ACCO Brands Corp (ACCO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 ACCO brands earnings conference call. My name is Lacey and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Good morning and welcome to our second-quarter 2009 conference call. On the call today are Bob Keller, Chairman and Chief Executive Officer of ACCO Brands Corp., and Neal Fenwick, Executive Vice President and Chief Financial Officer. A set of slides that accompany this call have been posted to the Investor Relations section of accobrands.com. These slides provided detailed information to supplement this call.

Our discussion this morning will refer to results on an adjusted basis for continuing operations, excluding all restructuring and other charges. 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. Now it's my pleasure to turn the call over to Mr. Keller.

Thank you, Jennifer, and good morning, everyone. Earlier this morning we reported our second-quarter 2009 results. Net sales were $304 million, a decline of 19% excluding foreign exchange. We recorded a loss from continuing operations of $116 million, which includes a non-cash charge of $108 million related to US deferred tax assets as well as non-cash trade name impairment charges of $2 million and restructuring and other costs totaling $10 million. Excluding charges our adjusted income per share was $0.11 and our adjusted EBITDA was $34 million.

Neal will provide additional detail and color shortly, but before he does I would like to share my perspective on our results. While our sales have continued to be negatively impacted by the global economic environment and the effects of increasing white-collar unemployment, we have done what we have had to do to protect our business. We have aggressively managed expenses to the point where our operating profit, excluding foreign exchange, was flat year-over-year, but I think we have done it thoughtfully.

In spite of the reductions we have protected our investment in new product development and our product pipeline is robust. We disposed of a non-performing asset, our commercial laminating business, and cleared our bank covenants comfortably. Our operational metrics are all better than they were six months ago and so are our customer relationships.

Our operating plans don't assume an improvement in the current economic environment. That said we believe we are appropriately scaled to operate and compete effectively in today's market. Our focus on the fundamentals -- cost control, execution, operational excellence, product vitality, and customer relationships -- have made and continue to make a difference in the short term.

We are taking market share and expect to continue to take share regardless of the economy. Additionally, the ongoing benefits of the changes we have made provide this business with tremendous leverage when we start to grow our top line again.

Looking forward, we expect that the remainder of 2009 will continue to be challenging, especially on the top line. However, we expect the rate of our year-over-year sales decline will be lower in the second half of 2009 with sales down approximately 15% to 20% versus a decline of 27% in the first half of 2009. The anticipated lower rate of decline is the result of our expectation of less inventory destocking, less adverse foreign exchange conversion, and some benefit from pipeline fill related to 2010 share gains.

In terms of operating margin, we expect the second half of 2009 to show continued improvement year-over-year, driven by fourth-quarter results and the combination of more favorable commodity costs, positive foreign exchange conversion, and less adverse impact from lower volumes. As a result, we believe out trailing 12-month adjusted EBITDA as of December 31, 2009, will show improvement over the levels as of June 30 and September 30.

Looking forward to 2010, we expect sales to be flat or show modest improvement driven by a combination of share gains and favorable foreign exchange translation, which are likely to offset continued lower demand. We expect the improvement in operating profit to be greater than the improvement in the top line as a result of the flow through of permanent cost reductions implemented in 2009, more favorable commodity costs, and favorable foreign exchange translation.

To summarize, we believe we are positioned to operate effectively in the environment that we are in, and we have significant leverage if the economy recovers faster than we anticipate. At this point I will turn the call over to Neal. Neal?

Thank you, Bob. This quarter's performance is recapped on slide four.

Sales declined 27% with volume down 21%. Currency further impacted sales by 7%. Sales in the second quarter are always defined by June and the seasonal back-to-school shipments. This year's shipments were similar to last year's. For us, it is the third-quarter replenishments that determine the ultimate strength of the back-to-school season.

Slide five shows the largest driver behind our revenue decline continued to be the negative economy. This has impacted business in all our markets reducing sales by $72 million or 17%. The timing of Easter in the first quarter of this year versus the second quarter last year does influence buying patterns in our international markets and reduced sales by around $6 million. Adjusting for the shift year-over-year we saw a similar sales decline in Q2 as in Q1 as detailed on slide six.

Adjusted operating income declined 15%, but our margin increased 110 basis points to 7.6%. However, foreign exchange translation reduced our operating income by $4.7 million. Excluding this, year-over-year operating income was actually flat, a great accomplishment on the dramatic sales reduction. As we will detail in a moment, the improvement was mainly attributed to SG&A-related cost savings.

All-in EBITDA declined 18% to $34.1 million and adjusted EPS from continuing operations was $0.11 per share. In terms of reported items included in the second-quarter loss was a non-cash charge of $108 million to establish a valuation allowance against the Company's US deferred tax assets. This was the result of our quarterly assessment confirming our ability to use our deferred tax assets in the future. We also recorded non-cash trade impairment charges of $2 million, and restructuring and other costs totaling $10.5 million.

Importantly, we do not anticipate taking restructuring charges beyond this year. Slide seven details the specific contributing factors to our margin changes. Gross margins declined 130 basis points, driven largely by the adverse impact of cost increases as we utilized inventory purchased when commodity costs and exchange rates were more adverse. Customer rebate programs have also increased as a percentage of sales from a combination of the Staples and Corporate Express merger, various customer resolutions, enhanced incentives, and adverse volume leverage related to fixed dollar components.

However, as expected, the decline was less severe in Q1 when the year-over-year comparison of commodity costs was even less favorable. This trend should continue to help improve the second half.

SG&A improved 250 basis points. The improvement was entirely the result of cost reduction initiatives and more than offset the adverse leverage from reduced volume. All told, operating margin improved 110 basis points to 7.6% from 6.5% last year.

Turning to an overview of our segments on slide eight, in the Americas sales declined 23.5% or 20% excluding currency. This is a slightly higher rate of decline than seen during the first quarter as white-collar unemployment continued to rise and large businesses continued to defer purchases. This is evidenced by a decline in sales to the retail channel of around 10%, while sales to commercial channels were down in the low 20% range and direct sales, where we sell mostly durable products, were down in the low 30% range.

Operating margin for the Americas segment increased 130 basis points to 6% as a result of cost reduction activities reducing the impact of lower sales volume.

In the international segment sales declined 30%, but excluding currency sales declined 17%. Europe was the main driver of the international sales decline and we are seeing less economic impact in the Australian and Asian markets.

International segment margin declined to 7.6% from 8.8% principally due to the lower sales volume. During the second quarter we implemented additional cost reduction activities in our international businesses to help offset the continued erosion in volume where trends have lagged the US. This can be seen on slide eight. The US was already in decline this time last year, but the international was still growing.

Turning to computer products, sales declined 29% but excluding currency declined 22%. This business continued to be impacted by overall lower economic demand and the impact from the Circuit City bankruptcy, which accounted for 7% of the segment decline. Computer products operating margin improved 380 basis points to 23.5% from 19.7%, principally due to cost reduction initiatives which have offset the impact from lower sales volumes.

Slide nine recaps our results on a six-month basis. To summarize, the first six months of 2009 were very challenging with a number of headwinds impacting us in addition to lower overall demand. We had a $10.5 million impact to EBITDA from foreign exchange translation, but the larger impact of the foreign exchange rate movements was from our international businesses' Asian purchases, which together with the overhang from last year's spike in commodity costs was an additional $26 million adverse impact on our cost of goods sold.

We also had higher customer programs in the first six months. Again, primarily due to the Staples Corporate Express consolidation and resolution of the various prior period customer claims. However, we are now in the seasonally stronger second half of the year for both earnings and cash flow.

As summarized on slide 10, we anticipate positive year-over-year operating income in the second half as a whole. This will be driven by the fourth quarter due to a variety of factors that Bob previously discussed.

Slide 11 recaps our first-half cash flow and debt balances. As expected, debt came down from its peak in Q1 mainly due to the reduction in working capital. In addition, we received $11 million net of fees related to the sale of our commercial print finishing business in June. The sale also involved an additional deferred consideration, working capital adjustment, and various future legal charges.

Cash flow will again be positive in Q3 and grow in Q4 as it is always seasonally does. Excluding proceeds from the sale, we anticipate generating $30 million to $40 million of net cash flow for the year as a whole.

Finally, we are cognizant of the fact that the maturity of our revolving credit facility is upcoming in August 2010 and plan to commence discussions with our banks in suitable time to ensure we achieve a refinancing. We are confident that our banks will appreciate how we have been able to manage through the difficult economic times and anticipate their continued support of the business.

That concludes my prepared remarks. At this point Bob and I will be happy to take your questions. Operator?

(Operator Instructions) Reza Vahabzadeh, Barclays Capital.

Good morning, Reza Vahabzadeh from Barclays. Just a couple of housekeeping items to start off with if you don't mind. Where was your total leverage as defined under your bank covenant agreement as of the end of second quarter?

We laid out our leverage, and from a bank's point of view it's a fraction higher than it appears on -- the way we do it from the public statements. It was around about 5.2 times.

Okay. And then your total gross debt outstanding as of the end of the second quarter. I think I can back into it, but can you give the actual number?

Yes, $724.5 million.

Okay, thanks. Then on the guidance, you are still talking about working capital being a source. Is it coming along as you would have anticipated at the beginning of the year, because the second-quarter number seems to be, at least, better than I would have expected?

It is and working capital is complicated. If you remember we ran up a lot of inventory at the end of last year. And although that inventory has come down significantly, there are two things you should know associated with it. The first one is that foreign exchange has started to move back in a favorable way from our profit and loss account, and a negative way in terms of our balance sheet. And as a consequence of that we added in the month over $10 million of the additional foreign exchange translation just on inventory.

Also, when you run your inventory down the first impact is that your accounts payable go down with it. And so as a consequence of that it actually takes a while for that full cycle to work through before the real cash effect of that working capital comes down. So low inventory, which is the leading indication, is down so is accounts payable, and so as a consequence of that a lot of the cash benefit from that gets deferred into the third and fourth quarter.

Got it. For Bob, if you don't mind, can you talk about how sales came in for this quarter relative to your expectations at the beginning of the quarter? Were they in line? Were there misses or surprises by channel or region?

Actually, I think sales came in pretty close to what we expected. Our back-to-school load actually was basically equivalent with what it was last year. And I think, as you know, the real opportunity for us is the sell-through of that product. So we feel okay about how sales were in the second quarter and now I think we are all going to be watching to see what happens in the back-to-school season.

Got it. And Europe was also in line with your expectations or different?

It was probably just a smidge soft, but they had a very good back half of June and recovered most of what we were expecting.

Got it. Thank you much.

Bill Chappell, SunTrust.

Hi, this is [Mike Schwartz] filling in for Bill Chappell today. Just a couple of quick questions, start off with the customer wins. Could you give us a little more color on that? What categories you are seeing the largest gains and then maybe who you are taking some of that share from?

We have been focusing on category management and, frankly, we have done a significantly better job relative to that. We have had wins in the mass channel and the office superstore channel and in the pharmacy channel as well.

Our board business has been pretty solid throughout that. We have had wins in binder business as well and then some smaller categories, so we are pleased with our progress so far. We are reasonably deep into the European line review cycle for 2010 and believe that we are taking market share both internationally and here domestically.

Okay, great. And then what are your category level assumptions for sales growth in the back half of the year and fiscal year '10 given what your internal targets are?

For the back half of the year we are still assuming that on a year-over-year basis the business will be smaller than it was this time last year, particularly in the third quarter. And, again, I would refer you back to slide eight in the deck presentation which shows the quarterly impact on the business last year. And you see it wasn't until Q4 that we saw the level of impact that we have seen in the first half.

So Q3 is going to see a significant negative pressure still on the top line and Q4 is going to see significantly less pressure. Obviously, that affects all categories in all markets for our business.

It's wins we have had. You really won't see significant impact from those wins until the beginning of next year.

Okay, great. And then, lastly, where do you think operating margins will get back to, let's say, on a full-year basis in fiscal year '10 and beyond?

For the year as a whole or ultimately?

Yes, yes, I am sorry. On a full-year basis, I guess. Yes, what is your goal ultimately?

They are very different things. Obviously in the short term we have taken a lot of costs out of the business and we are progressing with trying to get the business as a whole back to delivering a sort of low teens EBITDA kind of just close to a double-digit OI for the year are as a whole. And in the long term we think that there is still room to expand that performance.

Obviously, it's very dependent on what volume comes in and so the business has significantly lowered its breakeven point as a consequence of that. Any inflection at the end of this economic cycle will have a very positive impact on the business. In the short term, the main things that are improving it are the cost take out that we have made and the fact that foreign exchange has become less adverse and that the commodity spike that we had dragging the business down through the first half has been worked through.

Okay, great. That is all I have.

Torin Eastburn, CJS securities.

Good morning. I am sitting in for Tony Ursaner today. I just have two quick ones. The first question is on inventory reduction, I know it has been a focus for you. Can you quantify what it was in the quarter?

Yes, the exact inventory reduction in the quarter, if you exclude foreign exchange, was $20.6 million and the reported change was $9.4 million. So you can see that foreign exchange increased inventory by about $11 million in the quarter.

Okay, thank you. And then the next one, now that the CPF sale is finished can you quantify what impact that will have on your trailing 12-month EBITDA?

It will be the main -- we already, from an accounting point of view, declared the CPF business as a discontinued operation and so it has been shown as such since our fourth-quarter statements. And so the removal of it will have no impact on the numbers that we have been reporting excluding it.

From the point of view of our bank covenants it was a more important issue because it was still included until such time as it was sold. And its final sale it removed about $5 million of cumulative losses.

Perfect. Thank you.

Chris Dechiario, ISI Capital.

Good morning, it's ISI Capital. Just could you give us a little more detail on the POS of your products I guess versus what your volumes were? Were you continuing to see inventory destocking in the second quarter in the chains or -- can you just give us a little more detail on that?

Actually, it has flattened out. Our POS data is two to four weeks behind, but our customers' buy-in of our product and their sellout of their product are pretty closely in line at this point.

Okay. And that has been the case since around mid-February, you say?

Yes, towards the end of the first quarter we saw that flattening out.

Great. And then just a little bit more on the customer wins. You said you had it in mass and obviously some strong pharmacy. Was that mainly in more of the private label, because I know you were trying to expand that? How successful do you feel you have been in trying to expand in to the private label area?

Yes, the issue isn't as much about expanding into private label as it is trying to add value by being a category manager for our customers. We really do feel like a discrete focus on a limited number of product categories that we have we ought to be able to help our customers sell our product more effectively than just turning it over to their merchants and letting them treat our product like they treat everybody else's product. And so that focus I think has helped us.

If you look across our customer base, their private label sell-throughs are 20%-plus. Private label represents about 6% of our sales. And so this isn't about us trying to get into private label as much as it is -- especially in this economic environment -- trying to offer our customers product at different price points to sell more of our product and to improve their sales. And I think we have been pretty effective in doing that so far.

Okay, thank you.

At this time we have no further questions in queue. I would like to turn the call back over to Chairman and CEO, Bob Keller.

Again, as always, we appreciate your support and your involvement and look forward to talking to you at the end of next quarter. Thank you.

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