ACCO Brands Corp (ACCO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 ACCO Brands Corporation earnings conference call. My name is Stacey and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the 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, to Ms. Jennifer Rice, Vice President, Investor Relations. Please proceed.

Good morning, and welcome to our second quarter 2011 conference call. Speaking 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.

When speaking to earnings per share, we are using a normalized effective tax rate of 30%. 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 is my pleasure to turn the call over to Mr. Keller.

Thank you, Jennifer, and good morning, everyone. Earlier today, we released our second quarter financial results and I continue to be pleased with our progress. In what remains a difficult operating environment, we grew our top line by 8% and expanded our operating income margin 110 basis points.

We returned our European operations to profitability and we ended the quarter with $93 million in cash. Including the costs related to the rationalization of our European business, earnings from continuing operations were $0.15 per share. Virtually all of our businesses and geographies performed at or above our expectations.

Our teams in Australia, Asia-Pacific, Canada and Latin America all delivered strong results. Our Kensington Computer Products business was substantially ahead of plan, in large measure because of robust sales of iPad and iPhone accessories, and the continued success of the new ClickSafe computer security line.

In the United States, we held our own in a difficult business environment. Our Print Finishing Solutions business, a focus area we targeted for improvement, achieved break-even status in the quarter and we're expecting it to both grow the top line and become profitable in the second half of the year. In Europe, our account transition plan, and our SKU rationalization, are both tracking to our internal expectations.

On the product side, the Swingline Stack-and-Shred auto-feed shredder, which we introduced at the beginning of the year, continues to perform particularly well for us globally.

During the quarter, we announced that we had sold the GBC Australia operations to our long-time distribution partner, Neopost. While we weren't seeking a purchaser, Neopost made an attractive offer and they will become the exclusive distributor of print finishing products for the direct channel in Australia and New Zealand. The sale added significantly to our cash reserves and it had no effect on our two larger operations in the region, ACCO Australia and our joint venture interest in Pelikan Artline.

In closing, while we're pleased with our second quarter results, we remain cautious about the external operating environment. We continue to believe that we'll grow our business in line with our previous outlook -- sales up 2% to 4% excluding currency, but based on our year-to-date performance, we now believe that we'll be at the high end of our earnings range, growing EPS around 30% and generating $100 million to $110 million in free cash flow by year end. Overall I believe we are well positioned to deliver on our commitments for the year.

With that, I'll turn the call over to Neal for a more detailed review of the numbers. Neal?

Thank you, Bob. Our second quarter performance is recapped on slide 4. Reported sales increased 8% with a 6% benefit from foreign exchange. Pricing was favorable 2%. Underlying volume was flat. EBITDA was $42.2 million and included $3.7 million of benefit from foreign exchange translation. EPS from continuing operations was $0.15 using a 30% tax rate versus a comparable $0.08 in the prior year.

Our gross profit margin increased 100 basis points to 32%. The increase was mainly due to reductions in freight and distribution costs. SG&A expense was down 20 basis points, primarily due to reductions in Europe. In all, operating income increased 22% and margin expanded 110 basis points to 9.3%.

For the six months, sales increased 4%, driven by foreign exchange. Volume was down 2% for the six months due to the Q1 impact from the year-end buy-forward and inventory reductions by certain customers. Pricing for the six-month period was favorable 2%.

As shown on slide 5, gross margin increased 40 basis points for the six-month period to 31%. While savings accounted for 50 basis points of the improvement, but were particularly offset by material cost increases, which were not fully offset by our price increases.

SG&A was up 8% for the six months, including $4.7 million impact from foreign exchange. As a percentage of sales, SG&A increased 80 basis points to 23.5% of sales, primarily due to $4.3 million or 70 basis points of reorganization costs in Europe, and $3.7 million of higher incentive compensation costs. These were partially offset by savings, mainly in Europe.

EBITDA for the six-month period declined 3% to $66.3 million. Excluding the $4.3 million of reorganization costs in Europe, EBITDA was up 3%. EBITDA included $5.3 million benefit from foreign exchange during the six-month period.

EPS from continuing operations was $0.09 using a normalized tax rate of 30% and even with the comparable period.

Now, I will provide an overview of our segment performance for the quarter. During the second quarter, reported sales for the Americas increased 3% with foreign exchange, pricing and volume all positive factors. Customer purchases were back in line with point of sale after certain customers had ordered below POS in Q1 in order to improve their own inventory turns.

Operating margins in the Americas were down slightly, 20 basis points to 8.3% due to product material increases and continued investment in new plan-o-grams and accelerated go-to-market spending to drive demand and improve market share for durable products.

In our International segment, sales from continuing operations increased 14%, driven by foreign exchange translation and pricing. Underlying volumes declined 4%, largely due to reduced demand in the UK. We are also experiencing a small volume decline associated with the transition of certain of our smaller and unprofitable accounts to wholesalers.

In the International segment, profit increased 84% and operating margin expanded a strong 320 basis points to 8.5% as our European region returned to profitability. We incurred approximately $400,000 of additional charges associated with the rationalization of our European business, which was less than the $2 million we guided to, as many employees agreed to continue to work during their notice period. We have realized $600,000 of savings and expect a further $3 million of savings in the second half, helping to offset the $4.3 million of expenses incurred, making the initiative near break-even for the year. By next year, savings should grow to $6.5 million annually.

Finally, Computer Products had a very strong quarter, with sales up 16% and volume up 8%. We saw strong demand for our new products that accessorize iPads and iPhones. Computer Products operating profit increased 22% in the quarter and margin expanded 150 points to 26.9%. The improvement was driven by volume leverage and lower promotional activities.

Turning to cash flow, which is detailed on slide 6, we ended the quarter with a very healthy cash balance of $93 million and continue to have no borrowings on our ABL facility. We received $54 million of cash proceeds in the quarter from the sale of our Australian GBC-Fordigraph business and generated $32 million of cash from operations. We used $11 million of cash to repurchase our senior subordinated notes when the price fell to par and therefore, improved our leverage profile.

Our working capital balance has remained a little high, in part due to foreign exchange and in part due to higher accounts receivable and inventory balances, mainly in Europe. Versus a year ago, foreign exchange added $23 million to receivable balances and $14 million to inventory.

We continue to expect to generate $100 million to $110 million in free cash flow this year, including announced sale proceeds, and should end the year with over $3 per share in cash.

In terms of our 2011 outlook, adjusting for the sale of GBC-Fordigraph business, we are reiterating our expectation for sales to grow 2% to 4% before foreign exchange. As Bob mentioned, due to the benefits of foreign exchange realized in the first half, we are now guiding to the high end of our EPS growth range of 20% to 30%. The second half should benefit from the initiatives under way to improve our profitability in Europe.

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

Thank you. (Operator Instructions). Your first question comes from the line of Bill Chappell with SunTrust. Please proceed.

Good morning.

Good morning. How are you doing, Bill?

Good. I guess a couple of questions just kind of on the outlook for the back half. I think by now, you would have a pretty good outlook on how the European restructuring has gone and also kind of some of the competition in the shredder business and reaction there. Can you maybe give us some updates in terms of -- I know for Europe, you had expected to lose some revenue during the transition, but would have a better idea and also see some more pricing pressure on the shredder business. Maybe you can give us an update there.

Yes. I think we're pleased with the progress that we've made in Europe. We've returned that business to profitability. Both sales volume on the transition accounts to date is consistent with our expectations. We're making progress -- again, consistent with our expectations -- on the SKU rationalization.

We're cautious about sales in the back half. We think consumer confidence kind of goes up and down. The economic environment, both here in the States and in Europe, is still pretty volatile and we think our customers have a focus on inventory management as a response to the concerns that they have. We've got a lot of customers that are focused on their working capital.

And so we're pleased with the things that we can control and we're on track in Europe in terms of our expectations, so I don't think anything has changed relative to our perspective about the second half other than that we remain cautious about top line.

On the shredder situation, our competitor who had a delivery problem is now delivering product. We expect that to continue to be a very competitive marketplace. We've got business, and they have business, that is up for grabs in the second half and we will compete fiercely on that, but on a net-net, we're pleased with where we are from a pricing perspective.

And I guess kind of following up on that in terms of looking at market share gains, can you maybe give us an update on how the big (inaudible) have gone year-to-date and what you see kind of going into 2012 in terms of new business?

Yes. We're, again, pleased with the progress that we've made in terms of market share. We have a couple of opportunities in the back half of the year that are very large opportunities that we're focused on that would be -- have a meaningful impact in 2012. And we think we're positioned where we need to be positioned in order to compete effectively for those. So when we look at the industry as a whole, we think volumes are probably down slightly in our traditional channels and the fact that we're flat to marginally up would say that we've been successful in taking share.

And I guess just --

(Inaudible) the market is growing.

Just trying to put that into perspective for kind of the 0.4% volume growth in North America this quarter, does that mean some of the stuff you won last year is more back-end weighted?

No, I think it is a combination of the fact that it's partially back-end loaded and partially that volumes as a whole in some of the traditional channels are down.

Okay. And then just finally, kind of your initial read on back to school? I know it's early and I know it's not as big of a focus, but kind of what you see in both the US and internationally?

It looks an awful lot like last year so far. I think it's going to be a very competitive marketplace. I think that traditional office product superstores are going to compete aggressively. I think they had a pretty good year last year and that load-ins have been consistent with last year.

Great. Thanks so much.

Your next question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Good morning, Bob. Good morning, Neal.

Hey, Arnie.

A quick question -- first, the math. If you had a deferral, if you will, or a timing issue on about $1.6 million of expenses for Europe, am I correct that's about a $0.02 benefit in the quarter, about $0.015 to $0.02 benefit in the quarter?

We -- the way to understand that, Arnie, is that we incurred exactly what expected in Europe. For Europe, what you have is a situation where when you go into a big severance, you're unsure how people will respond and so we have to assume the worst case, which is that we will pay maximum severance for people's notice period.

We were successful this year in getting people to work, so effectively, if we had gone through our original plan, we would have incurred more severance costs and we would have got more savings in this quarter in terms of how we would have displayed it. By having people work, we effectively incurred less severance cost and incurred -- and received less savings.

Okay. Thank you. And Bob, all during the course of the quarter, your stock was, at various times, under a lot of pressure based on comments some of your customers made, the big box retailers. Can you just remind us again of the sales mix for ACCO Brand between the big box retailers and what people seem to not include in thinking about your company, the wholesalers and the independents, where trends appear to be pretty different than the big box retailers? Can you freshen that up for us a little, please?

Sure. The big box retailers represent 30% of our business and so the majority of our business is to the wholesale and independent dealer channel. And we had a couple of the wholesalers -- the US wholesalers, announced this week, and their Office Products sales were up 4%. And they service both the independent dealer channel and the superstore channel, and so just looking at the numbers, it's pretty obvious that the independents are growing at high single-digits or even potentially a little bit higher than that.

And another issue that comes up frequently is the other channels of distribution, internet and others. Just remind us the exposure you have there, if you can.

I think that's just -- it's a growing channel. It's small and getting bigger. A year ago, we had 750 SKUs at Amazon; we've got 3500 SKUs listed at Amazon today. That business is growing exponentially. The mass channel as a whole, we're pleased specifically with Wal-Mart where we continue to grow that business aggressively. And so the superstore channel is clearly facing some challenges, and I think there probably has been some share shift in the small and midsize customer.

I think one of the things that we've done pretty effectively over the last two and a half years is broaden our coverage of alternate channels, the mass channel, the e-commerce channel, and we've done a better job of supporting our wholesalers and independent dealers than we had been doing previously. And so I think that's reflected in our numbers.

Yes, my final question is are you putting in place, or are you attempting to put in place, sufficient price relief to offset your higher cost and what are you seeing as customer response in trying to make your margins whole or getting the costs recovered?

We're pleased with the progress that we've made on pricing. I think one of the things that's not obvious -- we report that 2% of our growth is specific to pricing, is that that's a net number on a global basis and it reflects the offset of the price decreases that we had in Australia, which is a very large market for us, which the currency has gone -- not crazy, but it's been pretty volatile there. I think they're trading over $1.09 as of the end of business yesterday. So we think that the price increases that we put out were fair and equitable and consistent with the data and we're comfortable with the response that we've gotten.

Thank you very much.

Your next question comes from the line of Reza Vahabzadeh with Barclays Capital. Please proceed.

Good morning.

Good morning, Reza.

On the cost side of the equation, do you see input cost pressures accelerating into second half or are they increasing, stabilizing or are they decelerating?

It's an interesting question and it's a very mixed bag that we're seeing as a response and clearly, in our second quarter, we incurred more raw material cost increases than we had in the first quarter and we saw that be a negative drag on our margins. We did raise our own prices starting in July to try and offset some of that continued erosion that was obviously going to get worse as we go into the third quarter.

From a headline point of view, we've seen some of the extreme commodity cost increases come back down, but they're still significantly above where they were last year, and we never actually paid and never passed on to our customers those extreme cost increases. We have seen more cost increases generally come through, particularly on things like paper and packaging now.

Got it. And would you say that the price increases that were implemented in the first half, and to the extent you can tell here in the third quarter, are they generally matched with the competitors?

I think you have to, or you lose share, and so we think the combination of our service levels, our product innovation and pricing, we think we're pretty competitive at this point.

Got it. And then as far as sales by channel, I think you just alluded to better sales in the wholesale channel than maybe your traditional big box channel. Has that different sales trend, has that been really consistent in the first half and would you expect more of the same in the second half or is it too hard to tell?

It's a very, very competitive industry. I think the traditional office product superstores are adding focus to the small business and midsize marketplace. I think they've commented on that in their earnings call and so I think that will become a more competitive market than it's been maybe in the last 12 months, but I just -- I think it's a competitive space and we've got a lot of people going after the same customers.

Right. You'd commented that your -- some of your customers are very focused on inventory management. Does that mean that inventories are in decent shape? Are they being brought down? Any comments on where you think inventories are at customers?

Yes, I think inventories are lower than they have traditionally been and I think our customers are going to push to take them even lower in the back half. So in the first quarter, we saw that our sell-in was significantly below their point of sale numbers. We thought about $14 million less in Q1. In Q2, we think our sell-in and their point of sale was roughly the same, pretty close to a one-to-one relationship.

Our expectation in Q3 is that our customers will buy below their point of sale and that's just from the meetings that we've had with customers about what their inventory plans are. I mean, they're going to try to push the edge of the envelope. And I think in Q4, it's not clear what people are going to do relative to buy-forwards. Based on the trajectory of raw material increases, our expectation is that we will have a January price increase and traditionally, people have bought forward in advance of that. It's not obvious to us that that will necessarily happen this year. So we're cautious about the top line.

We think we have expenses under control. We think we've got an ability to manage SG&A in reaction to gross margin and so we're comfortable about our ability to deliver on our profitability in the back half of the year, but we'll have to be responsive to what the top line demand is. Underneath all of that though, the demand for our products has been pretty consistent when you look at point of sale on a six-month basis. We feel good about the demand for our products across all of our channels.

Got it. Thank you.

(Operator Instructions). Your next question comes from the line of Arun Seshadri with Credit Suisse.

Good morning. This is Felix [Wei] in for Arun.

Good morning.

I just wanted to get a sense of how [FX] affected your guidance.

In terms of our guidance from a sales point of view, we've always given sales guidance that excluded the impact of FX. Obviously, we do assume it in terms of our EPS guidance. And so from our point of view, I think some of the more extremely favorable FX numbers that exist today, we're not assuming continuing through the end of the year. And it's a very volatile issue that if I could predict currencies, I probably wouldn't be doing this job.

Great, thank you. And then I also wanted to focus on cash-back guidance for a second. I noticed that it looks like a $5 million from the 1Q slide. Could you talk (inaudible)?

Yes, that's really driven by FX. It's -- the last time I put the real number down, I would have put more like 22, and I just rounded it down and this time, it's about 24 and I just rounded it up.

Okay. Thank you. That's all for me.

Your next question comes from the line of Dan Mazer with Harvest Capital. Please proceed.

Good morning.

Good morning.

Can you remind me on just with the restatement what the base EPS of 2010 that you're basing your 20% to 30% guidance for EPS growth rate?

$0.47.

Okay, $0.47, okay, great. And the -- so the -- so I think that implies $0.60 probably or $0.61 is at the high end, and I think you came in better than a lot of analysts this quarter. Is there -- and just going through the models in the back half, is there anything that kind of stands out on just -- is this being kind of conservative on sales and there's going to be lots of the big FX translation, or just -- maybe just kind of in the context of the back half coming down in the models?

Sure. Yes, I think what you should read into it was we had a very strong Q2 and that puts less pressure on the back half of this year. I think most of the models had kind of a hockey stick and there's less pressure on the back half and we don't think it helps anybody for us to get ahead of our skis. We just -- we think it's a challenging environment out there, and a volatile environment, and our expectation is we're going to deliver regardless of what the external environment is. So --

And at this time, I'd like to turn the call back over to Robert Keller, Chairman and CEO, for closing remarks.

Thanks, everybody, for joining us this morning. We're obviously very pleased with the quarter. We think we continue to manage the business effectively in a very challenging operating environment and expect to continue to do that in the second half of the year and look forward to talking to you at the end of next quarter. Thanks.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.