ACCO Brands Corp (ACCO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter, 2008, ACCO Brands earnings conference call. My name is Katina and I'll be the coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the presentation over to the host for today's call, Ms. Jennifer Rice, Vice President of Investor Relations, please proceed.

Good morning, everyone, and welcome to the our first quarter, 2008, conference call. On the call today are David Campbell, Chairman and Chief Executive Officer of ACCO Brands, and Neal Fenwick, Executive Vice President and Chief Financial Officer. We have posted a set of slides to accompany this call to the investor relation section of ACCOBrands.com. These slides give a lot of detailed information to supplement the call.

Our discussion this morning will refer to our results on an adjusted basis, excluding restructuring and nonrecurring items. Our 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'll hold a Q&A. Out of courtesy to others, we ask that you please limit yourself to one question. Now, I'll turn the call over to Mr. Campbell.

Thank you, Jennifer. And good morning, everyone. It should come as no surprise the quarter's top line growth is very challenge. Across our industry U.S. and U.K. sales trends have been down, reflecting weak demand and escalating customer inventory reductions. First quarter sales declined 5%. Pricing was positive adding two-points, but volume declined 10%. Our synergy savings continued to grow during this challenging period, as a result, our adjusted operating income declined only 2% and our adjusted margin improved by 10 basis points EBITDA and earnings per share were down as a result of lower sales volume making our fixed cost a further drag on earnings. Our cash flow is lowest during the first quarter due to the timing of customer rebates and employee incentive payments. The first quarter is, also, seasonally our slowest period for sales.

Having said that, free cash flow will ramp up significantly later in the year, we anticipate generating $90 million to $110 million of free cash flow for the full year, which will be available for debt reduction. Slide four recaps some the quarter's highlights. In addition to holding our operate margins we have now completed all of our major Office Products Integration products. Synergy savings will continue to flow to the bottom line throughout 2008. In April, we hosted the grand opening ceremonies of Booneville, Mississippi, distribution and manufacturing center. Our U.S. and European distribution centers are now fully operational and functioning at expected fill-rate levels. We remain on track to deliver an incremental $25 million in synergy-related cost savings in 2008, for a total of $40 million in cumulative synergies. With these integration products behind us, we can now intensify our focus to drive growth.

Late last month, we announced an organizational realignment intended to give an enhanced focus on growth, innovation, and operational effectiveness. Our senior management team is now squarely focused on winning in the marketplace and propelling us to the next phase of growth. The strategic review of our commercial laminating continues. We expect to provide an update as planned mid-year. In the meantime, we have seen the marketplace for high-speed laminating films being to stabilize, while at the same time, we have reduced capacity and passed through price increases as raw material costs continue to rise. On slide five, we have provided a breakdown of our Q1 year-over-year sales changes. We are still cycling through a $7 million impact from the planned $20 million business exits, mainly the sale of our MACO label business in 2007. We're also working through the $45 million product placement loss in 2007, which had a $17 million impact on the quarter. The first quarter Easter holiday particularly affected Europe and Australia having a $5 million negative impact that we've seen reverse in the second quarter. Once you isolate all of these items, you can see the underlying sales were down $24 million driven by lower demand in the U.S. and U.K. markets. This lower demand was coupled with inventory reductions in the indirect channel in the markets.

These negative demand trends offset the growth that we're seeing in the rest of the world. Notwithstanding the uncertainty regarding near-term economic trends my confidence in the strengths of each businesses remains high. We expect the harshness we're experiencing right now to ease over the next few quarters as customer inventories come to balance and we're able to launch new products that will help in the second half. Slide six speaks to this in greater detail. Today, we're in very uncertain economic times, as a result, we are now expecting demands to remain weak through 2008. However, our year-over-year sales comparisons will become less negative as the year progresses for a variety of reasons. The second quarter growth rate will remain below that of the full year. We'll continue to have the impact of approximately $5 million planned exits and $11 million of lost product placements. We anticipate approximately $10 additional customer inventory reductions and will not yet have the benefit of a new product development introductions. However, our comparisons will be helped by a $5 million impact of Easter, having been a second quarter holiday last year.

Moving into the second half of the year, headwinds should be less. First, our comparisons become easier as we anniversary the U.S. business downturn of July of 2007 and U.K. decline in September. While we'll still have to cycle through $8 million planned exits and $19 million of lost product placements in the second half we do expect to recover about $20 million through new product introductions, mainly in Document Finishing and Computer Products. Furthermore, we expect the customer inventory reductions to be complete, although we do not expect a repeat of the $10 million buy-forward seen last year from our customers in the coming fourth quarter.

Slide seven highlights why I'm confident in our ability to deliver synergies. This chart shows the specific facilities that we have closed or scheduled to close in each given year. Facility closures and the related expenses are the largest single contributor to our synergies. The work done in 2007 and the first quarter of 2008 provides the majority of the flow-through savings anticipated this year, hence our confidence in achieving our targets. When provided full year guidance in February, we anticipated a tough start in 2008. We now foresee the economic downturn impacting the second half as well. However, foreign exchange has provided us an unexpected upside. As a consequence, I'm comfortable affirming our expectations for 2008 as outlined on slide eight.

As originally stated in February, our growth in 2008 will still be bottom-line driven, this is the result of several factors: the amount of uncertainty and consumer and business spending, the completion of $20 million in business exits, the $45 million full-year impact from 2007 share loss, and the timing of new product introductions. Therefore, we're assuming top line will be flat with currency, but down mid-single digit on a constant currency basis. The first half of the year will be the most challenging, with sales at least two-points lower than full-year rate. We anticipate 150 basis points and positive price effect and see the share recovery in the back half of the year with new product launches and customer inventory reductions abating. Operating income is expected to be up low-single digit to low-double digit a wide range reflecting uncertainty.

If consumer demand continues to deteriorate beyond the current expectations we remain confident we can achieve the bottom line increases for the following reasons: we expect to realize $25 million in additional synergies, we have been vigilant in raising prices to match raw material inflation. And we'll continue to implement price increases when necessary and cost justified. We've previously invested in product development and streamlining our operations. We've also put the right structure in place to capitalize on opportunities to gain share. We are working through pulling forward some 2009 synergies, and we're carefully reviewing ongoing headcount and marketing investments in light of anticipated demand levels. With lower tax rates now anticipated, we're expecting earnings per share growth between flat and low double-digit. To sum up, we believe we have a number of factors within our control that will allow to us achieve the full-year guidance.

As I noted earlier, our cash flow will remain strong at $90 million to $110 million for the full year. Our capital expenditure level and cash restructuring expenses will be $45 million to $50 million lower than last year. 2008 is turning out to be a challenging, economic environment. Our key focus is to complete the repositioning of the business through restructuring, new product development, and reduced costs, so that we can gain share and benefit when the economy turns.

I would like to close by stressing that we're pleased with our ability to achieve a bottom-line increase through the strategic initiatives to improve the business, despite this weak economy. We recognize the current industry challenges and are successfully managing through them, while positioning ACCO Brands for the next phase of growth. Now at this point, I'd like to turn the call over to Neal to walk through more of the financial details. Neal?

Thank you, David, and good morning, everyone. As noted on slide nine comparable sales for the quarter were down 8% year-over-year driven by 2007 lost product placements and planned business exits as well as lower consumer demand and related inventory reductions at major customers. Despite this, operating income declined only 2% and margins increased 10 basis points. Adjusted gross margin increased 40 basis points, improvement was driven by by price increases and integration synergies. SG&A margin increased slightly as a result of the lower sales volume. We did see a reduction of $2.8 million in equity incentive accruals related to our performance share plans, go to market expenditure also down $1.3 million for the quarter. Adjusted earnings per share for the quarter was down 8% to $0.11. Our adjusted tax rate for the quarter came in at 26.8%. This was was slightly lower than our now anticipated full-year rate of 30% due largely to the typing of deductions. As expected, we had some one-time charges in the quarter. Pretax restructuring charges were $5.2 million and associated nonrecurring charges were $5.6 million.

Slide 10 shows drivers of margin improvement for the year in more detail. Notably, price less material inflation was a healthy 70 basis points and overall synergy contributions were 120 basis points or $5 million. Moving on to a discussion of our business segments in the quarter, on slide 11, beginning with Office Products. Sales in Office Products channel decreased 8% with underlying volumes down 13%. Previously reported share loss represented 5% and slower end-user demand and related inventory reductions represented 7%. Sales reductions were all in the U.S. and U.K. As a result of lower volume and higher input costs, adjusted operating income decreased 29% and margin contracted 180 basis points. We do anticipate more future inflationary pressures and have a midyear price increase going through for some categories.

Now, turning to Document Finishing, where sales decreased 2%, with underlying volumes down 9%. Once again, sales were down in the U.S. and the U.K. The majority of the decline was in the indirect channel, were previously reported share loss represented 4% with slower demand and reseller's reduced industries adding another 4%. Declines in the indirect was similar to those reported for the Office Products segment. The direct channel was less effected as there was no added channel inventory reduction. Despite the volume decline adjusted operating income increased a strong 24% and margins expanded 120 basis points. Improvement was due to lower product costs resulting from synergy-related outsourced manufacturing together with favorable mix.

Moving on to Computer Products. Sales decreased 3% and volumes declined 8%. As a repeating theme, 5% of the sales decline was from the U.S. and U.K. In addition, the demise of CompUSA was a primary cause of the remaining decline. The U.S. and U.K. weakened demand included related customer inventory reductions and weaker demand included lower consumer demand from the iPod accessory category, that represented about 8% of our 2007 sales. Adjusted operating income increased a strong 17% and margins expanded 270 basis points to 16%. The improvement was due to $800,000 income from the completion of prior period royalty claims, favorable mix, and expense management.

And finally, looking at commercial laminating. Comparable sales declined 1%, with volumes down 2%. While market pricing has become stabilized, volume declined as a result of increased back orders in Europe related to our supply transition to career. Volume is expected to recover in the first quarter with the benefits of both major industry exhibition and shipping the order backlog. Adjusted operating income declined slightly to $500,000 from $800,000. And margins declined from 1.1% to 1.9% principally due to severance costs.

While moving on to Q&A slide 12 provides more detail to help you model future years. We've updated certain modeling assumptions, mainly impacting lower cash taxes and lower effective tax rate, as we now anticipate relief from previously disallowed U.K. holding company interests and have also received a tax refund from prior periods. We expect to have a significant reduction from 2007 levels, from both capital expenditure and cash restructuring needs in 2008, which along with improved operating performance will drive very strong in improving free cash flow, particularly in the second half. We still expect full-year free cash flow to be $90 million to $110 million in 2008. Now, David and I will be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Questions will be taken in the order received. (OPERATOR INSTRUCTIONS) Your first question from the line of Reza Vahabzadeh, representing Lehman Brothers. Please proceed.

Good morning.

Good morning, Reza.

On the cost front, do you have visibility on input cost that might be rising? And can you lock cost and so you can price it according to those lock costs, or is this going to be your best guess kind of pricing increases?

So, this is David, good morning.

Good morning.

Reza, I guess to me this is an excellent area. Lots of change going on. I think that, certainly, we see particularly with our China-based products that we bring in, there's ambiguity as to exactly what the effects will be in terms of our raw material cost increases. We've over the months had a long sense there could be significant increases. What we've done, is we have been fairly progressive in putting through price increases, search in January and mid-year last year. This is an area we're monitoring very closely. We've had people located in China working with our vendors directly. We are putting through price increases mid-year this year, we are still, also, in the process of evaluating some further price increases that we might put through.

So I think it's one of these situations where you got kind of a weak economy. You don't want to be positioning yourself from a price perspective too far above sort of competitive areas or competitors. But on the other hand you want to make sure you recover your cost. I think there's just a real sensitivity. This is something, frankly, in the business, almost excused weekly as we, sort of, review our businesses. So, right on top of it, I think, again, we've talked in earlier conversations about having a natural hedge here of having about three months of inventory and then having an arrangement with customers where we communicate price increases about three months ahead of time. So I think kind of a natural hedge here. I -- we believe that we're well protected.

Got it. I appreciate that. And then, as far as sales of our branded products versus store brands and private label products, have you seen any change in share in the first quarter or at least in recent months, given the fact that we are in a slower economy? Or do you anticipate brands losing more share than in the past to private label?

Yes. Well, again, in difficult economic times, I think one would naturally assume a consumer or a business would really pay attention to their cost of goods and buying supplies. So, I think is it a good sensitivity. I would say that, first of all, we're paying a great deal of attention to the spread between our pricing and private brand pricing. We pay a lot of attention to that, to the consumer. I think it a little bit difficult -- and the nature of the question, Reza, in the last several months to have a sense of that. I'm not sure in our industry we have a quality of POS to give you a precise answer to that. I would say that from what we have seen in our business, that generally hasn't been a problem.

And, again, I think it is the real sensitivity to the whole pricing issue. It really, almost goes back to the first question you asked, raw materials, as we're monitoring very closely raw materials, we're also monitoring the pricing. We don't want the spreads to be too large. Also I think that the raw material price increases that we're seeing, not only affect our cost of goods, but they would affect private label costs of goods. So this is an economic issue that kind of rises all boats. So it's really the spread between the two that we're looking at and keeping that in check rather than the actual relative prices. The relative spread. Yes?

Got it. Thank you, much.

The next question comes from the line of Arnie Ursaner, representing CJS Securities. Please proceed.

Hi. Quick question for Neal, if I can? Neal, I'm looking at the modeling assumption slide. The thing that is glaringly obvious is you're not using free cash flow to either buy back shares or reduce interest expense. So should we assume somewhere in there are acquisition opportunities, or you just can't quantify the benefit in terms of reduced debt?

So Arnie, just to answer the questions, seasonally what you find in our business is that most of our cash flow is generated in the third quarter and the fourth quarter, and that's a tradition you see in our business ordinarily. Particularly cash flow is very strong in Q4 for us. And so what I've built into my model is really the assumption that the cash that we generate happens very much at the end of this year, as opposed to happening ratably through it, given the timing of things. So from the point of view of what happens on why don't we repurchase shares, etc. A lot of our bank covenants prevent us from doing so until a bank calculated EBITDA to debt ratio falls below 2.75, and that would tend not to happen until the beginning of next year or the end of this year, depending on whether we hit the top end or bottom end of the range. And so we have to get throughout banking restrictions that we have, which we should be through as we cross through the end of 2008, before we're in a position to think of repurchasing shares.

Okay. And, my second question is for David, if I can? David, you spent a great deal of time and effort through a rebranding process in Europe and a cost reduction program in Europe. Perhaps you could take a step back and highlight how you've consolidated Europe? What sort of savings you now believe you'll achieve? And additional steps you may need to take to reach those goals?

Sure, Arnie. So, just to recap, then, so folks understand, sort of, some of what's gone on there, there was a major consolidation of multiple distribution centers around Europe, 10, 12, 15 distribution centers, depending upon how you, sort of, define a distribution center. Some were fairly small. We really sort of consolidated the vast bulk of that now into one facility in [Bourne]. That's now is going very well. We've got our fill rates are up to where they expected. We're taking costs as our performance is up to speed now, we're taking costs. We feel very good about some of the benefits of that. I think we believe that when we talk with our large customers, they're feeling good and comfortable. We've gone through that transition as well as an IT transition. We're now beginning to have discussions with those folks about additional business capturing additional volumes. So I think from that perspective we feel very good about it.

Still working through over the course of 2008. Maybe we have the next two quarters to get, sort of, the cost of operations of that facility to a point where we like it. So we see that, sort of, yet the opportunity to improve the, sort of, the cost of operations. We will still do some additional activity in terms of consolidations. There's a German distribution facility we'll further consolidate and I think benefits should will flow through there. Italy, also, an area we'll be improving our operations. I think that we believe that the benefits from a cost perspective flowing through and we now see that the operational benefits, which we think will be much more Pan European allow our business to be Pan European and allow for further product consolidation. Consolidations distribution and consolidating products, are SKUs, are linked. So what you really want to do is you really want to simplify your SKU offering and then that allows you to put it into one central activity across Europe. Yes, because Europe still has some regional tastes.

So, with the introduction now of this distribution center that we have in Bourne that a Pan European distribution center I think we can now accelerate some of the work that we wanted to do with consolidating brands and SKUs. So, we've took an initial traunch and now that we have the distribution center working and work well, we'll see the back half of this year and 2009, yet, further simplification. I would hope and believe that would lead to a sort of a D-investment, sort of a better management of inventories and working capital in Europe. So I think things on that scale are going well. I think we're pleased. The process should continue through 2008 into 2009.

And Arnie, just to add to that, in parallel with the distribution consolidation, we've also moved our sales force in Europe so that it is now run on an European basis. We went through this last time running with a duplicate infrastructure both at a country level and also on the Pan European level. We've been able to eliminate all of that duplicate infrastructure. The result of that, is you saw a strong return to profit ability in Q1 of this year in Europe compared to last year, which was fortunately timed given the downturn that occurred in the United States.

So, just to quantify that for you, Arnie, that's probably something like 85 to 95 headcount reduction of sales folks across Europe.

Okay. Thank you very much.

Your next question comes from the line William Chappell representing SunTrust Robinson. Please proceed.

Good morning.

Good morning, Bill.

Some Computer Products business, just, can you give us a little more color around the continued weakness there? It was a fairly easy comp and, I guess, we were due to destocking last year. I was under the assumption that business would start to grow again. First, are you expecting growth there as we move through the rest of the year? Is the iPod business pretty much done, or is it due to iPods or more due to just competitive enters? How are you looking at the business as we move through the year?

So, a couple of things, Bill. First of all, we CompUSA which has finally rolls out of the end of Q1, still impact during Q1. The second issue is we do expect growth as the year goes ahead. In fact, we would expect that business for the year as a whole to look like it is up midsingle digits, so, it is a business where sometimes the way that orders fall can be different. One of the things that we saw in Q1 last year, which actually made this a difficult comp in Q1, was a significant amounts of load-in for iPod accessories in Europe which were able to play radio signals. And so, you didn't see that same benefit this year in Q1. And fundamentally what you did see was the same effect that you saw across the rest of the business, which was significant amount of inventory destocking in the channel in Q1, together with a slowdown in consumer demand. And so, Q1 for all of our segments, with the exception of the laminating segment, was heavily influenced by destocking in the channels. And so it doesn't give you a good view of what the run rate is for the year in any of the three segments.

I would just, also, add, Neal, if I might that, Bill, we have a new product introduction plan. I think it is pretty aggressive at Kensington this year. In the first quarter of this year did not introduce any new SKUs. In the second quarter, I believe, we have 25 SKUs planned. A similar number in Q3 and I believe about 10 in Q4. These are products we feel good about. We've had early exposure with merchant and buying people at some major customers. It focuses on the input area, input device area and also docking stations. So I think we feel pretty good that we'll be able to introduce some exciting new products in the back half of the year.

Okay. And how much was office -- I mean of CompUSA in terms of impact on the quarter?

From memory it was about $1.5 million.

Okay. And then within Office Products category, were there any products that were stronger or weaker, or was it just in general, whole thing down, kind of the high-single digit range?

Pretty much saw the weakness increase every single product category that we have, it was very uniform from an overall point of view. It was very spasmatic from a customer point of view, some working inventory down in the first quarter; some carrying inventory out of the first quarter.

Bill, just to comment further, I would say that a broad, general statement is that it is the U.S. indirect business, and the U.K. as well, but it's basically the U.S. indirect business to me at the sort of the heart of the issues here. If we take a look at the rest of the business in other channels, or the rest of the business from other parts of the world, we are not seeing what we're seeing in the U.S. The U.S. is really accounting for, like, 85% of all of the negativeness we've seen this quarter.

Okay. And, finally, on the tax rate, I think the new number is 30% for the year, but this quarter about 27%. Is there a catchup next quarter? Or should be flat 30% for the rest of the year and a little bit lower than 30% for the full year basis?

Quarter that will actually look at is Q4, which will bring the average to 30%. So you'll see below 30% the other three quarters. And part of the reason for that is the vagaries now of how you deal with the tax consequences of equity expensing, when the equity is now at a lower level. So I don't want to get into the detail, but that's the issue.

So it should be 27%, 28% until Q4 and then Q4 should be like above 30%? Like 33%.

A little bit above 30%, correct.

Okay. Great, thank you.

The next question comes from the line of Seth Basham representing Credit Suisse. Please proceed.

Good morning.

Good morning, Seth.

I would like to focus on the sales to date and the outlook for 2008. Just following on that last comment you made, David, with the U.S. indirect business and office supply being the weakest, you said it was 85% of the decline we saw there. So, what is that in numbers, that's down on comparable basis more than double digits?

So, if you look at where we are versus the rest of the world, what you see is that from a U.S. point of view, our various competitors have all come out. We've had new reporting down being 8% to 9%, 3M down 9%, Avery down about 12%. If you look at our U.S. and U.K. business, we're down about 10%. So we're in the same position as everybody else. And that includes the impact of inventory destocking as well as the market. If you ask me to pass it between what I think the market is down and the inventory is, I think the market is down 6% on ongoing basis and inventory accounts for about 4% of that. And again, that corresponds to what the customers said, if you look at Depot and Max, for example, what you see is that they're talking about their retail business being down on the same store basis by about 9% and they're talking about their contract business being down about 5%. if you take our weighted average of the two, which would be about 75% in contract and about 25% in retail, that would give you a weighted average of minus 6%. So, it correlates to what I would correspond the market decline as well.

Great. Then, in April, you talked about the Easter shift coming back and helping $5 million. But, excluding that, particularly in the U.S. business, have you seen the sales trends you just talked about the first quarter persist or any sign of a change?

So Easter has no impact in my opinion on the U.S. market, U.S./Australian market and when the people take spring break but they don't get a February spring break like you do in the U.S. And so, that impact doesn't impact the U.S. And so if you look at the U.S. business, we've pretty much seen a continuation in April what we saw through March, particularly with inventory destocking at customers who have a different quarterly close to the March close.

The one thing I will say, Seth, and you would know this as well as we, if you take a look at the job losses that occurred in the first quarter, there were, 75,000 a month, something like that. And obviously, in April we saw a reduction of that to about 25,000. So, from a macro indicator perspective, that's a positive sign. Still down, but sort of a positive sign indicating not so much. Again, the point I'm trying to make here, is I think the real market we're watching is principally the U.S. indirect market and to a smaller degree the U.K.

Right. And that brings to my last question regarding the balance of the year. You have a forecast which expects improvement in the back half, based on either comparisons and some of the other factors impacted you last back half. But as we think about the outlook here for 2008, and now is there a chance we're still on the verge of seeing much greater job losses, and thinking about, historically, what's happened we've seen more six quarters of negative comps out of most retailers in this space in the last recession.

Two comments I'll give you, Seth. The first one is the channel inventory destocking can't go on indefinitely. And, so, we saw about $10 million of that impactors in that -- $10 million or $11 million impact us in Q1 and expect $9 million or $10 million to impact us in Q2, as we see the level of inventory come right for the lower levels of demand in the channel. Things can always get worse. But if you look at the run rate or -- of what (inaudible), as I do track, tends to get revised retroactively. But the data that currently showing is that the rate of decline during April is actually slowed down, which I find slightly surprising, but that's what the data actually shows. So, I don't know where the rest of the economy is going. We've changed our opinion, which was originally we had thought the second half would see an economic revival, we are now forecasting the economy will remain the the depressed levels throughout the rest of the year. And our forecast has been adjusted accordingly.

Seth, that's an issue we talked about as we talked about as we thought through position on the guidance. it is broad. We understand it is broad. It's broader than we'd like to be providing. But with the economic uncertainties I don't know how we do anything better and provide something this meaningful.

I agree. Thank you very much.

Your next question comes from the line of Derek Leckow representing Barrington Research. Please proceed.

Thank you. Good morning.

Good morning, Derek.

Just wanted to touch on the consolidation among the customers, the weakness we've seen with CompUSA, for example. How would you characterize your exposure to any additional consolidation or market share shift going on among your customers?

Big potentially consolidation is obviously the publicly announced, hostile take-over bid of Corporate Express by Staples. And that fundamentally has two issues that we have to be aware of. The first one is that there would be a best terms price harmonization impact on us, which is very similar to the effects we saw where, for example, (inaudible) or Boise and Max came together. And that would be around a $5 million impact on us. And then typically what happens the year after was what you tend to see is back in consolidation and, therefore, further round of industry evaporation throughout the channel. However what we also would anticipate is gaining better replacement as a result of such a combination. And so by the second year, we would actually be hoping to take share out of the combined entity as well. The second potential acquisition out there is in the Computer Products channel and relates to Circuit City, and, obviously in that context we view that as a potential positive outcome for us from the point of view of it would put in place a secure future for Circuit City.

I would just add to that, that as we talk about these possible events, both Circuit City and at Corporate Express, I don't think that we see anything dramatic and rapid happening. We believe it will be a transition. We believe, fundamentally, the consumer demand continues, it just shifts channels approximately while as Neal indicated it can have a short-term effect, I think that's relatively minor and it really speaks to the further consolidation of the business.

Okay. If I could just ask one follow-up here. On the new products front, you said that $20 million of expected new product revenue. And can you discuss how that's split between direct and indirect? And what are the key new products within the group?

Wow. That's a big question.

Sorry.

I can certainly try to speak to some of our new product development, if you like, Derek, and chat about that.

Well, also the split between direct and indirect. It's kind of important given the fact that we've got different dynamics in each category.

Yes. Yes. I hear you, good, and I I understand. We're actually having a little bit of a problem hearing questions here. It is very soft. Our speaker system here needs to -- needs a tune, but I'll speak to that. I think in the direct area, the part of the business that I think is affected there is sort of, mainly, our DFG business. I think there's really a number of projects going on there that are new product development projects that we're going to be introducing late in 2008 and into 2009. The first thing I would talk about is that a jam-free shredder that we introduced in the first half of 2008. We're pleased with the progress there. We believe that will -- the volumes will ramp up. That is a product that is largely sold through the direct channel. So, again, feel good about introducing products there.

There's a new bindery proceed that we really aren't speaking of yet and there's some proprietary elements we need to work out, so we're not being too vocal about it, we believe it will significantly improve our binding system, our ProClick binding system, that we have. We believe that it is a terrific improvement to the machine that can provide high speed service. Again, that's a focus for our direct sales organization. I would, also, mention before I go on, in Document Finishing, we have dramatically increased now -- are dramatically increasing the number of folk in the direct sales force in Europe. By the end of the year, we expect to employ about 30 people. That will about triple the number of people that we have in our direct sales organization. Right now, we are looking to bring in a head of direct sales. Actually a head of total sales for the DFG Business in Europe. So not only are we bringing products on stream that we think will not only sell in North America and Europe through the direct channel, but we're also dramatically enhancing the size of our direct sales force in Europe. This is on top of a call center that we've put in place now over 2008 which is a direct sale organization. So we believe that's good.

A third product area we're focusing on in DFG laminating area. We are focusing on the education market, that's a product that will be brought in this fall. And it will provide automatic feed, trim, cut, as well as stack. So those are a set of products that really are predominantly focused on the direct sale area as well as the -- as I mentioned, as well as the expansion of our direct sale organization. Another part where we're adding additional new products in the work space tools our Swingline business. Sort of in three areas. The manual stapling, both the light touch, and the sort of the more traditional staplers, we're introducing and rolling out new products, first in North America and then in Europe.

And to be honest, Derek, that will go through the indirect channel. However, we've got what we believe is a pretty exciting line of electrics that we'll be introducing, again, both in North America and then in Europe. Additional products will follow with the trimmer category. In Europe, and, again, I point to Europe, because it's really the mainland European indirect channels seem to be resilient and strong. We'll have new merchandising programs around these and category management programs around these. So I think even though that's in the direct channel, we feel pretty good that we've got a good reason to change out. So does that give you a flavor in a sense?

Yes. Really does. It sounds like more of the revenue coming in your indirect channels and you've got more control over that and sounds like that's your estimate of the amount of revenues, reasonable based on that.

Yes. Just one last comment. I think we believe that it is the left hand washing the right hand and the right hand washing the left hand. We believe the success in the direct channel introduces platforms and introduces technology to people that will flow down more into the indirect channel, so we think a linkage, you probably lead with direct and flow into direct.

Sounds good.

Let me just add to that, David already recapped about the timing of Kensington product launches which is part of while you'll see our growth in Q2, Q3, Q4 there.

Great. Thanks a lot for the call. Appreciate it.

The next question comes from the line of Bill Schmitt representing Deutsche Bank. Please proceed.

Hi. Good morning.

Good morning, Bill.

Do you have any indication of what the retail -- the inventory levels are retail now? How it's going to trend over the last couple of years?

Yes. I spend a lot of time trying to get a handle on that, Bill, which is part of why I called out that I believe there's another $9 million to $10 million of inventory reduction still to flow through. Very much look at this by customer. You saw some of the customers address the excess inventory very aggressively in Q1. You've seen others who are taking a more measured approach to get over a couple of quarters and some are really driven by when the own quarter ends. So, for April I've seen one of our customers take a lot of inventory out. And so, I believe if you look at what they're trying to do with their inventory, they're basically getting their inventory into line with what they think is a lower demand level, which, each of them has called out independently. And if you look at their responses, it's very much in line with what they're talking about as their sales reductions.

Again do you know what it is in terms of weeks, or that just too specific quarter to quarter?

I do know. But it's proprietary data and I'm not allowed to issue that.

One thing I will give you a flavor for, Bill, depending on the category it can swing quite dramatically. Yes. There's some categories where, boy, the velocity that take place throughout the channel is very, very high. Others, not so high at all.

Got you. And then just in terms of all private label growth. In other categories, other businesses, once someone goes to private label it is pretty impossible to get them back, unless you have a steady stream of innovation. And so the reason I asked the question, is I know you talked about $20 million of incremental sales from new products. But are these new products on the focus on the categories where private label is growing? And, another question is seems like cutting some strategic spending in the advertising side, like you did in the first quarter. So how can you sort of juxtapose those two dynamics where private label growing, you need to fight back and take ship from them and innovate, but you're cutting ad spending?

Okay. Bill, well, excuse me, I think, first of all I think I'd say, over 2007 and 2008 what we really tried to do is exit areas that we believe are commodity areas where it would be tough to compete against private label. So that would be sort of step one. Step two is, then on the categories remaining that you believe will be a balanced blend between private label and branded going forward, that's where we've made our investments. And so that's really the areas we're making the investments. We still have a category, I would say, our storage and organization area is a category where there is limited new product development going on. Simply because that's just a very [commodity-esque] kind of category. Still things going on. improvement there and focus there is much more on supply chain and asset management.

And as I talked earlier about increasing velocity that products through there. So there's a good general return on asset there is, so, yes, new product development is going on is going on in the balance of earnings. Balance of our categories, then, where we have good return and we believe that there will be a balance struck, there will be an equilibrium between private brand and branded products. Our objective, clearly, to be the lead dog in the branded areas in the categories that we're in. One of the ways that you have to do that is by continually innovating and providing new product development. So we feel comfortable and good about that. That's very consistent with our positioning all along.

Okay. Great.

Add to that, we fundamentally believe product development is the long-term key to positioning premium products versus private label products in the market. It is not that one directly competes with the other anyway. They try to compete to trade up the consumer and so it's providing consumer benefits that they are prepared to pay more for that really drives the premium into the category. We haven't backed off our long-term investment spend at all on driving product development. What you're really seeing is short-term market support spend, which we're deciding to spend later in the year particularly because that's where we have a lot more product coming out.

Okay. Great. And then just one more follow-up if I could. If you look at your guidance, you have your EBITDA guidance at sort of low to midsingle digit, I guess, in the deck. But the low end of EPS guidance is flat. And everything else is kind of the same. So the tax rate is the same, it's just a little bit lower. Why would EPS come in lighter than operating income growth -- or operating margin growth?

So, part of the issue you got as you roll down the P&L is we fundamentally left our guidance in tact. Obviously, if you tweak all of the moving parts you'll understand that in some areas we've got more wiggle room than others because of, for example, having a lower tax rate. So, you would be right to focus on EPS could come in slightly higher that we've indicated. But it really depends on how the business progresses during the year and that's why we didn't think it was appropriate to change it.

Got you.

Again, Bill, as I said, boy, wide ranges.

Right. Exactly. Thank you very much.

Gentlemen, your final question will come from the line of Rick Weinhart representing BMO Capital Markets. Please proceed.

Hi. Good morning, gentlemen.

Good morning, Rick.

I had a couple of follow-ups. One on the price increases and inflation. You mentioned a couple times you're obviously looking closely at what private label is doing and trying to maintain that differential. I'm wondering, are you -- what are you seeing amongst the various private label customers, your customers? Do these retailers and some of the distributors at private label do they tend to move in a similar fashion? Because I mentioned if they don't, it might be difficult for you to kind of adjust that differential.

Do they move in a similar fashion? I would say that, really, every customer we have has their own strategy, their own go to market plans and their own perception of views where private brand versus branded fits into a category. So, I think you'll find that some of our consumers will offer private brand, right across the category: good, better, best. Others will be more playing at the good, better level. I think this is a point of differentiation that our consumers have in their business. Everybody wants to define their go to market positioning a little bit differently. I think our customers are concerned that they don't offer the same kind of SKU offering that there's a -- the consumer sees and perceives a difference in their offering than others. So --

David, David -- so -- David, can I clarify that question? What I'm trying to get at is, do you -- are you seeing similar price increases related to inflation in private label categories at different customers, or are you in a situation where, perhaps, one customer is holding back on price increases, while another one is kind of moving along with inflation? In which case what do you do with the price points? I'm assuming you can't change it depending on the customer.

So Rick, in all of the categories, the premium products are the brand leaders, the market leaders. And therefore, private brand is always referenced-priced, off of the premium products. If you think about this from the other way around, what's happening to cost of goods for the two relative products, the impact of inflation on cost of goods or private brand products is more significant than the impact of cost of goods inflation on premium products fundamentally, because it has a higher cost of goods element. Therefore, they are undoubtedly seeing exactly the same inflation that we're seeing on the private brand goods. And so, they may make a decision to hold prices for a month or two to try to gain some share. Fundamentally, it's what every competitor does in every industry when playing against the brand leader. It is no different than that.

Okay. My second question is on the investments you're making in terms -- or you made last year in R&D and advertising. You mentioned that it's more of a shift in the last question in terms of what your go to market investments this year. I mean, overall, look at the year, as a percentage of sales, what should we expect in those items in terms of R&D, advertising, and any other go-to-market?

This is where accounting that we publish accounting internally I look at different numbers. We tend to roll together in what we spend in terms of product development and merchandising and marketing together. And approximately, it's around 6% of sales, now at that level. Used to be about 4% or pro forma level back in 2004. We would anticipate that being at around 6% to 6.5% this year, again, obviously, we'll tweak down the dollars slightly as the business is a bit smaller, but we're not looking to spend less in that area, we're looking to cut our SG&A and other support costs so that we can continue to fund an aggressive level of support around our product development and marketing trends.

Okay. Thanks. That's all I have.

With no further questions in queue, I'd now like to turn back to David Campbell for closing remarks.

Thank you, operator. And thanks to everyone for the great questions. We appreciate that. And I hope what we've said today continues to demonstrate that we're on a course that we think is a very bright future for ACCO Brands. In my view, we continued to execute and do and move ahead on areas of the business that we think are important and continue to do what we say. And we expect this kind of steady progress to continue through 2008 and beyond. So, I look forward to speaking to you next in August. Thank you for your attention.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, you may disconnect. Good day.