ACCO Brands Corp (ACCO) 2009 Q4 法說會逐字稿

Welcome to the forth quarter 2009 ACCO Brands earnings conference call. My name is Latrice, and I'll be your operator. At this time, all participants are in a listen- only mode. Later, we conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would like to turn the call over to your host for today's conference, Miss Jennifer Rice, Vice- President of Investor Relations. Please proceed, maam.

Good morning, and welcome to our fourth 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. Slides that accompany this call have been posted to the investor relations section of accobrands.com. The slides provide 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. We will also refer to earnings per share excluding gains associated with the repurchase of subordinated notes in 2008, and a one- time loss associated with the early termination of our prior credit agreement in the third quarter of 2009. A reconciliation of all adjusts 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 and A session. Now, it is my pleasure to turn the call over to Mr. Keller.

Thank you, Jennifer. And good morning, everyone. Earlier this morning, we released our fourth quarter and 2009 full year results, marking the end to a year that began for us in crisis, and ended with us better positioned to compete than we've been in quite some time. In the fourth quarter, our net sales were essentially flat with the prior year quarter at $353 million. Factoring out the positive impact of currency translations, sales would have declined 7%, a significant improvement over the prior three quarters. Our adjusted operating income margins expanded 260 basis points, driven by cost savings and continuing tight expense controls. An adjusted earnings per share increased 24% to $0.21, versus a comparable $0.17 in the year- ago quarter.

For the full year, net sales decreased 19% to $1.27 billion, from $1.58 billion in the prior year. Excluding currency translation, sales declined 16%. Notably, we achieved full year adjusted EBITDA of $150 million, only 5% lower than last year despite a 17.5% decline in volume. Adjusts earnings per share were $0.54, relative to a comparable $0.62 for the prior year.

As I mentioned earlier, 2009 was an extremely challenging year for ACCO Brands. We began the year with significant head winds and a number of objectives we needed to accomplish to ensure our viability, protect our business and begin to position it for success. Specifically, we needed to get our expense structure in line with a rapidly falling top line, repair damaged customer relationships, improve operational execution, invest in new product development, and refinance our business in an exceptionally challenging banking environment. We met or exceeded all of those objectives.

We reorganized our business. We took $20 millions in permanent costs out, and increased internal accountability. We focused on supply chain effectiveness and brought our customer metrics back where they needed to be, at or above all of the major customers expectations. We centralized our product development, investigated more, and strengthened our binding laminating, shredding and viscom product lines. We improved our relationships with all of our major customers and were named a strategic supplier by Staples, the most improved supplier by Office Max, and supplier of the year by Office Depot.

We gained meaningful footholds in the mass-market channels with branded product wins at Wal- Mart and Target. We exceeded challenging bank covenants in first quarter and second quarter, and refinanced the business in third quarter, giving us greater operational flexibility and pushing maturities back to 2015. We kept our promises to our investors and to our employees. I'm proud of all that we accomplished last year to create a solid base for us to build on in 2010.

We'll face headwinds in 2010 though as well. The uncertainty surrounding the European economy, consumer and business spending and the impact of foreign exchange will all be challenging but we're better prepared to meet those challenges than we were a year ago. We expect to grow revenue and profitability this year. We'll grow the business without the impact of FX by leveraging the line review wins we had last year, by continuing to compete aggressively for market share, by introducing new and innovative products across our product range, by extending our reach into the mass market channel, and by adding more value to our customers by helping them sell our products more effectively across all of their channels of distribution.

On the execution side, we made great progress last year improving our effectiveness. To will improve our profitability this year, we need to improve our efficiency as well. We have opportunities to strengthen supplier relationships and performance, improve the efficiency of product engineering, reduce product development cycle time, lower the cost of freight and distribution, work more closely with our customers on order management, and increase our inventory terms. This year isn't about doing a handful of big things right, it's about doing hundreds of small things better. By doing so, we'll expand our gross margins by 200 to 300 basis points in 2010. Faster than our SG&A costs will increase as we normalize compensation expense and increase our marketing costs to drive end user sales. We expect to increase EBITDA margins by roughly a point over 2009 results, a step closer to our goal of delivering EBITDA margins of at least 15% to 16% on a sustainable basis.

In summary, I believe our performance last year is indictive of what this team is capable of delivering. We made great progress under very difficult circumstances. We're a different company, and I think a better company than we were a year ago and will deliver better results this year than last year . Now I'll turn the call over to Neal for a more detailed look at our

Thank you both. Our fourth quarter performance is recapped on slide 5. Sales were essentially even with a year ago, with currency adding 7 points, pricing 1 point, and volume down 8 points. The volume decline is significantly less than in last several quarters, and was in line with our expectations.

Adjusted gross margin increased sequentially due to normal seasonality, but contracted 90 basis points due to lower pricing in some international markets where currency movement benefits have exceeded commodity and freight cost increases. It also reflects higher customer rebate costs compared to a year- ago levels, and adverse mix. We continue to see better commodity cost and exchange rate comparisons year-over-year.

SG&A was substantially favorable, decreasing $12.4 million, or 14%, and as a percentage of sales improving 350 basis points to 21%. The improvement was in spite of a $3.9 million increase from foreign exchange translation, and our repayment of the 2008 furloughs to all employees below the vice- president level. We saw continued benefits from cost reduction initiatives. These cost savings more than offset the adverse leverage from reduced volume, which was also a much smaller headwind this quarter.

All in, adjusted operating income improved 38%, and operating margin increased 260 basis points to 9.5%. Within operating income there was a $5.2 million benefit from foreign exchange translation, offset by $4.7 million of employee incentives, including the pay back of 2008 furloughs.

EBITDA increased 31% to $46.3 million, in line with our forecast.

Adjusted EPS from continuing operations increased 24% to $0.21 per share, versus a comparable $0.17 per share in the prior year which excludes the $17 million gain associated with the repurchasing of bonds a year ago.

Turning to an overview of our segments on slide 6: In the Americas, sales declined 5%, or 7% excluding currency. We continued to see the impact of continued weakness in the business spending across all markets, although at a lesser rate than in previous quarters--in part due to the lower year-ago sales base. Operating margin for the Americas declined due to the higher employee compensation cost as well as benefits in the prior year from furloughs and the release of customer rebate reserves. Operating margin was also impacted by lower sales volume and mix. All in, operating income margin for the Americas declined 155 basis points to 7.3%.

In the international segment, sales increased 8%; excluding currency, sales declined 8%, a rate much lower than in previous quarters. Europe continued to see lower demand but Australia delivered another quarter of sales growth. International segment margin increased 700 basis points to 13.1%, due to combination of gross margin expansion from the elimination of commodity and currency imbalances with sales price, as well as improvement in SG&A due to cost reductions.

In Computer Products sales declined 2.5%, excluding currency sales declined 8%. This business was only modestly impacted by overall lower demand with a carryover effect from of bankruptcy of Circuit City accounting for 7% of the segment decline. Computer Products operating margin improved 410 basis points, to 20%, principally due to substantial reductions in SG&A, which have offset the impact from lower sales volume.

For the full year, all segments posted declines in the low to mid- teens, but the rate of decline substantially abated in the fourth quarter due primarily to the lower year-ago levels. All segments posted annual improvement in margin, primarily due to cost savings.

Slides 7 and 8 recap our full year revenue and margin results. Gross margin was 100 basis points lower for the year due to adverse mix, and a number of headwinds impacting the first six months of the year, including adverse commodities flow-through, the foreign exchange adversely impacting cost of goods in our international markets.

SG&A as a percent to sales was significantly lower, 240 basis points, 21.4%. This improvement was due to reduced selling and marketing expenses and cost savings, including necessary but temporary reductions in employee compensation and benefits during the first half of the year that helped offset the deleveraging caused by the lower volume.

Full year operating margin was 8.1%, up from 6.8% in 2008, a very strong 130 basis point improvement in the face of the 17% volume decline. And while operating profit and EBITDA were both down slightly in absolute dollars, this was mainly from adverse FX. Cost reductions largely preserved the profitability of the company and demonstrated our ability to remain a strong cash flow generating business, even during the most challenging times.

We generated $71 million of cash for the year, including $9 million from the sale of our Commercial Print Finishing business, putting us above our annual target. We made strong improvements in working capital as we lowered inventory throughout the year. We repaid all borrowings on our ABL, with cash generated in the fourth quarter and added to the cash on hand. We achieved a 4.5 times net leverage ratio at year end, down from 5.2 times when we completed our refinancing in September. In the year, we used $61 million of cash to settle costs associated with our September refinancing, and still slightly improved our net debt position.

Turning to the outlook for 2010, we expect to expands EBITDA margin between three-quarters and a full point. The increase will be the result of expanding gross margin and at a greater rate than SG&A. The normalization of year-over-year changes in input costs, currency and cost savings could result in approximately 1 point of gross margin improvement. We would expect a further 1 to 2 points of expansion from the numerous supply chain and execution tactics Bob outlined.

SG&A will also increase, however, by approximately 1.5 to 2.5 points. Again, the normalization of our 2009 cost base, including payroll, benefit plans and cost savings, represents about 1 point of the increase. We will also increase compensation to repay employees for the 2009 pay cuts, and to reinstate management incentives. We will invest in selling marketing, however we will tightly control our investment by increasing expenses only where necessary to capture improvements in demand. We will also gauge our management incentive programs to make sure that we deliver improved returns to both shareholders and employees before we accrue any management incentives. Overall, our profit improvement will be fairly even throughout the year with a slight acceleration in the back half as the top line share gains are fully realized.

Longer term, as our volume recovers, we will further leverage our leaner cost model and this will reduce our SG&A costs as a percent to sales.

In terms of cash flow, we expect to generate approximately $50 million to $60 million in free cash flow in 2010, predominantly in the second and fourth quarters. first quarter and third quarter will be cash out-flow quarters due to our new interest payment cycle and seasonality. This outlook includes an estimated $9 million in restructuring cash payment associated with the expenses accrued on the balance sheet, however, we don't expect any new charges in 2010. Capital expenditures should be approximately $20 million in 2010.

By year end, I anticipate that our net leverage ratio will be in the upper three times but or objective remains to reduce it below three times as our profit continues to improve and net debt declines.

And the last slide, 11, includes host a modeling assumptions, including many I just highlighted. I draw your attention to the effective tax line. For the next few years, our tax line will reflect a very high short-term accounting rate that will be hard to accurately predict because our US losses that can't be offset with deferred tax due to our tax valuation allowance. Beyond that, as our US business becomes tax profitable, our rate will become abnormally low as we utilize NOLs. As such, although our reported rate will be anywhere from 50% to 20%, we believe the best way to appreciate our long term earnings potential is to model a 30% tax rate for all periods. We will report against the 30% rate in addition to the GAAP rate so that you can better measure our operating performance. As you will see from slide 11, our cash taxes paid are little changed in 2010. At this point, Bob and I will be happy to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Reza Vahabzadeh with Barclays Capital. Please proceed.

Good morning.

Good morning.

So solid fourth quarter results. As far as the drivers of improved gross margin in 2010, can you elaborate in terms of the key drivers and how much visibility you have on those drivers?

If I kick off, Reza, and I'll let Bob join in. We have a lot of moving parts to normalize our year from 2009 going into 2010, and the very simple way to understand it that for all intents and purposes, the favorable impacts on gross margin are offset by adverse impacts on SG&A, and they both account for about a point so we will, if you just normalize 2009, you'd add a point to our full year gross margin and you would add a point to the full year SG&A and the two offset to zero. We then expecting improvements in gross margin and a big chunk of them are going to come out of our freight and distribution area.

We've been explaining all year that we've been hitting our customer says metrics in, particularly in the second half of the year through brute force by one of a better description,k and the offset of brute force is it costs more dollars. So we've incurred significantly higher freight and distribution costs than you would want in a long-term state, so one of the big things that we're looking to do is get a better point out of freight and distribution costs in our 2010 objectives. The other half point to a point that we're looking to get is out of supply chain and getting more efficient with vendors and we had a problem in consolidating vendors until we could get the business refinanced. And so as we expressed before, we view that as an opportunity for us to get on with, and we've been going on with it since we completed the refinancing. Want to add anything, Bob?

I think that was a great summary, to Neal's point, we muscled our performance in 2009. We airfreighted shipments, we did everything we could to insure that we met or exceeded customer expectations and we did a great job of that. But we have significant opportunities to improve the efficiency of the entire supply chain process. We were in a position last year financially where our best suppliers didn't want more of our volume because of the risk associated with that. I think we've dealt with that and so we have an opportunity to consolidate suppliers and try to drive better costs there. We have opportunities to consolidate freight in Asia, we have opportunities now that we've repaired customer relationships to change the intersection points of our supply chains and share benefits in doing that, so all along the entire supply chain, I think we have opportunities to be more efficient in 2010 and maintain the level of effectiveness.

But of the 100 basis points you want to get out of the freight and distribution, cost based and the over 50 to 100 basis points on the supply chain, how much of it do you think you're at run rate now?

Coming out of the fourth quarter, we were not at the run rate that we wanted in freight and distribution, and it may be fairer to characterize freight and distribution as less than 1 point. Our objective is to get 1 point out of both, but expect to try to get 1.5 points in aggregate. There's a timing issue that offsets both of them, and you're right to call that out and certainly we are making more rapid progress in North America than we're making in Europe in getting that efficiency right in freight and distribution. And so, in the fourth quarter, for example, year-over-year, fright and distribution was still adverse year-over-year by about 40 basis points and that's partly because we were achieving blind cost reductions but at the expense of service. So we need to improve our systems and we will be doing that every single month of the year as we incrementally improve various initiatives. We have a large number of individual initiatives which basically land almost every month to improve our freight levels and distribution levels. It's both issues, equally, which are heavy.

All right. And any thoughts, observations on input costs, inflation, expectations for 2010?

Yes, we have two drivers of our inflation and deflation, one of which we often talk about which is the impact of foreign exchange fluctuations and we've seen a lot of volatility in foreign exchange and so we, in some of our international markets, had to lower prices in the fourth quarter because if you take currencies like the Australian dollar, they had appreciated markedly against the US dollar. As we've always tried to explain, you shouldn't view that as a gain or a loss for our business. We try to remain neutral for that. And theres often a timing lead or lag that can hurt or help you slightly, but those price movements are really driven by currency fluctuations that we can't control and the market understands.

Then in terms of underlying raw materials, the biggest cost driver we've seen lately is international freight rates coming out of China, and probably like a lot of people, there was a big reduction in those freight rates in 2009, and theres a being increase going on, going into the first half of 2010. Basically, there's an imbalance of supply and demand right now, which is leading to short-term price hikes until some of the ships get un-mothballed. But, that's the biggest pressure we've seen and then obviously, we've seen oil prices creep up, and as you and I both know, that will feed into a lot of energy costs and plastic products and so the gentle upward pressure on underlying raw materials that we're seeing.

But that won't effect you in the second half, right?

Inbound freight is more immediate than that.

Okay. And will you have any cash restructuring in 2011?

We will have no P&L charges, buff we do have a tale of expenditure in 2011. It would be property lease costs, its about $1 million or $2 million at the most, but I actually have properties that we're looking to sell which I assume will offset that in 2011. That could happen in 2010, but the current property market is so rubbish, that I've assumed the sales will now carry into 2011, so I'm aiming for zero, but it depends on when we sell the property.

Thank you very much.

Our next question comes from the line of Bill Chappell with SunTrust Robinson.

Good morning.

Good morning.

I want to talk about the SG&A, both for the quarter and especially expectations for 2010. I'm trying to understand, if you look on a percentage basis, you're kind of expecting to go back to the 2008 levels of 24% of sales despite cutting a third of the work force during that time frame. I'm trying to understand why that is, why you also think the need to repave for all the cuts you were doing in 2009 when we're not seeing any improvement in the overall environment?

I'll take the back half of that. We have a fundamental belief that we have an obligation to pay people what we committed to pay them in terms of their salaries and we asked our people to perform under extraordinarily difficult circumstances last year, I mean, for six weeks last year, we took people to 50% of salary and then for the following quarter, we reduced their salaries by 25%. We furloughed people and expected them, frankly, to get their jobs done. Our people carried us, and we believe we had a moral obligation to pay them back, and we did. And we are. So, that's something that I think our management team and our board both felt strongly about, and frankly, we think our people are what drives this business, and they did a great job for us.

Just one for your other question, which is a valid observation. Our top line has declined more than 30%, so we've taken a lot of costs out on the SG&A line just to stand still. We do believe that we're a cyclical business, and you'll see cyclical growth over the next several years as the economy inflects. We have our cost base where we think it needs to be for the long term, hence, we don't expect anymore restructuring charges running through the business, but as the business grows, we don't need to add back in the dollars, apart from normalizing year to year, which we haven't spoken about, and you'll see us get that SG&A down over the next couple of years as the business recovers.

Just to follow up, if you're looking at your financial outlook and you're post recovery goals, from what it looks like, you'll get to the maximum gross margin this year by getting to that 32%, 33% level. But you're going to need 400 basis appointments improvement in SG&A to get to your target EBITDA margins. Do we need a major recovery to the economy or is that a five year time goal?

I think it's shorter term than that, Bill. I think if you looked at where we think we need to be in terms of delivering 15% to 16% EBITDA, we think we need to be a $1.5 billion company and we think that's a three to four year horizon.

I also think it's important to understand we don't just expect to wait for the economy to recover. We lost share coming in to the last couple of years, and we need to regain that share, and we also believe we've never had our fair share of the things at the mass channel, and we chose not to have a share of the private label price point. So if we just let the business recover through the economic cycle, we would actually over-shoot our gross margin long term target. Our belief is we're going to grow faster, partly by moving into slightly lower gross margin mix as we get into the mass channel and the private label categories, so if you think of SG&A, our SG&A is very much a function of the size of business we're trying to support. But we think we can get growth both from the economy inflating and also from taking share. The other piece in our SG&A to understand is we haven't paid any management incentives for two years. We didn't pay them in 2008 or 2009, and we will back end payment of those management incentives, but I like to go into a year expecting to earn them, and if things don't come as we expect, we recognize our duty to shareholders comes first, but we actually think our duty to our employees even comes before that, and that's why we put through the 5% pay raise for the rank and file employees of the business who fundamentally, are a big reason why we're all still here, so I think it's important that we recognize the contribution of the people in the business. And we look to achieve our own objectives and if we don't as a management team, then we will suffer before the shareholders.

The last piece to that, and it's consistent with what Neal has said, is our expenses are tied to improvement in top line in our budget process so what your seeing is our expectation that we're going to grow the business, but we have an opportunity to manage SG&A throughout the year based on what's going on in the external economy and how we're performing internally.

Just a couple of quick follow ups. As I look to the gross margin this quarter, and actually the operating profit, usually between third quarter and fourth quarter, there's a bigger delta going into fourth quarter, both for gross margin picking and also operating profit, it didn't seem to be that case this year. Was that just timing of orders? Was there something else that changed the sequential improvement or not less improvement?

I'm trying to walk everybody through the gross margin line because its both difficult to understand year-over-year and difficult to understand per quarter, so if you look at slide 8, which shows the full year break down of gross margin, what you see in there is a 30 point simple reclassification which has been going on all year between our SG&A and our gross margin. So year-over-year, there is a simple reclassification. There's then 70 points, if you net the other three things together, of net operational issues. In the first half, we suffered from gross margin pressure from raw material costs, all year we've seen an adverse sales mix, which is really selling less durable products, and we've partially offset both of those by the benefit of cost savings. When you run into the fourth quarter, the adverse mix still continues in the reclass from SG&A still continues, so neither of those things changed. The price cost equation became favorable but it's not as significantly favorable, it's favorable by around 50 basis points year-over-year. And then in the benefit from cost savings, we've seen a lot of the benefit as we got into the second half of last year from the underlying restructuring that's gone on. We did get a slight benefit, but it was largely offset by an increase of about 40 basis points in our freight and distribution costs, which was to achieve the service levels that we have spoken about and our needs to get those under control. So there is less favorability in the fourth quarter than you may have assumed, and I've tried to step you through why that was.

Just one last one. What are your expectations for both currency and for category growth this year, just trying to understand as we look at the top line guidance with the recent weakness, recent strength of the dollar, and also kind of what your share gains will be to offset the category declines?

Well, from a foreign exchange point of view, as we tried to explain, the big impact on us is just translation of our results, and back in December when I pulled together this years business plan, I was expecting something like a $9 million benefit if I used two days ago's results, I would expect only a $4 million benefit. But even at today's exchange rates, we would still get a benefit in the P&L from just translation. I do not personally expect today's exchange rates to maintain through the year. I think the dollar is going through some short term strength and things will settle out as the year goes on, and it will become slightly more favorable, so anywhere between $4 million and $9 million of favorable benefit from FX, depending on which exchange rate you wish to choose.

We think organic growth for our business is going to be in the low single digits which we think will be just based on what people have said externally so far, several points better than what the industry is expecting.

Because we're going to take share and that's the fundamental reason we think we can do better than industry. We have taken share.

Thanks.

Our next question comes from the line of Arnold Ursaner, with CJS Securities.

Good morning. First question relates to your on-time delivery rates. I know that's another one of your goals, Bob, where do you think you were in Q4?

We were at or above all of our customers' expectations. In situations where we have contractual commitments from our largest customers, we bonused from those customers based on our execution.

Okay. Second question relates to gross margin, relative to my model at least, if I have been told you had better volume, I would have thought you would have had better margin. You did highlight three factors, one was reversals of some programs, or I guess program accruals. Lowering some price points internationally and product mix, can you perhaps try to quantify those three buckets and give us a sense of the the magnitude of each of the three?

Not crisply, but I'll try to give it to you in the highlighted, so if you went back to Q4 of last year, in Q4 of last year, we did not forecast the big reduction in the volume that occurred in Q4 of last year. So in Q4 of last year, we did true-up customer programs that we'd been accruing all year based on a higher level of sales then they achieved and therefore we had a favorable benefit in Q4 of last year. I don't have that same favorable benefit this year because people have come in where we expected them to be.

But year over year, I have an adverse in price effectively that has occasioned that, and as I said earlier, the net delta between price and cost of goods is still favorable still year-over-year, notwithstanding that facts, but less favorable than it may have been expected to be, because although I'm favorable on a cost of goods points of view, I'm adverse on a price points of view. And so the net of those two is favorable by about 50 bips, but if you go back to third quarter, we had a more favorable price versus raw materials equation and if you, so anecdotally, the lack of the the credit that we had in the previous year is probably about 50 or 60 bips.

Freight and distribution is an adverse cost year-over-year by about 40 bips. And therefor, although we've achieved the service levels, and did get some service bonuses, net effect is still address versus, and the reason is fundamentally, we are not efficient as we need to be in terms of we are not efficient as we need to be in terms of could go that, so that's a combination just making sure we focus on the customer first and we get our cost base right in the long term. It's going to take longer to get our cost base right, and I forgot your last point.

The product mix.

In terms of product mix, that's the same as it's been all year, that's running at about 100 basis points adverse.

Looking at your gross margin view for the up coming year, I know your expanding dramatically in the mass channel, and I think some relationships you have with customers, they want you to do the manufacturing, but they would prefer to do the distribution and logistics. I'm assuming you have a lower gross margin since you're not recovering the freight and distribution which can be 10% of your business. Is that embed in your guidance for the up coming year?

Yes, it is. That's what I said earlier, all thing being equal, if we weren't planning to take additional share, we would actually over exceed our own targets of gross margin.

Another question I have is related to how the accounting treatment for the reversal of furloughs, where did that hit in Q4? What line item?

It actually hits both. Partly in cost of goods and partly in SG&A, depends where people work. Majority of it hits SG&A.

Okay. And the $15 million or so of incentive comp for the executive team, was any of that paid? Did you reach the goals you needed to in 2009 to pay of that and if not, what is embedded in your 2009 guidance or views?

We achieved about $1 million of management incentive performance accruals in the current year which was modest so we met our own internal guidance in order to do that. Next year, obviously is a much bigger delta, and just looking at normalizing costs into next year, I'll give you the high level items within there, what you have in terms of normalizing incentive payments and normalizing pay is about $13 million to normalize our base pay and 401(k), and those types of programs. Which is adverse hitting SG&A. It's then about $13.5 million of incremental increase and incentive payments, assuming we hit the upper end of our own targets, and so there's about $27 million of adverse costs running into next year's SG&A on a full basis. What offsets that is basically lower anticipated raw material costs, cost savings that we will have achieved, and the small benefit we gets today from FX, and if you take today's FX rates and use a smaller number, that adds up to about $26 million. The two offset each other which is what we said before, but there is about a 1 point improvement in gross margin, and 1 point increase in SG&A.

To be clear, the $13 million to normalize base pay has already been implemented, those are programs in place, the return of 401(k), salary increases. Is the $13.5 million incremental incentive for executives embedded in the view you've expressed?

It is embedded in the view I've expressed, and in the first half of the year, the normalization pay of benefits will be a drag on the P&L. So there is an impact, first half to second half, of how some things fall but in fact, its surprising how different things offset each other in different quarters so that there is a minimal impact in most quarters as it transpires.

But on the $13.5 million incremental executive incentive, again since you're more back end loaded normal in your business, wouldn't that be a heavier hit in the first half of the year in terms of results?

That should be a heavier hit in the seconds half of the year. The way that we have constructed the incentive plan, which is subject to board approval, the way we've proposed it to them is it looks more like an exponential curve, so the majority of incentive gets accrued when we achieve the results that we expect to achieve.

Final question, if I can, for Bob on the mass channel, I know you've expressed your view, you do have several contracts that will be ramping up during the course of 2010. Can you freshen up what your expectation for revenue from these new mass contracts for is for 2010? And how we might expect the timing of the ramp on that?

We haven't been provided guidance relative to that. I think our expectation is for that channel that there's $50 million to $60 million of opportunity, we think it's going to be dependent on our execution. We have loaded the two categories wins that we've had at Wal- Mart, we're in the process of loading Target, and from an execution points, thus far, we're doing a terrific job, and we like the sell-through.

Thank you very much.

Our next question comes from the line of Derek Leckow with Barrington Research.

Thank you, good morning, Bob, Neal. As I reflect back on the last couple of years, the most encouraging thing I see is the improving relationships with customers and as you say, this is the bottom of the cycle, we're improving these relationship now at a point in time when volumes are low. To what extent is that translating into better visibility of your customers ordering needs and what sort of volume increases should we see as it relates to these specific improvements?

Well, I appreciate that. I think we think its same thing. I think in tough times, if your customers aren't rooting for you, you don't have any chance of being successful, and I think the positive thing is all customers are rooting for us at this point in time. I think the other thing, I think the environment for all of our customer is extraordinarily competitive, and I think one of the things that we're excited about is we started discussions with all of them a year ago about the fact that we felt like we had to play a larger role in helping them sell our product. How they positioned it in their retail operation, how they positioned it on the web, how they positioned it in front of their direct selling organizations, how they positioned it in their catalogs, and that our job was more than just to settle them products at a low price, or job was to help them sell product, and frankly, that message has been well received. I think all of our customers are beyond the kinds of field-of-dreams mentality of if we build it, they will come. And they believe they have to take larger ownership for selling product, and the simple message that we have is we have a much smaller set of products and categories to focus on than they do, and we should be able to bring expertise in terms of how to position the product, what the ends consumer actually wants, what the latest innovations are relative to the product, with the relevant price points are and what the margin expectations should be. Neal spoke earlier about one of the increases in our SG&A is the fact that we are adding strengths to our marketing teams to help us be a better provider relative to that level of service.

Just if I could follow up on that. That's great. I just, I'm wondering to what extent you have better visibility now, I mean getting better information and data from your customers who consider you a key supplier. How is that improved, and is it translating right now into sort of a replenishment of your inventory, removal of some these competitors who have moved into some of your key categories. Just if you could elaborate on that, and on slide number 7, if you could elaborate on the impact of price next year as well. I mean, introducing new products that would be at higher price points that would help to give us some lift from price next year as well.

The answer to the first question is we are more closely in line with the customers and we are sharing more information and in fact, we're acquiring more information from external sources about our products and categories and how competitive they are than we have ever done before and we're feeding that back to our customers. Do I believe that it's had a huge impact or meaningful impact at this point? No, I don't. Do I believe it will going forward? Yes, I do. And when we go compete now, we're competing on a category basis, not on a product-specific basis, and I think that approach has helped us and our customers and we have meaningful joint exercises in process with all of our customers to improve both the effectiveness and efficiency of our organizations to help us help them sell more and to help us provide the product to them at lower costs and share in that benefit, and so our customers were a huge part in whatever success we had in 2009 and they will be going forward as well.

In terms of price, it's been expressed many times, a lot of our pricing, international markets is linked to currency. Given the current volatility, it's very hard for me to give you an answer to how much that's going to be in impact. We did lower prices in some markets, in other markets, the favorable price benefit roughly offset the cost of goods increase we've seen, but today, that may not be true. So pricing is an ongoing negotiation in all of our international markets, and is more movable because of currency than any other issue. In terms of underlying raw materials, we are seeing some starting increasing pressure particularly on freight shipping costs, which everybody's seeing, so last year the benefits we'd been seeing in international freight rates had been offsetting commodity cost increases. Now that's flipped around so negotiations with customers are ongoing over where to set pricing for all of 2010. So at this moment, going into 2010, we will actually see negative pricing running through the first half of the year, and it's really because we've seen the currency drivers in our international markets.

Currency that's holding it back right now, and then you talked about re-engineering some new product activities and wonder if there's a volume component you might be able to share with us on new products?"

We've spoken about the fact that we've picked up $50 million to $60 million of share for 2010. We do have more new products which we will launch during the year, and a lot of those will really drive share gains for the following year. But you get the opportunities in computer products and in mass channels to get earlier placement and so there are opportunities for us to pick up share next year. A lot of the share gains we got this year were because of new products we launched, so it's hard to segregate new products from share gains because the two tends to be very linked. I think the key thing is our objective is to renew the vitality of the ranges that we have over time, so we have an aggressive plan to do that.

Thanks very much. I'm going to stop there. Good luck. Thank you.

Thank you very much.

(Operator Instructions) The next question comes from the line of Arun Seshadri with credits Swiss.

Hello, gentlemen. Congrats on a good quarter. A couple of quick questions. Your revenue growth trajectory in 2010, how should we be thinking about which quarters in 2010 you actually expect to show revenue growth?

There are two drivers of revenue growth that you should think about. One is the underlying business, and we're talking about the underlying business growing at a low rate, and so that's fairly even throughout the year, but with a little back-end load for additional share pickup in the second half of the year. The bigger driver of our top line in the short term is going to be foreign exchange moving year over year, and obviously, that has a much bigger impact in the first half of the year than it will have in the second half, and in fact, if you took today's exchange rate, it would go adverse by the fourth quarter, I think that the important thing is to, I'm not going to forecast FX because I can't, but I think the underlying business is fundamentally slow growth with a back end load.

Got it, that's very helpful. And then, could you update us a little bit on your private label strategy? Category management, update us on that and how the Wal- Mart, trials are going, and where do you think private label ends up as a percent of sales over the long- term for you?

Our private label right now represents a little bit less than 4% of our sales, and in an industry that is running about 25%, and so it's a small percentage of our sales right now, and it's actually declined over its course of the last 18 months because it was probably a little north of 5%, 18 months ago, and we have converted some private label work that we were doing for customers to branded product. Our expectation is that we want to compete on a full category basis which means we do want to supply the opening price points. We do appreciate that you can't do it the way that you've historically done it, that you can't get a full program load, that you have to do things both in terms of the materials and how you design the product and how you deliver the product, and the logistics associated with it. Take costs in order to make money in that part of the set. But we do have a fundamental belief that if we do our job, and our job is that our products have to compete on a cost basis, on a global basis, and that we have to innovate the product line, that buying branded product from us is a better solution for our customers than creating private label strategies and solutions of their own because of the working capital associated internally in the organizations to do that. And we've been consistent about that message, we've been very competitive in the line review process throughout 2009, and we have demonstrated both in the products that we've introduced into the marketplace and the three year product road maps we've shared with customers across all of our categories but our intentions are in terms of innovating the product line that we're a supplier they can can't on, and I think people get concerned when they hear us talk about private label as we're going to blow up our margins, we don't believe that's true. We think it's a components of the services that we need to provide to our customers to be a full line product supplier.

Okay. That's helpful. I guess, can I take that to mean that generally, versus today, the 4-ish% of sales, that you don't expect major movement in either direction there, and you're doing this complimentary thing to your overall all business, is that the right take-away there?

That is the right take-away. If it does anything, it will slightly trend upwards, but we don't see it as being particularly dilutive to our margins.

Appreciate that. Last question, you expect to generate $50 million to $60 million of cash in 2010, and you've stated you're going to delever. How exactly do you plan to delever? Do you plan to buy these bonds back, the various bonds back, and also if you could remind us, what is your restricted payments basket as of know that allows you to buy back the subordinated bonds, and that's it for me. Thanks.

In terms of how we deal with leverage, my point of view is leverage is really a net leverage position. Net of whatever cash we have on the balance sheet. It's our intention to increase the amount of cash we have in hold on our balance sheet. In the short-term, and part of the reason that we intend to that is to fundamentally we need to win back supplier confidence, that we are a business that can always pay them, and so part of what we lost through our own financial issues was the confidence of some of our vendors who still, today, can't get debt insurance on their receivables from ACCO, so we need to change that so that we have the normal relationship with our vendors and so we, today, have restricted payments basket that allows us to buy back 25 million of our sub notes. At this moment in time, the use of the cash flow on the balance sheet will be to funds the normal cash outflow that exists in first quarter so it's that cyclical nature of our business, and we will generate cash, particularly as we go through next year. In the fourth quarter is when most of the cash will get generated with the new cycle of interest payments because, although we'll generate cash in second quarter, what it will largely do is pay off whatever ABL balance in first quarter and then third quarter is fairly neutral from a cash point of view, and Q4 is when the annual cash gets generated. So, it's a good question, but it's maybe three- quarters premature.

And our next question comes from the line of Karru Martinson with Deutsche Bank.

Good morning. When we talk about all these market share gains that we're targeting for the year, where are they coming from? Are you replacing the competitor, are you taking it from private label? Where are we getting all of these gains?

Frankly, it's a combination of a lot of things, it's broad in terms of geographic coverage. We want as much business in Europe as we did in the US. It came across a variety of product lines. Some of it was competitive win-backs, some was stuff we lost over the last several years because ever our own performance. We do think there remains significant opportunities out there. We have targeted half a dozen opportunities that we're going after in line reviews in 2010, which in aggregate are significantly more than the business that we won in 2009. And we just feel like we are both a better supplier and a more competitive supplier than we've been in a long time.

Okay. In terms of the line reviews, what's its typical timing for the industry?

That's starting to shift. Historically, Europe has been in front of the US, but several suppliers in the US are kind of going to a continuous stream of line reviews that start earlier in the year and last into the fourth quarter, so I'd think that's kind of an evolution at this point.

Okay. And in terms of the weakness in Europe, how has that been split out and what's going to lead the outlook for the year?

That's worth calling out, if you look at the major markets around the world, they are in different places. We've seen the best performing economy we trade in is Australia. We're had two quarters consecutively where the business has grown. In the US, by contrast, we're really bumping along the bottom would be my description, it's not getting better, it's not getting any worse. Within Europe, there's a bits of a division. We've seen the UK market start to show signs of stabilities, main line Europe is still showing signs of deterioration, so our own belief is that Europe won't stabilize until the middle of the year, so we're not assuming that Europe is on its same time line as the rest of the world. It seems to be the laggard in this cycle.

Okay. And just lastly, Circuit City is now out of the numbers, correct?

It drops out. It was in q4 significantly, it was the major driver of the Computer Products decline, but it has no impacts in first quarter.

Okay. Thank you very much, guys.

There are no further questions. At this time, I would like to turn the call over to Mr. Bob Keller for closing remarks.

Thank you all for your participation. We're excited about the opportunities, we appreciate the challenges in front of us. We think we're better prepared and better positioned than we've been in a long time to deal with them, and looking forward to talking to you at the end of the first quarter about our progress. Have a great day.

Thank you for your participation. This concludes the presentation.