the benefits flow through, again, as Neal was talking about, the second half of the year and on into '08.

I would just suggest that this is very much, Rick, a long term process. I don't think that we see necessarily a huge pop take place in the back half of the year. But I see this being a long term positioning in growth of the business into '08, two year, three years, four years, five years down the road. This is really the positioning of the business.

Okay. Thank you very much.

Our next question will come from the line of Gary Balter of Credit Suisse. Please proceed.

It's actually Seth Basham in for Gary. A couple question for you. First, I'm trying to understand the softness in the office supply business in March. Were there specific customers that changed their ordering patterns, or was it a more widespread phenomenon.

It was actually a more widespread phenomenon. So I think that, as you would expect, some are bigger than others. But I think it was a wider phenomenon that just one or two customers.

Okay. And then you mentioned a substantial increase in April from March. Does that suggest that POS was up year over year in April?

I don't know the POS sellout for April yet. We get all these things some weeks in arrears.

Understood. Okay. Then just to clarify, I think you had mentioned on previous calls that you expected some $20 million or so to drop to the bottom line from price increases this year. Is that still what you're expecting, or, given the strong progress in the first quarter, are you expecting more from that?

No. That's still our estimate.

Okay. On the Computer Products division, have you actually signed contracts with retailers to put product in their stores in the second half?

We have with a limited number which have already closed. But most of them are still pending.

Great. That's all I had. Thank you, guys.

Our next question will come from the line of Ricky Sandler of Eminence Capital. Please proceed.

Two questions, one on the volume in the quarter. I guess you guys reported a 3% decline, constant currency, ex the exited businesses. How much was the July and January price increases? How much did they impact the quarter? So, if we could sort of back that out and get a sense for what actual volumes really did--

Sure. Price was up 1.5, so volume is down closer to 5.

Okay. So, the 1.5 is a combined from the July and the January price increase.

Correct.

Okay. Then, on the Computer Products business, I guess you guys mentioned that you think that business can grow 15% per year longer term. Is that the number I heard? Maybe-- what do you need it to do in the back half of the year to kind of make the guidance that you've laid out? It sounds like you're sort of banking on that business having a strong second half based on all the product development that you've done. Maybe just talk a little bit about your expectations, both in the back half of the year for that business and then longer term? Is the category growing 15%? Do you expect to gain share? Is there any price pressure that offsets that?

My goodness. There are a number of questions there. I'll try to respond as best I can. We do believe this is a category that can and is experiencing high rates of growth, and I think that we see that internationally. We see that in all markets we're in, with the exception of the U.S. I think in the U.S., as we talked about, there are a number of activities going on with a variety of customers that we're just working through. We need to redefine our distribution capabilities. We think that, when we do that, we'll return to the same rates of growth that you see in other parts of the world. So we just-- Again, just reaffirming that this is an area that we see of good growth.

A good part of that growth too is high rates of innovation. As we've talked to folks earlier, we have invested a lot of time and energy into new product development in '06. We think we'll see the benefits of that going forward. So I think that speaks sort of broadly to how we feel about the category. It's good. I think we have quality people that have a very good business model.

Yes. Okay. And what sort of results would be in the back half of the year, just consistent with that 15% trend to sort of make the numbers or a bigger push because of all the new product development?

I think that it really speaks to what we've already said, and that is that a very large part-- and this is the time of year when a lot of those decisions are getting looked at and getting made. There's just a significant amount of business pending. We've introduced our new products at the Consumer Electronics show. We think we got a good response. We like what we saw. It's just now sort of working through and turning that into actual orders and shelf placement.

It's very hard to judge whether the second half will therefore be able to pick up for the obvious shortfall that we're going to have in the first half. So I think the second half may be more indicative of where we're going with this business. The issue is whether you can recover from the first half hole that we have obviously got at this moment.

Great. Thank you.

Our next question will come from the line of [Corey Armand] or Rice, Voelker. Please proceed.

You've already touched on my question a little bit. But, with regard to advertising SG&A, could you explain in a bit more detail what activities are driving the 200 basis points erosion year over year? It sounds like this is something that you had expected, and I was wondering if that's the case and if it's all related to Europe. Or is this a function of sales not achieving your desired targets?

There are multiple issues. One issue to quickly understand is that SG&A tends to be much more of a fixed cost. Therefore, the lower volume that we saw in the quarter obviously causes the SG&A as a percent of sales to increase. So that's kind of issue number one. Issue number two is that, clearly, in Europe, we've added to our cost base. And issue number three is that we have started increasing our expenditure in the Document Finishing area in order to get that business moving.

Okay. Thank you very much.

Our next question will come from the line of Milan Gupta of Southpoint Capital. Please proceed.

Could you just talk about use of cash in the quarter? I'm trying to back into it. It looks like working capital might have been $20 or $25 million of usage. And can you just help me think about that, because I think of-- if we look at the historical and I think about the seasonality of the business, with fourth quarter being strong, I would expect that, from a working capital perspective, it would be a source this quarter.

No. Historically, Q1 is not a source of this business, and the major reason for that is we have a lot of annual rebate programs with customers which get paid out in the first quarter. So that's the big change in working capital that you see from Q4 to Q1 in this industry.

It was a source last year, though.

That was somewhat unusual because we were correcting a problem that we had with receivables in part of the business. We also had very low management incentive payouts in the prior year compared to this year, just to add to why last year was a little bit unusual. If you go back and look at-- and even the preceding four years, you'll find it was a use.

I see. Okay. Thanks.

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

Thank you, everyone, for your questions. We appreciate it, and we hopefully have demonstrated over the course of the call that we continue to believe we have a very bright future at ACCO Brands. In my view, we are continuing to do what we said we would. I think we're moving the business ahead to a significantly better position. So thank you for your participation.