ACCO Brands Corp (ACCO) 2010 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the ACCO Brands Corporation fourth-quarter 2010 conference call. My name is Lacy and I will be your coordinator for today. At this time all participants are in listen-only mode. (Operator Instructions)We will facilitate a question-and-answer session towards the end of the presentation. As a reminder, this conference is being recorded for replay purposes. I will now 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 fourth-quarter 2010 conference call. On the call today are Bob Keller, Chairman and Chief Executive Officer of ACCO Brands Corporation, 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. These slides provide detailed information to supplement this call. Our discussion this morning will refer to results for continuing operations on an adjusted basis, which for 2009 exclude all restructuring and other charges and for 2010 apply normalized effective tax rate of 30%. A reconciliation of adjusted results to GAAP can be found 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 for 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. I continue to be pleased with our progress. We grew sales, expanded our margins, improved profitability and positioned ourselves for further growth in 2011, all in the face of economic headwinds, rising commodity costs and the challenge of normalizing compensation. Our reported net sales increased by a healthy 6%, based on a 5% volume increase and driven by solid contributions from all of our business segments.EBITDA, which included $6.7 million of higher compensation cost in the current quarter, increased 8% year-over-year, growing to $50 million from $46 million. Adjusted per share earnings increased to $0.25 from $0.21 in last year's fourth quarter.

For all of 2010 net sales increased 5% and sales volume grew 4%, driven again by growth from all business segments. EBITDA increased 9% to $164 million, the starting point of our cliff vesting bonus plan. All in, we absorbed $27 million of additional salary, management incentive and employee benefits expense this year to deliver the EBITDA number. Adjusted per share earnings grew to $0.53 from $0.47 last year. We generated $40 million in free cash flow during the year and end of the year with a cash balance of $83 million. In short, we have continued to make significant progress in a very challenging environment and though we still have a long way to go, I like how we're positioned as we enter 2011.

We've worked hard the past two years to be a better partner to our customers. We've improved our operational performance, invested in innovation, simplified our organization to make it easier to do business with us, competed aggressively at all relevant price points in our categories, and improved our financial performance while helping our customers improve theirs. Now we're starting to do the kinds of things we need to do to help our customers sell more of our products. We're doing a better job of understanding our customers and their customers' needs and bringing outstanding products to the market to meet them.We're utilizing outside agencies to compliment internal expertise to design specific marketing campaigns to help drive product positioning and sales. Our Kensington ClickSafe locks, Swingline and Rexel low-force staplers and our new Stack and Shred shredders are all examples of products we've recently brought to market that will benefit from this approach as we move forward in 2011.

We don't anticipate this year will be any easier than last year. We operate in a tough industry with tough competitors and we are assuming ongoing uncertainty around consumer and business spending. Regardless, we expect to grow sales between 2% and 4% as we continue to grow our market share globally. We also expect to grow EBITDA in the mid single digits through gross margin improvements, which will be partially offset by increases in selling, general and administrative expenses. This should result in earnings per share growth of between 20% and 30%. Targeted free cash flow, after interest, taxes and capital expenditures, is expected to be approximately $50 million to $60 million. We will do all of this while we fix our European business. We expect to incur between $6 million and $9 million of one-time costs in SG&A in the first half of the year as we rationalize our operations there with most of the pay back expected in 2011.

I'll close by making note of the recent changes at ACCO Brands, which we will believe will help us do an even better job of creating value for our customers, our employees and our shareowners. In December we named Boris Elisman as President and Chief Operating Officer. Tom Tedford replaced Boris as Executive Vice President and President of the Americas. Tom Shortt became President of Product Strategy and Development. And late last year we named Christopher Franey President of our International and Kensington businesses.The board of directors and I believe that we have the right leadership team for the next decade and I look forward to working with them to make our vision of ACCO Brand's potential a reality.

Now I'll turn the call over to Neal to provide greater detail on our performance. Neal?

Thank you, Bob. Our fourth-quarter performance is recapped on slide four. Reported sales increased 6% and volume increased 5%, with growth in all business segments. We expanded our gross profit margin 90 basis points to 31.9%, in spite of the continuing inflation in commodity costs during the quarter, which we are not able to recover until Q1. The improvement in gross margin was the result of improved sales mix, improved freight and distribution and other process efficiencies. SG&A expenses were up in the quarter 80 basis points, primarily due to the $6.7 million of increased compensation costs as a result of reaching our annual incentive threshold at year end.

In all, operating income increased 7%, which included a $1.2 million year-over-year benefit from foreign exchange translation and operating margin increased to 9.6%, an improvement of ten basis points. EBITDA increased 8% to $50 million, including $1.5 million of benefit from foreign exchange translation, and EPS from continuing operations was $0.25 versus a comparable $0.21 in the prior quarter. Due to delivering a better-than-forecast fourth quarter we actually triggered our first ever performance share award as part of our incentive compensation plan, which reduced EPS by $0.01 in the quarter. Additionally, we lost about a penny-and-a-half year-over-year due to FX losses running through other income expense lines and due to changes in the number of diluted shares.

Turning to an overview our segments on slide five, during the quarter reported sales for the Americas increased 3% and volume increased 2%, driven by market share gains, improved category management and some increased demand ahead of price increases. For the full year volume in the Americas increased 2%, as well. Operating income for the Americas increased 33% in the quarter and operating margin increased 210 basis points. Improved sales volumes, lower freight and distribution costs and other efficiency gains offset higher incentive compensation costs.

International segment sales in volume increased 7%, driven by share gains and improved category management. Prices decreased in certain markets, reflecting fluctuations in local currency rates. For the full year, International volume increased 4%. International segment profit declined 19% in the quarter, however, and operating margin contracted 320 basis points to 9.9%. The decline in profit was the result of higher commodity costs and adverse sales mix.

Computer Product sales and volumes increased 11%, driven by another quarter of strong sales of new products for iPads and iPhones, as well as computer security locks. Growth was broad-based and across most regions. For the full year Computer Products volume increased 8%. Computer Products operating profit increased 26% in the quarter and margin expanded 280 basis points to 22.8%. The improvement was the result of gross margin expansion, which was driven by growth in security locks and increased royalty income from security locks.

Slides six and seven recap our full-year revenue and margin results. For the year sales increased 5% and volume increased 3.5%, driven by growth in all business segments. Gross margin expanded 110 basis points for the year in spite of higher commodity costs and ocean freight rates. The improvement was the result favorable sales mix, which accounted for 60 basis points of the improvement and supply chain initiatives, which accounted for 130 basis points of the improvement. The adverse impact of higher costs, net of pricing, was 100 basis points.

SG&A increased 8% year-over-year and as a percentage of sales increased 70 basis points to 22.1%. FX translation accounted for $4.9 million, or 20 basis points of the increase, and higher salary, benefits and incentive costs amounted to 190 basis points of the increase. Cost savings helped to offset these increases by 80 basis points.All in, with 5% annual sales growth, operating income improved 11% and operating margin expanded 50 basis point to 8.6%.

Foreign exchange translation added $7.6 million to operating income. The improvement in operating income was in spite of absorbing significant cost during the year, including $27 million of higher compensation costs and also higher cost of goods. EBITDA increased 9% to $164 million, including an $8.9 million benefit from foreign exchange translation. EPS from continuing operations was $0.53 versus a comparable $0.47 in the prior year.

Turning to cash flow, which is detailed on slide eight, Q4 was a strong cash-generating quarter as it seasonally should be and was strong despite heavy shipments at the end of the quarter, which increased our accounts receivable balances. As expected we finished the year with no borrowings from our ABL facility. We generated $40 million of cash for the year, which was at the high end of our revised outlook, due to tight management of working capital. We added significantly to our cash on hand during the quarter and finished the year with a cash balance of $83 million. Our strong cash balance helped us work our net leverage down to 3.9 times, which is down from 4.5 times last year and 5.2 when we completed our refinancing in September 2009.

In terms of 2011, as Bob outlined, we do expect to drive sales growth of 2% to 4% and EBITDA growth in mid single digits. We expect to deliver this by expanding our gross margin, despite the continued pressure of rising commodity costs and despite $12 million of incremental SG&A required to normalize employee incentive compensation to target levels. We will also invest in product development and marketing to drive growth in future periods. As we demonstrated throughout 2009 and 2010 we will manage our entire cost base so that we deliver to all stakeholders. All in, we expect to grow earnings per share 20% to 30%, and this assumes a 30% tax rate and 58 million shares.

Our performance is always weighted to the second half of the year for a number of seasonal factors, but in 2011 the second half will be even more meaningful this year because of the initiatives we have underway in Europe to improve our profitability in that region, specifically to right size our SG&A and distribution expense in that region. Our first-quarter numbers will include the majority of an anticipated $6 million to $9 million of cash expense. Excluding these one-time costs we expect Q1 to be relatively flat year-over-year, but with them Q1 will be down year-over-year. We anticipate then showing growth, particularly in the second half. Our guidance includes these costs.

And that concludes our prepared remarks. At this point Bob and I will be happy to take your questions. Operator?

(Operator Instructions)Our first question will come from the line of Bill Chappell with SunTrust Robinson. Please proceed.

Good morning.

Good morning, Bill.

I want to talk a little bit more about the guidance, both on top and bottom line. When I look at the 2% to 4%, that's both below what you did in the fourth quarter and most of the last year, and just trying to understand, one, are you not expecting any pricing to help or is this just a volume number? And then two, should we look at last year as kind of just an inventory restock at retail and the end markets really aren't rebounding?

No, I think you should read that as we're being conservative. The number includes both volume growth, market share growth and pricing impact. But part of our plan for the year is to get Europe right and part of that assumes that we're going to transition a significant number of smaller accounts to the proper channels. And while we want to retain and potentially even grow the revenue that we shift to the right channel, our plans assume that we're going to lose some in that mix. We're assuming it's going to be a challenging environment. We're not assuming economic growth or increased spending in either the business or the consumer sector, and so if the economy gets better we should benefit from that. And so, our expectation from -- going into the year is that we have at least as much opportunity as we've had the past two years to take market share and the top-line forecast, we think, is appropriately conservative.

Just to dig in a little bit further, I would assume you took at least a couple of percentage points of pricing on the January 1 reset and if commodities are spiking as much as you're saying in terms of the impact to gross margin there'd be another price increase that would come mid year.So am I looking at that wrong, or are you not able to pass off the pricing right now?

No. No, we haven't built a second-half price increase into this number, but your expectation if commodity costs remain where they are is correct and we, and I think everyone in the industry, would expect an increase in pricing.

And so just to -- would you expect the Americas to move a lot of faster than your guidance and then the real drag being International?

I'd say that, but we performed better on the top line in Europe than the external circumstances would suggest over the course of the last nine months, so I don't want to count Europe out. But, yes, I think we're a little bit better positioned at this point in time in the Americas. The other thing is we didn't see much of any benefit in terms of a retail restocking in the fourth quarter. I think our operational performance has gotten us to the point where our customers expect that we're going to be able to deliver full orders on time and so we've actually seen them improving their turns on our business, not going the other way, and so we didn't get that. Our -- we had a little bit of a pull forward in terms of pricing in advance of the pricing impact. We think it was maybe a point, point-and-a-half percent in December, but it wasn't really a restocking thing, it was some customers getting ahead of the price increase.

Okay, and just a last one, just digging a little bit more to the charge -- or the restructuring in Europe. Typically, saying your restructuring in Europe and getting a pay back in the same year are not in the same sentence, so can you give us a little bit more color of how you're -- that's happening and what you're actually doing?

Honestly I don't want to get into an awful lot of detail, Bill, because we're announcing it to our folks in Europe today and I'd rather that we give our local management time to speak with them before we talk about it publicly. But we're going to do what we've been saying for the last 90 days, which is we need to simplify that business. We've been being a direct supplier to too many small customers, the small customers ordering small quantities and infrequently and it's increased our cost all along the entire infrastructure from customer support all the way through our operations, freight and delivery.

The first thing we're going to do is rationalize the customer base and get customers in the proper support channels. Significant portions are going to go into the wholesaler channel and we've been working closely with the wholesalers there to get that done. We need to rationalize our SKU base there. We need to do a better job of increasing the number of SKUs that we sale on a pan-European basis, and then we'll rationalize our infrastructure that supports all of that. We've done the work and we do believe that we can get the majority of the pay back in next year and unlike what we have historically done, we're not taking a restructuring charge. We're going to eat this as part of normal expense and our numbers include this expense for 2011 and so --

But you expect to be net neutral to earnings this year?

In very large measure and the numbers that we've given in terms of our full-year expectations include the impact of what we're doing internally.

Okay. Thanks so much.

Sure.

Next question will come from the line with Arnie Ursaner with CJS Securities. Please proceed.

Hi, good morning. My first question --

Hi, Arnie.

-- is a follow up to that. To be clear, in your prepared remarks you indicated that the first quarter would be flat with a year ago ex the $6 million to $9 million of expense, the majority of which you're going to incur. How should I think about that? Is it relative to the operating to the operating income of $21.5 million you did last year in Q1?

Yes, you can assume that's where we were communicating the flat position.

So If you're flat with $21.5 million including $6 million you're talking about a very robust improvement in Q1?

No, no, we're talking about being flat before the charge. The charge will make Q1 lower so we are pre- notifying people that because of the significant charge we will have to take in Q1 where we will get little benefit in Q1 apart from taking the expense that we will see Q1 below prior year because of that.

Perfect, thanks for clarification. On the cliff payments tied to the multi-year executive comp, is it fair to say that these are essentially now completely behind us?

No, no. We wanted to bite off a significant chunk of it this year. We did that. We still have to absorb about $12 million in incremental bonus payments and incentive payments in order to get us on a fully normal paying at 100% of target basis. But we did what we wanted to do in 2010, we got where we wanted to get in 2010.

And the $12 million would be incurred in 2011?

It will be. And, again, it's not cliff vested this year, but it gives us leverage to ensure that we deliver our expectation in terms of profitability.

Okay. And Bob, in the past you've given pretty specific operating and gross margin improvement goals at the beginning of year and you seem to not have done it this year. Would you care to comment?

Yes, we view both gross margin and SG&A as levers that we've got in order to get to our EBITDA target and I think from a modeling perspective, again appreciating that they are levers that will play against each other, our expectation is that we're going to improve our gross margin by about 150 basis points roughly and that the increase in SG&A will be about what it was last year.

Okay. Two more quick questions, if I can. If I were -- just remind me, with the debt refinancing you did there was various levels within your leverage coverage ratio that once you went below certain levels it gave you quite a bit more flexibility. You're obviously sub- four, but remind us where the key cuts would be where you actually have a meaningful benefit in terms of rate --?

So that's the senior secured leverage test --

Yes.

-- and under that covenant we need to get below 2.5 times. We're currently at 2.9 times.

Okay, and final question for me, a two-part question related to International. Australia is your most important profitability market within International and obviously the country's been under water. You've seen --

Well, yes, the northeast portion of it has been.

Okay. Is that impacting current results in any meaningful or measurable way?

A tiny bit. Australia is an interesting place. It's got 22 million people, they're in three cities and each of the cities is 1,000 miles apart and the storm is closest to Melbourne, up in the northeast sector, in terms of major population centers, and so it's had some impact but not appreciable. We don't expect over the course of the quarter that it will make a difference. There's a short-term impact, which is clearly negative and then, frankly, there's an expectation that there will be a rebuilding phase, which will be somewhat positive. And so net-net we think over time -- over the course of the year it won't have any impact.

Okay. Neal, if you could expand on International, your operating margin had a pretty meaningful decline despite very strong volumes and you cited in your prepared remarks commodity cost and mix. Can you expand on both of those a little bit, please?

Yes, we've seen significant commodity cost pressures throughout 2010 and they haven't abated. They're continuing through the first part of 2011. And so we came into 2010 expecting to actually see reductions in commodity costs until the complete flip around. Whatever we saw in the United States in terms of commodity cost increases throughout most of 2010 we saw even more pressure in Europe because you had a weak currency on top. And so a good example, when steel in the US was up about 20% the same steel in Europe -- in Euros was up about 43%. So there's a lag effect between what happens in the real world and what happens in a P&L account because of inventory and currency hedging. So what we've seen rip through our P&L in Q4 in International is about the worst point in the commodity cycle.

Thank you very much.

And our next question will come from the line of Reza Vahabzadeh with Barclays Capital. Please proceed.

Good morning.

Good morning, Reza.

Just a couple of housekeeping items to start with, I may have missed it. The working capital performance in the fourth quarter, was that in line with your expectations or better?

It was actually at the top end of our expectations, which is why we met the higher end of our cash flow estimate.

Got it. And then as far as sales performance in the first quarter, I wasn't able to catch what you expect for sales in the first quarter?

We didn't give --

We don't give quarterly guidance.

Right, thank you.

The guidance that we did give was -- for the whole year we gave sales guidance and we gave the other guidance that our operating income would be flat in Q1 prior to taking the $6 million to $9 million charge in Europe.

Got it. I guess to the extent that your fourth quarter sales may have benefit from shift in timing of sales, do those kind of things usually reverse in the following quarter?

Yes, they do within -- so we would expect a little bit of an impact there and the weather hasn't been anybody's friend as we start January, either. On days where we've gotten less than ten inches of snow, the point of sale is pretty much where we expected it to be, but we've got more days with ten inches of snow than anybody would like.

And massive floods in other countries.

Right. And then on the commodity cost inflation, you discussed that in some detail, what kind of commodity cost inflation -- or really cost inflation is embedded in your guidance at this point in time? And I know it's a moving target, but what's already in your guidance?

I think the way to look at it is we try and model raising our prices or lowering our prices, depending on what happens to commodity cost. We don't try to make money out to things that we can't control, but there's a lag effect between our ability to incur an expense and pass it on. So in January of this year we raised prices but that really reflects what was happening in the world about six months prior to that. So in the last six months we've seen some commodities go down, we've seen others go up sharply, and most notably those driven by the oil price, which hasn't really completing factored through yet into plastic pricing. And so we will take stock of where we're at now and we will talk to our customers about what we have to do to reflect what's going on in the current world. So what we do is we basically have to mop up a lag effect.

I see. So you're basically -- your guidance implies that there might be another price increase needed to offset cost inflation between now and the end of the second quarter?

Our guidance includes the fact -- that we our expectations is that commodities are higher than current pricing levels.

Got it, and then just if I missed this one, on your sales guidance, how much of that is volume versus price mix?

We didn't break that out.

Any color as far as how you came up with the sales guidance by any chance?

We threw a dart at a wall. No, honestly, it's a portion of market share gains and a significant portion of that we've already captured. We expect to continue to take share throughout the year and there are parts of our business and parts of our customer base that will allow us to translate gains that we win in 2011 into 2011 revenue. We did have price increases in both the US and Europe on January 1st and so that is a component of it. We have assumed that the overall office products industry is going to be relatively flat on a year-to-year basis and so we're not getting a lift out of that. We've assumed that our competitors will get more aggressive in response to how we've performed over the last couple of years, and so we've factored that in. We've factored in the fact that, while we transition customers into the proper channels in Europe that there will be some disruption or lost business as a result of that. And net-net we think that on a volume basis we're doing to continue to out-perform the industry and our competition, so that's -- those are the components that we looked at.

Got it. Thank you very much.

And our next question will come from the line of Karru Martinson with Deutsche Bank. Please proceed.

Good morning. Just to follow up on that last comment, I'm having a little trouble understanding, when you say you want to transition accounts to the proper channels, what does that mean?

We're serving a lot of small customers directly in Europe and the proper channel for those customers is really the wholesaler channel. So we're negotiating with multiple wholesalers in Europe to ensure that we have the right product coverage, the right distribution capability, the right geographic coverage. Our business isn't set up to deliver small orders on an infrequent basis to small customers, and so the -- they're the right channel for smaller dealers.

Okay. When all of these steps are taken what's the magnitude of the savings that you guys are looking at on a run-rate basis?

Well, we've said that the charge is going to be $6 million to $9 million, so you should assume that that's an on-going savings, but I would tell you that's a relatively small piece of the operating performance that we expect out of Europe on an on-going basis.

Okay. Of that $6 million to $9 million charge, only $3 million of that is going to be cash, correct?

No, it's largely cash.

Okay, because I was looking at the modeling assumptions here, it says from a cash restructuring --

That's the tail of the charges we classified as restructuring, which is really based on our balance sheet.

Okay.

We're not taking this as restructuring charge.

Okay, but you will break that out in the first quarter?

No, we won't be. We will update what the actual charge was in Q1 that we took, but we're not going to break it out on the financial statements as a restructuring charge. We'll take it as a SG&A expense and we'll just call it out as exception.

Okay. And in terms of the pricing actions that you've taken, what has been the response from the industry and also private label, more specifically?

No, that response from our customers has been what we had expected. Neal made the point before and I think our customers appreciated. I think historically ACCO has tried to use pricing as a vehicle to grow the business. We're not using pricing relative to commodity cost increases as a vehicle to try to grow our business. We're trying to recover costs that are consistent across the marketplace. And, again, Neal has been pretty outspoken in the past. Our three largest commodities are plastic, steel, and cardboard, and so are our customers, and they operate in the same marketplace and they're seeing the same things. It's been a very rational discussion. I think our customers appreciate how we approach this and so we ended up with something that I think works for both of us.

And in terms of the use of cash, you've got a healthy cash balance here of $50 million to $60 million in the upcoming year. What are the investment areas for you and then how do you think can of your capital structure going forward?

In the immediate -- as people who follow us would understand, Q1 is a big cash outflow quarter for us and so most of the cash sitting on the balance sheet will just fund that normal cyclical outflow of cash. And as we get later into 2011 and then obviously start the cyclical growth in the cash balance again, that's where you really start building the opportunities for what you do with cash. And we've always said that we will look to deploy that cash where we consider best. And so, organic growth is the best support followed by things we can do to drive the business growth and then paying down debt.

Okay. And what is the acquisition environment out there for you guys right now in terms of targets?

Well, we have a lot of investment bankers knocking on our door.

I'm sure.

It's a different perspective than we've had in a while so I think honestly we need to continue to focus on delevering the business. We've said publicly we think 2.5 times to 3 times is the right number, we're pleased with the progress we made so far. But if we saw something that we thought was opportunistic and creative in the short term we'd take a hard look at it.

All right. Thank you very much, guys.

Sure.

And our next question will come from the line of Arun Seshadri with Credit Suisse. Please proceed.

Thanks for taking my questions. Just a couple of quick follow ups and most of them -- most of my questions are answered. First one --

Arun, could you speak up a little, we're having a hard time hearing.

Okay, is this better?

Yes, that is. Thank you.

Okay, great. The first question was Computer Products growth, can you talk about, broadly speaking, do you expect similar growth going into 2011, or what type of assumptions are taking in Computer Products?

You're fading out again, Arun.

Computer Products growth, I just wanted to get some sense for how -- whether we should continue to expect the kind of strength that you've seen recently?

Yes, we do, we expect that part of the business to grow. We're -- we introduced the replacement for the physical security lock, the new product is called ClickSafe and it's off to a great start and both -- it's had great reception from our customers and I think we're doing a terrific job on the marketing side of the business. And the non-security part of our business is performing very well and we expect significant opportunity there. The expansion of the iPhone market to Verizon will create an opportunity for us and we like that business. They've done a great job of growing the top line, they've done a great job of managing expenses and bringing product to the market. That whole management team has done a terrific job the last two years.

I appreciate that. And then next, on the broad outlook of the market I think you said your expectation is that the market is flattish in 2011. Any color you can give us on why that is, why the outlook is still so somewhat weak given especially that, at least on the technology side there's a lot of refresh and enterprise spending coming back. So I just wanted to get your sense of why the broad -- your market outlook is flat?

Yes, I think you know that the technology side of our business represents less than 20% of our business, and so when we speak about that, we're largely talking about the office products environment and that environment we're not seeing -- if someone else is if they could give us a call we'd appreciate it, but we're just not seeing much in the way of white collar employment growth and ultimately that's going to be a big driver. We've bifurcated our comments over the last year-and-a-half and have said that we think that the durable part of our business, which represents about half of our business, is more tied to business health and financial health and financial performance of businesses. That part of our business is significantly outperforming the consumable side, which we think is directly correlated to white collar employment and it's one of the reasons why I think we'll outperform is just because of our mix. So the pessimism is we just -- we just don't have a strong sense that the economy is going to rebound in 2011. We don't see a double dip, but we don't see a rebound either.

Okay, that's fair. One last question for you. Capital expenditure. Your outlook is up versus 2010, can you talk about what the main components are?

True. I think the other way to look at that is level of expenditures in 2009 and 2010 were significantly lower than our normal run rate. Our normal run rate for this business is about $20 million a year and fundamentally that is deployed to support new product and IT infrastructure.

Understood. Thank you, guys.

Sure.

And our next question will come from the line from Gary Balter with Credit Suisse. Please proceed.

This is Simeon Gutman for Gary. Just a quick question on how to think about the sales progression? I know you're not giving quarterly, but sales progression, actually in International, because in the comments you alluded to switching some business around among channels, but I imagine there will be some culling of accounts may be in there, as well. So how we do think about how the sales progresses throughout the year?

I don't know that you should think about it any differently than we performed last year, which we got successively stronger from a quarter-to-quarter-to-quarter basis and we would expect that again this year that the first quarter will be our smallest quarter in terms of sales, second will be next, third and then fourth.

Okay. And then I guess following on the International piece, what's different today than in the thick of the recession that came to the realization that some of these accounts probably are better served in other parts? Did the sales not come back as much, or just some of the cost issues that have -- are just more exposed?

No. Frankly, we just -- we haven't been -- we weren't pleased with the progress that we were making in terms of overall profitability and we started taking a hard look at it last year. We changed the management team out in the -- or the leadership out in the third quarter, we sent a team of analysts over in the fourth quarter. And we believe that the challenges that we have in Europe in large measure are our own making, that we made our business too complex, that we're trying to be all things to all people and that's not what we do. We should have a core group of large customers that we serve efficiently and we've just gotten it to be too fragmented. We're going to fix that. And so, we think we have the right team over there now and they're working with the right data and we think we're going to fix that problem this year.

And just along those lines, can you just contrast that or compare that to the Americas piece and there are similar opportunities, or that one is --?

If you look at the US business over the last five years, the number of customers has contracted by 60%.

Right. Okay, thanks.

And our next question comes from the line of Bill Chappell with SunTrust Robinson. Please proceed.

Yes, wanted to follow up on the SG&A side just looking at the progression as you look both to your long term and what you talked about for this year, and just trying to understand, are there any other catch-ups? I think you talked about another $6 million of getting compensation to where it should be. I kind of thought that was behind us, so just trying to understand what additional things there may be? And then also, when do you see SG&A start to go down as a percentage?

It's actually $12 million, BIll, for this year and that gets us to full compensation, full payout, and that's what we've got built into our expectations, that we're gong to pay out at 100% this year and so you should see leverage of off that. This should be the highest number from a percentage point of view. You should see continued leverage on that going forward.

It's also worth noting that to manage 2010 we also had to cut back on some of the marketing support dollars that we would ordinarily spend, so we fundamentally, not just in terms of payroll need to increase expense, but we also need to increase some of our market support costs. So our SG&A will go up as a percent of sales in 2011 and after that we would anticipate using growth to leverage it back down, together with some of the Lean Six Sigma initiatives that we've undertaken.

So can I imply that if you actually see better than 2% to 4% growth this year there should be some leverage to the model this year?

Yes, there should be. Our planning number is around 70 basis point increase this year --

Right.

-- but that's with a 2% to 4% sales increase.

Okay, and then just -- I might have missed it, but I want to say last year there was a thought there was at least $50 million in revenue in terms of market share gains and I know you won some business. Can you quantify that for this year and then how should we look at that back to that 2% to 4% top line?

I think we came in pretty close to that number each of the last two years and we think our growth opportunity -- or our market share capture opportunity is at least that much for that year.

But that almost implies that using the low end of your 2% to 4% that you're expecting flat to no growth out of the category and no pricing?

No, we're expecting some breakage in terms of the European business model which Bob alluded to earlier.

Okay.

And again, we've been pretty successful on the sales side the last two years. Our expectation is our competitors are going to respond, and so we're trying to create a model that's conservative and realistic.

Okay, thanks.

Ladies and gentlemen, this concludes our question-and=answer portion of today's call. I would now turn the call back over to Mr. Bob Keller, Chairman and CEO, for any closing remarks.

Thanks very much. To close, we're pleased with our progress, we thought we had a terrific quarter and a very good year. We thought we did the best job we've done in a long time of balancing the needs of our customers, our shareowners and our employees. We're pleased with how we're positioned as we start the year. We think it'll be a challenging year, but we're excited about how we're positioned and the kinds of things that we can do this year and look forward to talking to you after the first quarter. Thanks.

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