ACCO Brands Corp (ACCO) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 ACCO Brands earnings conference call. My name is Janada and I will be your Operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Jennifer Rice, Vice President Investor Relations.

Good morning, and welcome to our fourth 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. The slides provide detailed information to supplement this call. When speaking to our earnings per share, we are using a normalized effective tax rate of 30%, and we exclude the costs associated with the pending acquisition of MeadWestvaco's Consumer and Office Products business, and costs associated with the repurchase of our bonds during the year. SG&A, operating income, and EBITDA also exclude costs associated with the pending acquisition.

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 the call over to Mr. Keller.

Good morning, everyone. This morning we released or Q4 and full-year results. Let me address the fourth quarter first. We continued to manage the business well in the quarter, expanding operating income margin by 190 basis points, improving EBITDA by 8%, and EPS by 26% on 2% lower sales. We also ended the quarter with $121 million in cash and no borrowings on our revolving credit facility, and our net leverage dropped to 3.3 from 4.1 last year. For the full year, sales were up 3%, and operating income, excluding acquisition-related cost, was up 10%. EBITDA increased 6% to $168 million, and earnings per share came in at $0.64, up 36% compared to the $0.47 we posted last year.

Our strong earnings growth was driven by a significant improvement in the profitability of our European business due to the changes we implemented in the first half of the year. Growth in our Computer Products segment, where sales increased 8%, also helped drive our bottom-line improvement. In a difficult macro environment, we continued to make progress. We reorganized our European business. We added talent in both our US and European organizations. We improved our supply chain efficiency and our effectiveness. We introduced a number of exciting new products, including the hands-free Stack-and-Shred line of shredders, and an array of smartphone and tablet accessories under the Kensington brand.

We are pleased with our overall progress. But even as a stand-alone Company, we've got significant opportunities for improvement. A year ago we told you we needed to address the profitability of our European business and improve the performance of our Print Finishing Solutions business in the US, an organization which sells commercial-grade binding and laminating equipment and supplies. We made significant progress on both fronts during the year, but in the case of Europe, we assumed the economy there would remain flat, and it is obviously softened. With regard to print Finishing Solutions, we've also made progress, but in a constrained buying environment, we need to do more. We are taking the steps we need to now in order to further improve and strengthen those businesses.

Looking forward, we believe the macroeconomic environment will remain challenging. While we see gradual improvement in the United States, the future of Europe and the euro is uncertain at best. Nevertheless, and again, on an ACCO Brands stand-alone basis, we have planned for sales in constant currency to be flat to slightly positive in 2012, as growth in our US business and Kensington is offset by market contraction in Europe. We do expect continued gross margin expansion, and we expect to grow EPS by approximately 30% again this year.

Finally let me comment on the agreement to merge with the MeadWestvaco's Consumer and Office Products business. Boris Elisman, our President and COO, and I were in Brazil last week meeting with Mead's team and their customers, and I came away from the trip even more excited about our collective opportunities. Our integration activities are progressing well and are on track, and we are confident that the merger will be completed on schedule in the first half of this year. We're anxious to get started. In closing I think we had a very strong year in 2011. We are very well-positioned to deliver 2012 and we're incredibly excited about our pending combination with Mead. Now I will turn the call over to Neal for a more detailed look at our results. Neal?

Thank you, Bob. Our fourth quarter performance is recapped on slide 4. Reported sales decreased 2% and volume decreased 4%. We expanded our gross profit margin 50 basis points to 32.2%. Improvement came from freight, distribution, and other process efficiencies, particularly in Europe. SG&A expenses are down in the quarter 130 points, excluding $4.1 million of costs related to the pending acquisition due to reduced expenses in both Europe and Computer Products. In all, fourth-quarter operating income increased 17%. Also, excluding the Mead transaction costs, and operating margin increased 11.4%, an improvement of 190 basis points. EBITDA increased 8% to $52 million, and EPS from continuing operations increased 26% to $0.29 versus a comparable $0.23 in the prior-year quarter.

For the full year, sales increased 3%, driven by currency and pricing. Volume was down 2% due to declines in US and Europe, largely due to inventory reductions by certain customers and lower demand and Europe. As shown on slide 5, for the full year, gross margin increased 60 basis points to 31.5%. Operational improvements, particularly in Europe, were the largest driver of the increase. SG&A was up 2.5% for the year, excluding $5.6 million of costs related to the pending acquisition. The increase in SG&A dollars was due largely to the impact from foreign exchange, which was $7 million. As a percentage of sales, SG&A was even with the prior year at 21.9%.

Investments made in the first half of the year to improve our operations in Europe were offset by savings in the second half of the year. Operating income increased 10% for the year, excluding transaction-related costs, and margin expanded 70 basis points to 9.2%. EBITDA increased 6% to $168 million and to 12.8% of sales. Foreign exchange added $8.6 million to EBITDA, and finally, EPS from continuing operations increased 36% to $0.64, excluding the $0.05 of costs associated with bond repurchases and the $0.07 of transaction-related costs. This compared to $0.47 in the prior year.

Looking at segment performance for the quarter, reported sales to the Americas decreased 4% due to currency in volume. The decline in volume was due to a tough comparison to the prior-year quarter, as well as tight management of inventory by certain of our customers. Operating income for the Americas decreased 17% and margin declined 130 basis points due to the lower sales volume. International segment sales decreased 4% due to a 7% decline in volume, which was the result of lower demand in Europe. Pricing and currency were both favorable. Operating income increased 47% to $17.9 million, compared to $12.2 million in the prior-year quarter, and operating margin expanded 500 basis points to 14.6% from 9.6% due to the turnaround of the profitability of the European business, resulting from price increases and operational improvements executed in the first half of the year, which returned the business to modest profitability.

Computer Products' sales increased 6%, driven by strong volume growth, which was up 10% due to strong sales of new products for smartphones and tablets. Growth was broad-based and across most regions. Computer Products' operating profit increased 17% in the quarter and margin expanded 230 points to 25.1%. Margins improved despite significantly lower royalty revenue, which were the result of lower laptop sales and therefore, lower security sales. We continue to roll out our new ClickSafe security lock. The net volume growth resulted in lower SG&A-to-sales ratio.

Turning to cash flow, which is detailed on slide 6, fourth quarter operating cash flow was strong at $80 million, bringing the year to $106 million before Mead transaction-related costs, excluding GBC-Fordigraph operating cash and proceeds from sale, as well as costs related to the Mead transaction. Fully free cash flow was $53 million. During the year we reduced debt by $59 million, resulting in year-end net leverage of 3.3 times, our lowest level so far as a public Company. We are pleased that our balance sheet has become very manageable, even before the acquisition of MeadWest Consumer and Office business, which will increase or annual cash flows.

In terms of 2012, as Bob outlined, we do expect sales growth for the standalone ACCO Brands business to be essentially flat, with volume growth in the Americas and Computer Products offset by volume declines in Europe and negative foreign currency translation. However, based on productivity improvements we expect to deliver EPS growth of approximately 30%. This assumes a 30% tax rate and 59 million shares. This also includes benefits from our restructuring actions in the first half of the year. We expect free cash flow of $50 million to $60 million.

As we reported, ACCO Brands expects to incur restructuring charges of $5 million to $7 million during Q1 of 2012, which is separate and apart from the pending acquisition. Of these, approximately $5 million are cash charges. We expect savings of $5 million to $7 million in 2012, growing to $8 million annually. We expect cash payback within the year. The restructured charges are in response to weak demand in Europe, and the rationalization of our go-to-market organization in the United States.

ACCO Brands is committed to driving further improvement to its underlying business as we see an opportunity for further operating efficiencies in today's market environment. So we will continue to make progress improving our business, even ahead of the Mead Consumer and Office Products transaction. That concludes our prepared remarks. At this point Bob, and I will be happy to take your questions. Operator?

(Operator Instructions) Arnie Ursaner, CJS Securities.

My first question relates to the Q4 results. Last year in Q4 for you had, had significant pre-purchases from some clients in anticipation of price increases, and then it was offset in Q1. Have you given some thought to quantifying how that did impact you this year, and what do you did see with customer inventory levels in Q4?

Yes, we haven't quantified it. We had a tough comparison on sales in Q4 last year. We introduced the Stack-and-Shred shredder and had enormous sales in December of last year on that product. Just given the volatility in the raw materials market last year, in the back-half of last year, we had a reasonably significant price increase for our core markets, so we did see some pretty aggressive buy-forward this year. If you look at the commodities that we're most impacted by, it's plastic, steel, corrugated, and copper would be the fourth one. The plastics is still up, steel and corrugated have moderated over the course of year, but are still higher than they were a year ago, and copper is up. But we had a pretty reasonable increase that we passed on into the marketplace, so we didn't see quite as aggressive a pull-forward this year as we had in the prior year.

I think the other thing that at least has impacted us, and I think it gives a false signal about the health of our products in the marketplace, is our top five customers continue to consolidate their distribution centers. In aggregate, they're probably down by about one-third in terms of the number of locations that we ship to on a year-to-year basis. So, there's less of our inventory in the market as result of that. So, the sell-in is actually less than the sell-through, at this point in time.

Okay, so in terms of the current quarter, last year you had, had a very weak quarter because of the tough Q4 comparison, are you seeing a return to normalcy in this year's first quarter?

Yes, our expectation is that we probably grossed slightly in the quarter.

My second question relates on the International business, you had terrific results, 500 basis points improvement in operating margin year-over-year, but embedded in International are things like Europe that are quite weak, and markets like Australia that have been very strong. When we think about your results in 2011, can you try to quantify, maybe you can give us a feel for the swing in Europe in profitability in the year, and also how we should think about that in 2012?

I think the thing you should really focus on the 2012 is we basically, on the moves that we made last year, we're net-net neutral. We will get a full year positive impact of the moves we made in the first half of last year, and so we will be $6 million or $7 million more profitable just based on the actions that we've already taken.

I will jump back in queue, thank you very much.

Bill Chappell, SunTrust.

Just digging in a little into your top line guidance for 2012, just trying to understand market share gains or new business wins. Then how that compares to what you're expecting for the overall category versus both in North America and Europe. Do you expect ex Europe you'd post pretty solid growth? Or is it really across the board you expect some flatness?

No, we do expect growth in basically all of our markets except Europe. In Europe, it is just too sensitive to call at this point in time and we are planning very conservatively there. We are assuming that we will have a reasonably significant top line hit there, we are assuming that we will perform significantly better in terms of operating profit contribution. But we do, from a market share point of view, we are very happy with what's happened in the first six weeks of this year, especially in the US. We expect to grow that market. Last year, Australia was not as strong as it has historically been. It's still a great market for us, but it wasn't as strong as it's historically been. Our expectation is that it will perform a little bit better, and all of the trading Company locations, Australia, Asia-Pacific, Canada, and Mexico, we expect to perform better than they did a year ago.

I am not sure if you said, but any idea you can give us some pricing that was taken January 1 and how that's affecting, and then what your expectation for pricing mid-year might be?

The impact this year of pricing is going to be modest, flat to maybe up 1 point.

Okay. Then just a couple of one-offs, with regards to your EPS guidance for this year, are you excluding the restructuring charges or are you including that? Then also what are you assuming for the loss of the royalty from the physical laptop lock? How should we be looking at that going through this year?

Two good questions. We've excluded the restructuring charges in calculating our EPS guidance. In terms of the royalty, which was your second question, we have assumed, obviously, that we lose that royalty income. Obviously, with the patent expiring in January, we are expecting that to go away. It was approximately $5 million last year and it will be miniscule this year.

So, that guidance assumes the $5 million net loss?

Yes, it does, and it assumes that we do get the savings from the restructuring, even though we don't include the expense.

Got it. One last one in terms of new business wins. Are there some opportunities for this year or is that put on hold until you have the merger and then see what revenue synergies you can get going into 2013?

No, our expectation is absent the merger, we are going to net a little bit north of $50 million in market share gains in 2012. We've made significant progress towards that already. We feel good about that, and we've got an awful lot more that we are still competing for at this point in time and we will have an opportunity to compete for during the course of the year. So, we feel good about how we are positioned competitively.

Then beyond that, we are very excited about the potential sales synergies after the Mead transaction closes. We think we've got significant opportunity to add ACCO product to their distribution capability in Brazil. As I mentioned in my remarks, Boris and I were down there with their senior leadership team and their local team last week. We think we have significant opportunity in a marketplace where they are clearly the market leader. We think we have opportunities to bring them into our channels in Mexico, and significantly expand their distribution there. Then we think we have leverage in the US and Canada, where we tend to be stronger than they are in the office product superstore side. They tend to be stronger than we are in the mass market, and in Canada, they are much stronger on the consumer side and we are much stronger on the commercial side. So, we think the untapped or the unrealized potential of this merger is the sales synergies.

Great. Thanks so much for the color.

Brad Thomas, Keybanc Capital Markets.

Wanted to just ask for another point of clarification on the guidance as well, in terms of the 30% EPS growth, I was just wondering what that assumes in terms of the capital structure. I believe on page 8 of the handout, it says you did not assume any calling of your notes that you could technically call. Is that the right way to look at it that, that's been excluded from this current guidance?

Yes, exactly right, Brad. It assumes the existing capital structure carried on for the whole year.

Right, so in the event that the merger didn't go through, you would have that as potential upside to your current guidance?

We would refinance if something happened and the transaction didn't happen.

Great. I realize we're talking hypotheticals here, but it is helpful. Then in terms of the Mead deal, could you just give us an update in terms of what the next steps are and what we should expect from a timing standpoint?

We are waiting on the IRS at this point in time. I think, everybody saw that we got HSR approval in the US and the comparable ruling in Canada. Those were two important steps to get out of the way. We've submitted the S-4 and gotten comments from the SEC. We responded to those comments. That's an iterative process, but we expect to wrap that up in the next 30 days. It is a complex transaction for the IRS, and they are still inside their guidelines for when they would respond. There hasn't been anything that would indicate that we have an issue, but it will take a little bit of time. We are still expecting to close in the first half of this year.

Great, and Bob, you sound very excited about the revenue synergies once the deal does close. How quickly could we start to see those?

My expectation is we will see some this year. We are not at a point of quantifying those, but when we look at the integration activities, we have three primary focuses. The first is to be able to transact business the day after this deal closes. So, we have to be able to pay our people, and take orders, and ship orders, and do all those things. We are right on track with that. Second thing is, we are focused on the $20 million in cost synergies, we've got decisions we've got to make. We've identified how we get there on those things, we have to finalize those decisions but we are very comfortable with that number and being able to deliver that number. The third thing, and the one that everybody is crawling all over is, how to we leverage our strengths in the US and Canada and how do we grow our business in Mexico and Latin America by putting the two organizations together? That part is really exciting.

Great, congratulations on a great year and best of luck here in 2012.

Thank you, appreciate it.

Karru Martinson, Deutsche Bank.

As you guys look at the modest price increases for the upcoming year, what are you seeing from your competitors and also from private label?

I think they are at a minimum consistent with where we are. We've had a long-standing -- or at least as long as I've been here standing, practice of not trying to use pricing to artificially grow our business. It is a reflection of what's gone on in the marketplace relative to commodity cost increases and FX. We both raised and lowered prices, frankly over the three years depending on specific market conditions in those two issues. Private label is exactly there. Our customers are -- we are all buying the same products to manufacture similar products, and when we sit down and talk about pricing, we're looking at the same indexes. So, it is a challenging economic environment out there. People are trying to be moderate relative to pricing. If you get outside of reasonability, you are going to lose share. It is a rational pricing environment.

Okay, I thought I heard you say that raw materials here have mitigated but were still up. That's the outlook for the year as well, correct?

Yes. Plastics is still high, copper is still high, and steel and paper have moderated a little bit, and fuel costs are up a little bit as well.

Okay. When you look at the mass channel growth, I know you mentioned MeadWestvaco, they are doing better in the channel, where has your growth gone from that? I know it was a small channel to begin with when you came on board, where are we there today?

We've made progress. But honestly, most of the progress we've made has been at Wal-Mart, and they are a great customer and that's a positive thing. But Mead has a much stronger presence in Target, and in the drugstores, and they've just done a significantly better job than we have there. So our expectation is, given the strength of their relationships, that will have better leverage in talking to those potential customers and we will have an opportunity to grow there as well. But we are very happy with the progress we've made at Wal-Mart, they're a terrific customer.

Lastly, with the $50 million to $60 million of cash flow pre the merger, what's the prioritization of cash flow going forward?

At the moment, one of the challenges we have is our inability to reduce debt on a go-forward basis. After the merger, we will have a lot of debt that we can pay down and our focus will be to continue to pay debt down.

Thank you very much guys.

(Operator Instructions) Gary Balter, Credit Suisse.

Good morning, it is Simeon Gutman for Gary. One other follow-up on the merger. So, it sounds like your pretty confident in the $20 million of the synergy. Just on the revenue side, if you rewind to where you were a few months ago. Looking at this deal going forward to where you are now, are there further revenue opportunities that you weren't thinking of -- beyond some of the more obvious reasons or brand platforms that you were considering?

I don't know that there are further. I think we are more excited about the ones that are in front of us. If you look at the two geographies where we operate side-by-side in the US and in Canada. We both do about $100 million in Canada, and in the US, Mead does about $400 million and we do about $675 million. So, there's a relatively high ratio of opportunity when you put us side-by-side. In Brazil, they do $190 million and we do zero. In Mexico, we do $80 million and they do very little, it is an export business for them. In Australia, we do $135 million and they do zero. So, the opportunity to compete for product placements when in those marketplaces, one or the other of us is the market leader. We are just excited about that. We do believe we should be able to grow this business faster after the integration then anything that looks like what our historical growth pattern has been.

Just following up on that, this is Gary, if putting aside the acquisition, because obviously there's a lot of synergies, as you just mentioned, a lot of opportunity to drive business through going into some other countries and moving products that aren't sold in different channels through those channels. If you just look at the ACCO business, what steps are available for you to gain additional market share? Because if we look at your guidance, you're flattish on the top and then some great stuff on the margins, which you've already shown. Are there other actions you can take to drive additional share?

Yes, we look at it frankly from a category point of view. We think there are a couple of categories where we've got pretty reasonable opportunities. So there are, in the business filing category, we think we have opportunity. We continue to push aggressively on the stapling category. We will introduce a -- and this is the last major piece, is just product innovation. We are going to introduce a full new line of laminating equipment this year, we think we have an opportunity to take share there. When we look at our Kensington business, we've got 60 new products in the pipeline. On a 36-month basis, something in the neighborhood of 70% of their revenue is from products that have been introduced in the last 36 months. So, we are attacking on the product side, and anytime you innovate in a category you have an opportunity to take share.

Back to Simeon again, related to that, the reference about US customers being tighter, is that all because of that sell-in versus sell-through issue? Implying that the customers are just buying less overall macro? Or was there some shift out of certain brands into other ones?

I don't know if that is necessarily a shift out of certain brands into other ones, and I think it is broader than just our top five customers, which is what I was addressing before. I think there are some fundamental shifts going on in the marketplace that three, four, five years ago, it was probably reasonably fair to take a Staples and Depot and Max and view them as a surrogate for the industry, and I don't think that's fair today. I think the wholesalers have a dramatically different position than they did three, four, five years ago. The independent dealer network has had an incredible resurgence, and the top-half of that marketplace is performing exceptionally well. The e-commerce channel is much, much stronger and the mass channel, obviously, in the last three to five years has become a strong player in the category.

So, part of the challenge for us as a manufacturer is to stay in front of the shifts going on in the marketplace, and I think we've done a reasonably job of doing that. Not as great a job as I would've liked, but a reasonable job of doing that. I think one of the added benefits of the Mead merger is going to be that, when you look at the marketplace and how office products are distributed and you put the two of us together, we're going to look at awful lot like how the entire market is performing -- much better than we are today.

Then one last one on some of the restructuring that was mentioned and some of the charges that are going to be taken. Are those commensurate with where demand may have shaken out in Q4? Or is there some anticipation that the business moderates further and that captures all that?

It is two things. Specific to Europe, it is a reaction to where we view that market going over the next 12 to 24 months. Beyond that, it is taking parts of our business that are underperforming our expectations and making changes to allow us to contribute more.

Okay, thanks a lot.

Reza Vahabzadeh, Barclays Capital.

Just to a house keeping item for 2011. What ended up being your cost inflation for 2011?

We assume different cost inflations for different commodities. But obviously, our general assumption is it is low, and that's our assumption. Sorry, for 2011 historically, what was it -- is that the question?

Yes.

It was around 3%.

Okay. For 2012, you expect that to be more or less about the same to maybe slightly less?

Slightly less.

Got it. As far as channel trends in the US, it sounded like you made a lot of progress in the distributor channel, the wholesale channel, and they may have gained share as well. Is that accurate, and is that how you would expect to proceed in 2012?

Yes, I think I'd look -- and this is our perspective. So, I'm not trying to characterize this as how they performed or how the market at large performed, but I think the two fastest-growing segments for us were the independent dealer channel and the e-commerce channel. We saw significant growth in both of those channels. We saw growth in the wholesaler channel and again we have limited participation in the mass channel. Our customer there with our products grew, and we were relatively flat in the office product superstore channel.

Got it. Then as far as sales trends by the type of product, it sounded like 2011 experienced better sales for durables, how do you see that unfolding for 2012?

The big unknown in the world is, when is the world going to get better. Obviously, at the moment we are looking at a tail of two diametrically-opposite trends. We are seeing very slow improvement in the United States, and in Europe, we are seeing the world actually deteriorating. We would love one to offset the other or even to see a net positive, but it is just so hard to predict that. So at some point, we will get some help from the economy, but at the moment we are still not planning on, that basis of any help from the economy.

A couple of things that we do you think move the needle, whenever we dramatically innovative product, we see movement. So, on our shredder line, we saw broad-based positive acceptance of that product and very strong performance throughout the year, and we've introduced a full family to compliment what we introduced in December of last year. So, we are excited about that.

We are excited about the opportunities we have on the laminating side as we introduced that family of products. In Kensington, our computer accessories product, we saw a fall-off in laptop demand, which impacted the security side of our business, and a significant pick-up in tablet and smartphone. That part of the business grew very, very rapidly. So again, part of the challenge for us is to be current, and to stay in front of it, and to be committed to investing money and innovation.

Got it, thank you much.

At this time we had no further questions. I would now like to turn the call back over to Mr. Bob Keller, Chairman and CEO, for any closing remarks.

I want to thank everybody again for your time and attention this morning. To recap briefly, we are very pleased with how we performed in 2011. We feel very good about how we are positioned for 2012, and we are incredibly excited about the transaction with Mead. Look forward to talking to you again soon.