ACCO Brands Corp (ACCO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to ACCO Brands third quarter 2007 earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's presentation, Ms Jennifer Rice. Please proceed, ma'am.

Good morning, everyone and welcome to our third quarter conference call. On the call today are David Campbell, Chairman and Chief Executive Officer of ACCO Brands Corporation and Neal Fenwick, Executive Vice President and Chief Financial Officer. Before we begin, I want to let you know that we have posted a set of slides to the Investor Relations section of ACCOBrands.com this morning.

These slides give a lot of detailed information to supplement this call. Our discussion this morning will refer to our results on an adjusted basis excluding restructuring and nonrecurring items. A reconciliation of these results to GAAP can be found in this morning's press release. 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. Following our prepared remarks, we will hold a Q&A session out of courtesy to others, we ask that you please limit yourselves to one question. Now, I'll turn the call over to David Campbell. Mr. Campbell?

Thank you, Jennifer. And good morning, everyone. In our third quarter July and August started out well. With the continuation of a strong second quarter performance. But September sales proved to be slower than we expected for our sales and across the industry. Our subsequent analysis tells us the underlying markets softened in both North America and Europe during the third quarter. Based on our own analysis and multiple conversations with customers as well as comments from industry analysts, there is a clear consensus that office product sales in September were down essentially for everyone.

We see this downturn as part of a broader consumer trend which appears to be particularly affecting the retail and small business sectors. While we see ourselves as well-positioned, ACCO Brands is not immune to the economic forces pressuring American and European businesses. Nevertheless, we are holding firm to the fundamentals of our business strategy, while we make near-term adjustments are necessary to adapt to a changing economic environment. Despite lower sales volume, adjusted operating margins improved 130 basis points in the quarter, demonstrating the continued progress in our merger integration. Our 36-month program is unplanned as strengthening our business overall. We're looking to accelerate wherever possible selected integration activities, bringing their benefits to the bottom line sooner as a partial offset to any potential future top-line softness. We're also re-examining our 2008 budgets and delaying previously-planned operational spends in light of the current realities. These spending delays will involve deferring some long-term go to market investments particularly in the area of sales force development and marketing spend. In short, while we're hoping for the best, we are taking actions and preparing for an ambiguous sales environment. Meanwhile, we are positioning ourselves terrifically well for our future growth.

Our merger integration activities are moving at a fast pace. Since our last update, we have successfully transitioned our distribution operations in France and Spain into our new central European distribution facility in Borne, Holland. This sets the stage for the next integration project, the consolidation of our term and distribution which will take place in 2008. As previously discussed, the changes we are making in Europe have required us to build, duplicate infrastructure in our European sales and marketing organization. During the fourth quarter, we will begin to eliminate the original country-based sales and management structures, leaving only our new Pan European structure. We will also close two additional sites in the U.K. One manufacturing facility and one in the administrative office. In Mexico, one of our two Maquiladora operations closed in the third quarter and the other will be shut in the first quarter of 2008. Finally, we're looking forward to the grand opening of our Booneville, Mississippi distribution center in January of 2008 on schedule and on budget. While in the quarter, our integration continues to go well. We did incur some costs related to the transition of two plants into Booneville. These transition costs suppressed our gross margin improvement for the quarter and hence our synergy savings by approximately $3 million. I believe it is important to note that in such a complex integration, it is not unusual to encounter a few speed bumps. However, I can assure you that our synergy targets for 2008 are comfortably intact. To date, we have closed our consolidated 24 facilities in North America and Europe and we will have eliminated more than 1500 full-time positions by the end of 2008, we believe 39 facilities will be closed and total employment through severance and attrition will be down by approximately 2500 full-time equivalents. As always, our investor site, ACCOBrands.com, provides quarterly detailed information on the progression of the integration accomplishments, such as the (inaudible) process early in 2006.

On the new product front, we have been very active since our last call. For example, our North American visual communications business has launched a completely revamped product line under the Quartet brand and early customer acceptance is very encouraging. This is a business within our office product segment where, in addition to our planned, low margin exits, we have lost $15 million of future volume to a combination of competitors and to private label. We believe that these new products will allow us to reverse this trend. The new line, comprised as products targeted for home office use as well as professional and commercial installations. One of these ranges includes presentation boards that are made 100% of recycled materials, appealing to the growing consumer demand for green products. We're pleased to report that these boards have already been placed in a major North American retail chain. We have also introduced white boards that made capturing and transferring digital information and images easier than ever. Again, early customer feedback has been very positive. At Kensington, we have rolled out our (Slimblade Lifestyle Collection) of (inaudible) devices that are especially appealing to the mobile professional.

This product line includes mice, keyboards and other accessories that can be used in all settings that compromise a full mobile experience. Slimblade's mice, feature the first mobile track ball that can be used virtually anywhere and do not require mouse pad. Our document finishing group continues to ramp up new product development. We expect to announce exciting new products for this business segment as well. We have recently recruited a talented Senior Executive to head up the important product development effort. We are also reinforcing our new product development initiatives with the reconfiguration of our sales organization, better aligned with customers and customer channels. We will be discussing these changes in greater detail as they are announced in (inaudible) in the fourth quarter. While we have experienced some market share erosion, particularly in our office products and document finishing segments, this is not an unexpected development. The former GPC businesses have not been invested in and there're a new product pipeline for quite some time. Revitalizing new product development and go to market activities in these businesses, has been a high priority for us since we began the integration process early in 2006. And we believe the benefits of our efforts will become much more evident in 2008.

Let me conclude with comments about our commercial laminating solutions business which continues to experience the market place challenges that began in the first quarter. As we have discussed in previous calls, a low-cost Asian competitor has been selling high-speed laminating film at prices below our cost, simply put, our high U.S. and European manufacturing operations just aren't competitive. So far, we have elected to hold on to leading market share positions, while we evaluate alternatives. The management team of this business with some outside support, has devoted a great deal of time and effort to reviewing and understanding the situation. We believe we have a good handle on all of the strategic options. And we have taken the first important steps to make this business profitable again, for the long-term. We have announced the closure of half of our Netherlands based high-speed film manufacturing operations to remove excess capacity. In addition, we're also closing a manufacturing site in Madison, Wisconsin.

And wherever possible, are increasingly outsourcing to Asian vendors. While neither of these closures will impact 2007 results, they will significantly improve the outlook for this business in 2008. We're also evaluating other cost reduction steps that we can take to make this a more appealing business. We have the largest global market share in commercial laminating. We have a portfolio of value-added products, machines and services, that no competitor can match. For these reasons, we believe this is still a very attractive business, albeit, one with the manufacturing cost issue. Despite these efforts, we continue to thoroughly explore a wide range of strategic options for commercial laminating solutions and we will be providing an update of our plans very shortly now. And with that, I will turn the call over to Neal for a more detailed analysis of the quarter's results. Neal?

Thank you, David. While our top line performance was disappointing, we grew adjusted operating income in three of our most important businesses. Price increases, synergies, favorable mix and reduced SG&A drove the bottom line improvement. Reported and adjusted sales (inaudible) 1%, we had a 3% benefit from currency translation and a 2% benefit from price increases. But these did not make up for a 3% volume decline in addition to the 3% impact of extra business. As we noted last quarter, we're now realizing the full benefit of our January price increase. The previous price increase implemented in July 2006 was less than the third quarter of 2007. We are beginning to feel more pressure from rising raw material costs driven by major commodity items such as oil, metals, plastic and ocean freight rates as well as inflationary pressure from China.

Therefore, we have already notified customers of a further price increase effective in January of 2008. Adjusted gross margin as a percentage of sales was up 10 basis points. However, we reclassified 90 basis points after sales service costs to gross margin from SG&A in the quarter. Adjusting for this comparison issue, real gross margin improvement was 100 basis points. Improvement was driven by integration synergies, price increases and a favorable product mix. However, our improvement was tempered by 90 basis points of increased distribution-related costs, 60 basis points of supply chain start-up variances both of which reduced synergy savings. Increased raw material costs were also a factor at 40 basis points and obsolete inventory charges associated with new product roll-outs supply chain integration, were 20 basis points. The start-up variances and obsolete inventory charges are short-term transition issues. Adjusted SG&A margin improved by 130 basis points helped by the 90 basis points from the noted reclassification. Underlying improvements is 40 basis points. Net synergy savings reduced SG&A by 50 basis points and lower equity incentive compensation accruals accounted for approximately 40 basis points in the year-over-year improvement with adverse volume cost leverage offsetting 50 basis points of the improvement. In light of the economic headwinds we're facing, we will further scrutinize our SG&A levels and are reducing all of our spending plans for the remainder of this year and into 2008 to ensure the SG&A ratios remain appropriate to the environments flat to declining revenue. Adjusted operating income in the quarter was $45 million and margin was 9.1%, a 130 basis point improvement. This was accomplished despite the sales downturn. Adjusted earnings per share for the quarter were up 12% to $0.38 per share. The adjusted income tax rate for the quarter was 32.6%. We continue to expect the tax rate for the year to be about 31% and cash taxes for the year are estimated to be about $24 million. Turning to one-time charges, during the quarter, we expensed restructuring charges were $11.4 million and associated nonrecurring charges of $7.6 million.

Finally, looking at some balance sheet items. Our inventory has increased with the largest factor being an increase in inventory values at $15 million from foreign exchange. We have built extra inventory to ensure a smooth transition for our customers as we change our sourcing and distribution models. Transition related inventory amounted to approximately $10 million. Our debt level decreased slightly at the end of the quarter. We expect to reduce debt during our strongest cash flow generating fourth quarter by roughly $50 million. This will yield a cumulative annual reduction of roughly $35 million. Excluding foreign exchange. We continue to expect our debt to EBITDA ratio to improve in 2007 and 2008 as we simultaneously improve EBITDA and continue to reduce debt. We have made great progress improving our return on invested capital as we work to integrate ACCO and GVC. Return on invested capitals, calculated free charges interest in tax has increased over 400 basis points to 12.3% since December of 2005.

Now, I will briefly discuss the performance of each of our four business segments. Sales for office products were down 3% with business exits of $15 million accounting for the bulk of the decline. Underlying volumes declined 4% with share loss and slower underlying demand, each representing about one half of the decline. It was clear from our subsequent analysis that our sell in to customers in July and August was ahead of the consumer pull through, therefore leading to a large inventory adjustment in the month of September. Much larger than we had had been anticipating based on the previously-reported shift in our customer (inaudible) patent, within the first two quarters. Despite the volume decline and 120 basis points of integration related start-up items that were not charged to restructuring and 60 basis points of obsolete inventory charges, adjusted operating margins still expanded 100 basis points. The improvement was due to price increases, lower product costs resulting from outsourcing and manufacturing as well as favorable mix. In document finishing, sales increased 2%. However, adjusting for currency and price increases underlying volumes declined 3%. It has climbed with the results of lower sales in the indirect channel with about 0.6 coming from Europe, where we've lost capital placement to competitors and private label and 0.3 coming from lower demand. Nevertheless, operating income margins expanded a strong 210 basis points, thanks to price increases as well as lower product costs resulting from outsourcing manufacturing. We reclassified certain expenses relating to after sales service from SG&A to cost of goods.

So, the company as a whole has had a 90 basis point impact on gross margin and SG&A respectively. Computer product sales declined 3% for the quarter. Adjusting for currency and business exits, they were down 5%. However, U.S. sales declined 14%. The volume decline was disappointing. It was the result of the continuation of the distribution channel shift as well as store closures by a large customer. We have annualized this event by the fourth quarter. We have made good progress adjusting the long-term market positioning of this business in the U.S. With Kensington now having its highest penetration at Best Buy, Circuit City, CDW, Amazon and HP. However, while we're pleased with the progress, it is taking time. Non-U.S. volume excluding foreign exchange was up 4%, however the rate of increase was less than previous quarters due to a tough comparison in the year ago quarter where we had a large sell in -- of additional product placements in Europe. We believe Q4 will look more robust from a sales perspective. However, we anticipate 2008 growth rates to be in the high single digit range. This is lower than our double digit long-term growth objective. Computer products adjusted operating income margins increased 140 basis points because of a favorable product mix and expense management. Commercial laminating solutions group sales increased 1% on a constant currency basis. Favorable volume benefited from strength in machine sales and an easier comparison with last year's third quarter. However, adjusted operating income and margins were still down because of low cost import competition which continued to impact pricing and caused an unfavorable sales mix. For the remainder of the year, we now believe the commercial lamination solutions will contribute about $3 to $4 million of adjusted operating income to the bottom line for 2007 versus our previous estimate of $6 million.

Turning to our outlook, at the end of October, we completed the divestiture of the Maco Label business which was about $15 million in sales. In addition, some of the business exit timing has shifted from 2007 into 2008 as customers have been slower to transition than we had planned. Therefore, we now estimate exits of only $63 million for 2007. $52 million of which was realized through the third quarter. In 2008, we're expecting the remaining $22 million impact with $11 million related to Maco. Turning to guidance, last month when we gauged the impact of September results on our third quarter performance, we revised our full-year guidance. As part of that revised guidance, we now expect 2007 sales volumes to be down low single digits as a percentage of prior year sales. We also expected adjusted supplemental annual EBITDA to be in the range of $215 to $225 million down from the previously expected $230 to $240 million. This still compares favorably to the $197 million in 2006. When we release our fourth quarter and full-year earnings report in February, I'll provide further update on our 2008 guidance. With that, I'll turn the call over to the operator so that we can respond to any questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Questions will be taken in the order they're received. (OPERATOR INSTRUCTIONS) First question comes from the line of Seth Basham from Credit Suisse. Please proceed, sir.

Good morning.

Good morning, Seth. How are you?

Good, thank you. A couple of questions. First from a bigger picture perspective, could you give me your opinion on what you think is going on with end demand in this segment? It appears that demand is much weaker than the economy would suggest. I'm wondering if you think there's any structural change going on for the demand for office supplies?

I really don't think there's any structural change, Seth. I think from our conversations -- and we've had many conversations now with customers over the period, many conversations with industry analysts, both in Europe and North America. Our sense is that there really is a kind of an ambiguous environment right now for the consumer and I think that absolutely affects the small businessman, the smaller business segment because I think the two applaud each other.

I think there's just a softness and a concern. I think we've seen it across many businesses and across a lot of retail activity. So, I don't think the fundamentals have is changed. If you take a look historically at the macro indicators of white collar employment, they tend to be very stable both in North America and in Europe. So, I think that -- you know, I think we've got -- I just think we have an ambiguous economic time right now.

Would you expect some of the sluggishness to spread to the larger customer segments?

You know, I'm not an economist. I can report and comment on our business. I don't think we have seen that or believe we have seen that so much, so, I don't think we're seeing that as a trend. You know, as goes the economy, so goes all players in the economy, I guess. So, I don't really think at this time.

Got you.. And just one final question before I turn it over. What are you guys going to do to sort of protect market share? You talked about losing listings in certain places. Is that planned? Do you expect sales to continue to be pulled away from you because of that or are you going to try to protect some of that share?

I think certainly we will try to protect the share. I don't think this is a quarter -- I don't think you can answer this in the context of the quarter. I think that what you really have to do is take a giant step back. Just to take a look at what we are really trying to accomplish with our business. So, fundamentally, we brought two businesses together that over a long period of time, have not had significant investment in their product development portfolio and their product development line. I think with a we're doing is sort of putting our house in order initially, shedding a lot of commodity areas. Really trying to hire in people to focus on new product development.

Significantly increasing prices, catching up as we did last January. Catching up on our prices. There is no question as we do that, there will be some shakeout and some of our customers saying yes, I understand this. This is the new, kind of, reality. Others saying gee, I would like to test the waters. I would like to go talk with competitors or private brand. That's a process that takes some period of time to shake out. And so I think that -- I think we feel that it is shaking out. I think we feel that we're sort of just going through the implications of an integration.

Thank you, David.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed.

Good morning.

Good morning, Bill.

Good morning, Bill.

Can you maybe talk a little bit more about -- you talked about the synergy plan for '08. Are you still comfortable with possibly a lower revenue rate of reaching the kind of margin goals by the end of '08 and then into '09 or are you just right now focusing on synergies?

Well, it's very hard to really judge at the moment where the economic, kind of, level of the business is going to settle out. How much is due to the economy and how much is due to things that we can influence ourselves through launching new products, et cetera. So, we plan to talk about where we think 2008 is going to land in the February conference call. So, of the synergies which are under our control, we have a very good view of and we are very certain that we're going to deliver the synergies that we anticipate in 2008.

I think I would just add to that, Bill, there are some things that when you run a business are clearly within managements control. Some things that are not so much within management control. I think what Neal is speaking to is those things which we believe are in our control, I think we feel good about it. Those things that are more outside, like a bit of a soft economy, I think there are some things we can do. We can certainly, as I talked about in my comments, readjust our spend and make sure that we focus on the short-term and promotional activities and that kind of thing to work with our customers to jointly drive volumes. We certainly will do that. And that we're -- you know, running a business, you are constantly faced with the issues of deferring the long-term against the short term. Clearly, we're going to have a focus and an emphasis here on the short term.

And I guess, just as a follow-up, can you talk about your forecasting and budgeting systems. It seems that this quarter caught you a little bit by surprise at the end of the quarter, the computer products business continues to kind of surprise on the downside. I mean do you feel comfortable with your ability to kind of forecast right now on a quarterly basis or even on an annual basis or what do you need to do to change that?

First of all I would say, this is a very difficult industry to forecast within. We have embedded supply chain people with our customers to try and improve that process. That's something we've had in place all year but where you're seeing changing ordering patent against prior periods and you're seeing customers telling you one thing and doing another is very difficult for us to actually plan our business. And so what we have to do is learn how to react quicker to it. And that's very much what we're trying to do. But, it does make forecasting very difficult.

In addition to that, we still have legacy systems from an IT point of view throughout Europe and in commercial parts of the former GBC business which make visibility difficult at the same time. And so I think there are several things going on here. There are customers who are adjusting their own supply chain which is different to the merchants who are communicating what they're going to be buying within our customers. Which causes different effects. I think that we naturally saw a -- an improvement in the business in the second quarter, it continued through July and August. We quite reasonably expected that to continue through September. I think that a -- what you see when you look back with the benefit of hindsight is different to what you were able to see at the time. And with the benefit of hindsight, what we see is the back to school occurred later and our customers were pulling forward their demand effectively in July and August, ahead of end consumer and then made a big adjustment to September.

They made the adjustment right at the end of September. And so, you know, even looking at the first couple of weeks of September, September didn't look like it was going to be nearly as bad as it turned out to be. So, forecasting very difficult. We have a very short period of order dispatch in our business. We don't have a big order book ever. And, therefore, I think unfortunately, in our business, the long-term tends to come back to the need and therefore in the long-term forecasting is much easier than it is the short-term.

Bill, if I can just respond a little bit in a specific, tangible comment. We ask our top six customers for a forecast and a plan for the balance of the year into the first quarter. We then break that up into weekly buckets. We then review those weekly buckets daily with our customers. That is just a huge amount of contact and interface with our customers. And as Neal said, just to reinforce now, we actually have embedded in our customers people who are working side by side, shoulder to shoulder with the people who are actually placing these orders. So, I just -- I just care that folks understand and that you understand, I don't think it's an absence of ability or time or effort that is put into this. I think it is truly the nature of the industry we're in.

Ok, thanks.

thank you very much. Ladies and gentlemen, your next question comes from the line of Reza Vahabzadeh of Lehman Brothers. Please proceed.

Good morning.

Good morning.

Good morning, Reza.

Just on the cost front, Neal, you touched on that. Which are the costs that are giving you the greatest pressure as we look forward and you also touched on the China issue. Can you elaborate on that, please?

Yes. Again, I tried to articulate this to people (inaudible). The raw material increases that we're seeing comes from -- as rising costs at the moment, are really historic events that are in line with what we had expected in terms of the pricing we anticipated for this year. So, for 2007, while I'm indicating future increases above where I would be expecting, that's something we'll pick up and recover in a 2008 issue. The causes of that rising though are effectively the standard things that everybody would understand. Energy costs going up significantly.

There is a shortage of ocean freight capacity coming out of China which has driven up ocean freight rates particularly to Europe where, again, maybe you we don't perhaps realize this, but, Europe became a bigger customer for China than the United States at the end of last year and that's causing freight rates going to Europe, particularly, to go up. And within China, what you are seeing is all the way down the coastal area of China which is a more developed area, we've seen significant labor inflation, coupled with a reduction of what used to be what I'll call start-up incentives that were given through Chinese VAT. Those -- elimination of those start-up incentives plus the significant labor inflation in that area is starting to cause an inflationary spiral coming out of China which you can then couple with the flotation of the (inaudible) with the U.S. dollar. So, my biggest concern from a price pressure point of view right now, is China followed by oil and its trickle down effect to all the other commodities and energy.

Ok. And when you look kind of into the fourth quarter and first quarter, do you think that the cost pressures will be you know, greater than the last couple of quarters? Or are we about the same, just different issues?

I think that they will probably continue to grow through 2008 would be my personal belief. And so we are already in the process of putting a January price increase into our business to offset what we currently are believing is coming through in the first half of the year. We're in the process of examining whether that's going to be enough given what we're now seeing as enhancing cost pressure.

Reza, I think it is a great sensitivity. I think this is an area that could change quickly and we're prudent to just monitor, monitor, monitor it as we are.

Got it. And then do you have an early read just a housekeeping item for Cap Ex for this year and next year?

Yeah. Cap Ex, again, at the moment I haven't changed my view on it. We targeted hitting $65 million of Cap Ex this year with $50 million next year. Given that one of the biggest projects we have underway is the Booneville distribution center and although we believe it is still on plan and budget to finish so that the majority of that expense should go through in December as you would probably understand with big building contracts, whether the builder thinks the building is finished and we think it's finished (inaudible) can be different things. So, you can see a flop over of a few million from this year to Q1 but the total spend will be the same.

Got it. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Bill Schmitz of Deutsche Bank. Please proceed.

Hi, good morning, guys.

Good morning, Bill.

Good morning, Bill.

Hey, looking at the operating margin target of 11% leaving 2008, can you quantify what kind of volume growth you need to get to those numbers?

That's obviously a pertinent question. We had anticipated, you know, low single digit growth in our refute into 2008. As I mentioned earlier, we're going to get a view of where we think volumes are going to be before reviewing where we think that's going to be in 2008. We'll talk about that in February in the year-end conference call.

Ok. I noticed in the press release, there was no mention of the longer term margin target so is that sort of under review right now?

That's a natural product, I think of seeing a lot of volatility in the market place and wanting to get a good read on where we think it is settling so we don't issue a false view of next year and we give you the best.

Got you. Then just on the private label impact, can you just talk about which categories it was most pronounced into what product lines? Because, I know you said $15 million of sales or something, were lost to private label and competitors.

Yes, the interesting thing actually is how much we've lost actually to branded product as opposed to private labels. And if you kind of unthink the two things, it is really driven primarily by the form of GBC overlap with ACCO. And, it's not really a surprise in many ways because GBC was a business that had not invested in product development in the way we would have liked, so, in the document finishing area or in the visual communication area, what effectively has happened is we've raised prices to recover many years of raw material inflation in that area. And so people are trying other products and other suppliers. They've increased their private label penetration as well as trying other brands (inaudible). So, we think as we bring to bear our new products that we have a good opportunity to win that back. And that's obviously our belief and we have to prove it in the market place.

But in terms of impact on the current year, you know, the impact on our current year, sales trend is probably, you know, half economic and half loss of position. That loss of position will actually, in the short-term, accelerate a little bit more, particularly in the visual communication area because it is really old decisions that were made when we first raised prices. We've actually just rolled out a new product line in that area, we would anticipate that being successful in gaining some of this back but decisions are always in the rear-view mirror in this industry because of the catalog delivery site of the business which tends to be very slow to move. And therefore, you know, you have the opportunity to win back that business in the middle of next year effectively.

Ok. Yes, because sort of the volume softness, I thought 70% of the business was to business users and not consumers. So -- and that's held up ok. So, just kind of, what's going on there?

I think the point I tried to articulate earlier, a great deal of our volume softness in my opinion is where we have lost share as opposed to the market disappearing. And, I think that that is a good take on the business you're seeing both a combination of the economy slowing down. Some of that is driven by our customer's trimming inventory which means the impact on ours is probably bigger than their end drop in demand. And then part of it is driven by us losing share.

Ok. Then lastly -- sorry go ahead.

Sorry, Bill, I just care that when we say that, that that's well understood in terms of that a year ago, as we put price increases through, and you've got to remember a year ago, we hadn't rolled out some of what our customers are seeing today in terms of the products and the potential that we have -- that we offer. And basically the value proposition we're offering. I think that's better understood today and I think that as people see that, and with the new products, its -- this is a good thing. I think they are -- I think we're getting some enhanced credibility and confidence with our customer base that the model that we've talked about is really coming through.

Okay great. And then just lastly, if I could, and this might be out of left field. Have you ever considered revisiting the going private transaction given where the stock is and your bullishness in 2009, (inaudible) synergies coming forward. It seems like we are going to have to wait awhile to get the benefits of that. So, have you thought about that in anymore detail?

Obviously you're talking about a board level review of what is long-term view of the business and the board, like any competent board, reviews those decisions all the time. In the light of what they feel the correct view of the business is. So, what I would say is that we believe that our current public status is the correct status for the business.

Ok, great. Thanks so much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Arnie Ursaner of CJS securities. Please proceed.

Hi, good morning. First my question for Neal is a clarification. In your guidance or business outlook, you mentioned $63 million of planned exits from non-strategic business but then in your prepared remarks, I think you mentioned $63 brought it down to $52. As you shifted some business out into '08. Can you just clarify that please?

The $53 was for the first nine months of '07 and $63 is for the full year.

Got it. So, that has not changed?

Right. It is a little bit less than we were expecting due to the transition from some of our customers and then next year is 22 which includes the Maco label business.

Ok. My next question is -- you mentioned in your prepared remarks you're looking to accelerate select integration activities and bring the benefits to the bottom line sooner. Can you give us a little feel for some of what they may be please, and the timing?

I think, Arnie, that's something that is a set of conversations in progress. I would say this. I would say that what we are doing is going through a process where we are reviewing where we have confidence that we can bring things forward in a non-disruptive way. I guess I would put it that way. To be honest, I think it is fair to say that we are being and have historically been pretty aggressive. So, I think this is an area that I think we're really already sort of doing about as much as we can but you know, as things progress or as we look as to how we could shift resource to bring things forward, we're just trying to understand what all we could do. So, that's a work in process.

I think I could also say that it -- in the reconfiguration of our sales organization and our marketing spend, I think that we can bring activities for (inaudible) where we refocus our spend less on sales organization and sales structure and more on some of the marketing initiatives now, that we have. That's a principal area.

The other comment I would make on these -- our current performance on what I'll call net synergies is not quite as strong and robust as I would have liked it to have been. Its is part of why our current year is not going to be as strong as we would have originally chosen it to be. The reason being that we're incurring some excess costs which are associated with the (inaudible) we're making. They're really short-term issues that are slowing us down. The major things that drives the long-term savings are all happening actually on schedule or slightly ahead of schedule. So, the long-term picture is very good and very robust. What we have to do is make sure that we keep the short-term picture in line with that and that's really about how difficult the execution we're undertaking really is. We are executing many, many moving parts across many geographies and keeping them all without issues has proven to be more of a challenge than we would have liked.

Question related to Europe if I can. I know you had to shut France and Spain and can you comment perhaps about how clients have -- whether clients have been concerned about your ability to keep supplies up during this transition and also on a go-forward basis, you mentioned you're going to be closing the Maquiladora in Mexico. Can you comment on how you've had to build up inventories to make sure you have ample supplies for your customers, kind of a full-year impact of both of those places?

Yes, so given the initial moves we had made in Europe which we reported in the first quarter is -- had caused some customer challenges. In the announcement we were making with our move in France. Whish is our largest single mainland European market. We certainly wonder -- it's caused a lot of concern by our customers. One of our largest French customers was so concerned, in fact, they wanted to come and examine our whole process of going live which they did and actually then volunteered to be one of the guinea pigs to move first. Which I think (inaudible) and then proved to be a good choice because it meant that they got particular attention in making sure there were no issues. So, we have moved very successfully the French and Spanish business. It's not to say we're not incurring some difficulties of getting it but those difficulties are within the normal type of difficulties you get with this type of exercise. So, really, that is going very well.

In terms of carrying excess inventory, I pointed out that I am carrying about 10 million of excess inventory, actually, the same level we're carrying into Q2 but the flavor of it has completely changed. So, the excess French inventory is actually started to come down during the quarter and the extra inventory we added was actually due to the Mexican Maquiladora closure. We closed in the third quarter one of the Mexican Maquiladora's and made that transition and that actually -- from a closure of the Maquiladora went well, the start-up of all the new process in Booneville has gone less well and that's some of the integration difficults we referenced on this quarter. However, we're getting through those and in the long-term, savings are intact in that project. n the fourth quarter, we will again carry a little excess inventory out of the year and that's just due with the closure of the second Maquiladora down in Mexico which is scheduled for closure in early Q4.

If I can ask one final very quick question, in the last couple quarters have you've seen a dramatic slowdown of your business in the very last month of each quarter followed by a pretty big pickup in activity as soon as the quarter ended and people reordered. Did you see that pattern in October?

Yes, we did. Again, I wouldn't run away with any excitement over that because it seems to be, you know, that oh yeah, you've seen a strong start to the quarter and a slow finish. And so we were actually expecting that in the third quarter. What we didn't expect was the dramatic increase of how slow that got and also the fact that it got mirrored in Europe which was the first time we had seen that. For October, what we've seen is three of our businesses have a good positive start -- office products, computer products and laminating. Document finishing is a little down still. And that's really a continuation of the (inaudible) issues that they've had in Europe.

Thank you very much.

thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Alex Yaggy of Morgan Stanley. Please proceed.

Hi, good morning, everyone.

Good morning, Alex. How are you?

Good. I'm wondering if you all have seen any change from the way your major retail customers are approaching private label.

Yes, we are. I don't think that we can say that it is has affected yet, our P&L or you've seen (inaudible). As we talk about our forward plans in '08, I think that what we are coming to believe is that really our customers are going through sort of a trial and error process of how much store brand or private label they want to bring into their business and how much national brand, our kinds of brands. And I don't think it is a clear path. I think it is sort of a trial and error event and I -- from conversations we've had with a number of our customers, I think that it has been a hot topic and the pendulum has swung and perhaps maybe swung too far. I think that when we talk with customers, they are understanding and seeing that the value proposition we offer, the innovative products and conversations we are having about our new products, category management and sort of the field support that we can offer, all of those things, I think are attractive. The very short supply lines that we have that often times private label -- Asian private label product does not have.

Allows -- means that their return on investment or return on capital employee in our kinds of categories is perhaps hired the opportunity to sell up a consumer. All of the things we've talked with you all about and that we talk with our customers about daily. I think there is a balance. No question there is a place for private brand equally no question there is a place for national brand. It's a question of finding the balance between the two. And I think our sense is very much that customers are beginning to look at that balance in a little more reasonable way.

So, perhaps you might be able to recapture some share from that channel?

Yes. Well, I think so. I think that -- again, excuse me, I would say that that really is going to be, in my opinion, a function of how innovative, creative, just all of the benefits we can add. I don't think it's sort of written in stone on a tablet somewhere that it will be -- what the ratios or proportions would be. I think the better job that we do, the more compelling an offering we have with our ability to supply and do all of the things we're talking about, the more it will tend to -- the pendulum will swing towards national brand. But, I really do believe that it's perhaps been taken too far and that as people -- as people sort of again, see and understand -- as our customers see and understand what we're doing, I do think over the course of '08 and '09 and onto the future, it is the whole premise of what we're doing here.

It is very important for our customers that they can trade the consumer up because that's what actually grows the size of their business. So, they need to decide what the balance is in terms of how and where they make money. And they're in different places. Our customers. So, some of them are still steaming ahead with private labels (inaudible). Others are considering how they make money more scientifically.

And, you know, Alex, I would even say again, I don't follow this that closely, but I believe in some of -- even some of the comments that I've read from various analysts, I think in the industry, I think you're getting that flavor as well. Yes?

Ok. Thank you.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Rick Weinhart of BMO Capital Markets. Please proceed.

Hi, good morning, everyone.

Good morning, Rick.

Good morning, Rick.

First, I want to follow-up on the price increase questions. Can you -- can you tell us -- it sounds like you're ahead of the game this time in terms of your price increase, whereas I think in the past sometimes you were playing a little bit of catch up on your price increases. Has something fundamentally changed or is it just better forecasting on your part that's allowed that this time?

No, it is something fundamentally has changed.

The management!

When we acquired general binding, general binding did not have the same ability to raise prices within its contracts that ACCO had. And we were pinned for a long period of time on prices that (inaudible) no relationship to the cost of producing those products. So, what we have always felt within ACCO was that it was very difficult for us to be clairvoyant and therefore we had to be fluid with what happened with raw materials. Are they going up or going down? And therefore we're now (inaudible) contracts and we are able to respond to market commodity movements. And that's fundamentally what's changed.

Ok. And from an industry perspective, I think for a long time, they just didn't see price increases whether it was commodity driven or other. Are your customers starting to kind of accept the fact that, you know, this is going to be an inflationary business now for at least the near term?

If I could jump in. Yes, I absolutely think so. I think one of the things that I think is -- just a reality is that if you take a look at sort of inflation, the whole inflationary issue, we went through a long period, many years where there was sort of a deflation in these areas and I think there is a fundamental economic shift. I also think it is -- I also think it is a good thing that our customers more and more are dealing globally, are dealing directly with Asian sourcing themselves. They see and understand that. Our customers are intelligent, abled, bright people. They run large organizations and are sophisticated people. They see and understand sort of the macro issues that are going on.

I also think this. I think that the office products manufacturers have perhaps been small, inefficient. I think as we do the kinds of things we're doing with creating the kind of organization, we are squeezing now inefficiencies. If you take a look at the plant closures, the people that are exiting our business, all of that means that we are, today, a much more realistic, viable supplier that has squeezed out a lot of excess costs. Again, I think what we're doing in the business model, we're putting in place is just so appropriate and so in line with where our industry is going.

Ok. Thanks for that. And then switching gears, I think that you had talked about and you mentioned again on this call, getting additional shelf placement with Best Buy. Our store checks seemed to indicate your products are showing up but they've been showing up later than I thought, largely in October. Was there a shift in the schedule or one Best Buy was taking those in or more importantly, when it impacted your quarter?

I would say that two things really have gone on. There has been a bit of contraction in everybody's view about how robust the economy is. That's caused customers in lots of different channels to actually review the timing of when they put things in, et cetera. And yes, our sales in the U.S. in the third quarter were not as robust as we had originally assumed they would be and part of that is due to the timing of when things are going into stores.

Ok. Thanks. And my last question is on your changing in some of the spending I think for '08. It sounds like -- and correct me if I'm wrong, it sounds like you're going to be spending a little bit more on promotional advertising and working with your retailers to move volumes as opposed to maybe longer term branding. Is that correct? And if so, can you just kind of compare, contrast what the spend looks like versus '07?

I don't know that I can so much compare and contrast what the spend will look like in '07. I will say this though that we are very much trying to be proactive in working with our customers to say look -- excuse me. I think price increases are in order and I don't think you've backed away from them. Having said that, I think on the other side of the coin, what you say is these are difficult economic times or we are believing that they're softer economic times.

It is in our best interest as well as our customer's best interest to jointly undertake activities that will collectively generate volume for both parties. So, that's very much the conversations that are going on and those are quite honestly conversations that are currently going on. And sort of plans are trying to be put in place over '08. Some customers are more flexible to that. Some customers are more capable to react to that. But we are even now sort of working through those conversations.

The main thing we're trying to do, Rick is effect the mix change of how we spend our money. So, we're trying to reduce our fixed selling costs and increase our expenditure on product development, marketing, merchandising and promotion. That's really driving both the long-term which will include brand because that's really driven by product development and marketing and the short term which is about merchandising and promotion.

Ok. Got it. Thanks very much.

Thank you very much, sir. And ladies and gentlemen, our last question will come from the line of Corey [Ammend] of Rice Voelker. Please proceed.

Good morning. I had a question regarding guidance for 2007. The midpoint of your guidance implies that adjusted EBITDA for the fourth quarter will be about $78 million versus $67 million in last year's fourth quarter. And also in your commentary, you implied that sales in the fourth quarter will likely be down. I was just wondering, given that your sales will be down and you're EBITDA will be up 15% to 20% over last year, you're expecting an acceleration of the margin improvement in Q4. In view of the headwinds that you outlined, I was wondering if you could comment on the quarter-over-quarter and year-over-year margin improvement that you're expecting?

Your mathematics are in line with mine.

It is.

So, fundamentally, what we're assuming is that the top line in the fourth quarter will be a continuation of what we see coming out of the third quarter effectively. And that in the event that it gets better than that, because people are buying for (rebate) programs, then we'll probably hit the top end of our range. In the event that it gets worse than that, we'll probably hit the bottom end of our range. And that's why we issued a range. But the actual margin expansion is fundamentally driven by two things during this year. It's driven by price increases versus raw materials which fundamentally is not going to change much from fourth quarter versus the third quarter. And it is driven by synergies which we do expect a substantial improvement in the fourth quarter versus the third quarter.

Really driven by two separate things. Number one is if you look at the actual synergies in the third quarter, they were very impacted by short-term issues. We don't expect the short-term issues to completely disappear in the fourth quarter but we expect them to be substantially less. And the second issue is there are some big savings we physically made in the third quarter which show up in the fourth quarter P&L, the change in Europe, to do with the distribution center will have a fourth quarter impact. Had very little in the third quarter. And the Mexico Maquiladora, that we closed in the third quarter will have a much bigger impact in the fourth quarter coupled with product roll-outs which improves the mix in the fourth quarter, for example, in computer products and in visual communications.

Ok. So, it seems that the cost pressures that you guys are confronting, you'll be able to overcome that in the fourth quarter it sounds like. In (inaudible) this guidance.

I believe our fourth quarter is going to be robust. And as you continue to see 2008, you'll see that what we're able to do in terms of improving margin won't be the overwhelming sting that will define 2008.

Ok.

There could be some volume headwinds. But they're small compared in my view to the synergy (inaudible).

Great. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, I would like to turn the call back over to our speakers for closing comments they may have.

I just want to say thank you very much to all of you for joining us and we appreciate your ongoing interest. Thank you and good day.

Thank you very much and thank you ladies and gentleman for your participation in today's conference call. This concludes your presentation for today, and you may now disconnect, have a good day.