ACCO Brands Corp (ACCO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2012 ACCO Brands earnings conference call. My name is Shanay and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session toward the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I will turn the presentation over to your host for today, Ms. Jennifer Rice, Vice-President of Investor Relations.

Good morning and welcome to our first quarter 2012 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 the quarterly results, we are referring to adjusted results which exclude restructuring costs and the costs associated with the acquisition of Meadwestvaco's consumer and office product business and for earnings per share using normalized effective tax rate of 30%. A reconciliation of adjusted results to GAAP can be found in our press release.

During the call, we may make forward-looking statements and based on certain risks and uncertainties, our actual results could differ materially. We assume no obligation to update our forward-looking statements. 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 Bob Keller.

Thank you, Jennifer and good morning, everyone. Today we reported our first quarter results for 2012 as stand alone ACCO Brands. As most of you are aware, we had previewed these results on April 17 in conjunction with our financing the merger with Mead.

Net sales were down 3%, primarily because of a 4% sales volume decline, which was offset by 1% of pricing. Our adjusted loss from continuing operations was $0.05 per share, compared to a loss of $0.06 per share in last year's quarter. Adjusted operating income was down $1.4 million on a year-to-year basis. Our declines resulted from lower sales in Europe and Canada. Despite this, we improved our profitability in Europe significantly because of the operational changes we implemented there in 2011. Sales increased in every other region and our business remains on track for the year.

The last few weeks have been an exciting time for us. We successfully refinanced our business in connection with the merger and the new weighted average interest rate on our debt is down to 5.25%. By this time next year we expect our net leverage to be below three times EBITDA, down from the 3.8 level when we announced the Mead transaction. More importantly, we strengthen our business with the acquisition of Mead's talented people and its leading brands. The new ACCO Brands is better penetrated in the five channels most important to our industry, and we've improved our geographic footprint as well. We expect the cross selling opportunities between the two legacy organizations to be substantial.

It's been less than two weeks, but the integration of the two businesses is well underway and we are pleased with our initial progress. We look forward to leveraging the strengths of both organizations as we move forward and we will continue to keep you updated on our progress. With that, I will ask Neal to address the financial highlights of the quarter.

Thank you, Bob. Our first quarter performance is recapped on Slide 4. Sales declined 3%, foreign exchange translation was modestly negative, while pricing was favorable 1%. Underlying volumes declined 4% due to declines mainly in Europe, but also in Canada.

Our gross profit margin declined 90 basis points to 29% as shown on Slide 5. The decline was due to high commodity costs relative to selling prices, which had a 90 basis point impact. Sales mix, which had a 50 basis point impact, and other items, largely deleveraging and fixed costs, which was 40 basis points. These factors were partially offset by the favorable impact of cost reductions, such as improvements in freight and distribution costs which accounted for 90 basis points. SG&A expenses decreased 50 basis points, primarily due to lower costs in Europe. In all, operating income margin decreased 40 basis points to 4.1% from 4.5%. Foreign exchange was a slight negative to the bottom line but not material.

Turning to an overview of our segments, during the quarter reported sales for the Americas increased slightly driven by higher selling prices. Volume declined in the quarter due to lower sales in Canada, primarily at one customer that reduced inventory. Largely as a result of adverse product mix, as well as high commodity cost in Canada, operating margins in the Americas decreased 180 basis points to 1.8%. Keep in mind that Q1 is our seasonally low margin quarter.

International segment sales declined 10% driven by volume declines of 13%. Selling prices were higher by 3%. The decline in volume is due entirely to Europe and was largely in line with our expectations. The economy there is softer than expected and as we announced when we reported Q4 results, we have taken even further actions to reduce costs as a result of the environment there. We did see profits improve in our international segment. Margins improved to 8.5% from 3.9%, but last year we did have $3.9 million of costs related to our operational changes in Europe.

Computer product sales increased 1%. Volume increased 5%, but was offset by pricing and currency. The volume increase was the result of strong sales of new products for iPads and iPhones. Computer products operating profit decreased in the quarter due to product mix with lower laptop security product sales. The margin decreased 18% from 22.5% in the prior year quarter. We expect this adverse margin mix to continue.

In terms of the balance sheet and cash flow, as you know we did complete our refinancing at the end of April so our balance sheet in Q1 is not reflective of our ongoing profile. Some important points to note are that ACCO Brands has its normal seasonal cash outflow in Q1 and we typically generate all of our cash in Q4. Mead consumer and office products generates the majority of its cash in Q1, so that stated Mead's former parent this year but by this time next year, we will benefit from having the combined companies cash flow and therefore expect on our net leverage to be under three times. Q2 should be a cash outflow quarter for the combined business and Q3 should be a cash neutral quarter for us.

The transaction with Mead doubles our EBITDA, but it triples our annual free cash flow. This is as a result of more favorable interest rates and low cash taxes. Therefore, next year we expect to generate combined free cash flow of at least $150 million. We had already provided combined guidance when we pre-released in April and that remains intact. Both ACCO and Mead generate majority of profits in Q3 and Q4 and that seasonal patent will continue, but will be more pronounced for the combined company. We will provide historical pro forma combined financial results by quarter and by segment before our next quarter end. At this point, we will conclude our prepared remarks and Bob and I will be happy to take your questions.

Reza Vahabzadeh, Barclays.

Under European volume decline, how much of that was voluntary concession of volumes because of your restructuring and how much of it was organic?

About 70% of it is stuff that we gave up as part of the actions we took to rationalize the business and improve the profitability, and about 30% of it is due to the continued decline in the general macro-economic environment.

Would you anticipate that trend to continue at least into the next quarter, 70%?

Yes, we think Europe is going to be a very tough market frankly for the next couple of years and have planned it that way. We took significant actions in the first half of last year to rationalize our cost basis on the assumption that would continue. We took some more actions earlier this year because it frankly was even worst than we had anticipated at the beginning of last year, and we will take actions as required to ensure that we deliver the profitability from that marketplace. I think we have been consistent for 15 months that we think, in that environment, we need to manage the business for profitability and that we don't have aggressive plans to try to grow the top line.

Given your cost savings from last year but the volume declines organic and otherwise, would you anticipate European EBIT to continue to be higher year-over-year?

Absolutely. It's going to be a significant component of our year-to-year improvement in profitability.

For your EPS guidance for the year, how does that translate into EBITDA?

We haven't given specific EBITDA guidance for the year. What we did do is include a slide with all of the pro forma modeling assumptions in the deck that is posted on the website and I think you should be able to work through that whole scenario. If you start with last year's pro forma EBITDA at 320.6 and then you can work down the rest of the P&L from the modeling assumptions that are on there. We have included what we anticipate the stepped up D&A to be on the business.

As far as tone of business for the US, can you elaborate on that?

I'm sorry. I missed the question.

As far as the tone of business in the US channel for both businesses, Mead and ACCO, how would you characterize your outlook for the US business, especially in the top line?

I think we were comfortable with where US office products business came not Q1. Our expectation is we will grow that business, take market share in 2012. We are seeing what we expected to see on the Kensington side of the business, which is reasonably rapid shift from laptops to tablet. If you look at what we are doing in that market in response, we have 60 products that we will introduce this year to support the tablet and smartphone marketplace. That part of our business has gone from about 5% of our business two years ago, to it will represent something probably a little north of 30% this year, but the margins on that aren't as strong as security part of this business. We will see -- we like how we were positioned from a growth perspective given the product set that we were introducing, but margins will leak a little bit on that.

Bill Chappell, SunTrust.

Can you talk a little bit about the computer products business? I think you said something had to do with around iPad shipment and how you see that playing out for the rest of the year? Should we get back to mid-single digit higher single digit growth?

I think that's probably a reasonable expectation for growth. The margins on that business, we have said we think ultimately are going to settle in mid to high teens and we think that's the right number for that business going forward. But, we are seeing product shifts. We saw people hold off on purchases in Q1 related to both laptops and notebook products in anticipation of the new iPad introduction. We saw some hesitancy from some of our suppliers to take product until they saw the new product to ensure that the form factor for iPad 2 and iPad 3 were consistent.

We are going to -- we are seeing and expect to continue to see, as we bring new product to the market, strong demand for the iPhone and tablet accessories or smartphone and tablet accessories, and we are driving our business that way. We planned our business to be that way. You will see most of the impact of that in the second half of the year.

I think the one thing having tough time getting my arms around is the revenue synergy potential between the two companies. In the past you've said or I have heard that if Mead and ACCO were equal size in every country, it would equate to $500 million type in revenue synergies and that's not happening next year. Is there anyway or guide post that we can look for or any metrics you are trying to look for to help quantify that?

We do think that they are significant. I think if you just look where, not counting any cross synergy opportunities in the US or Canada, if you just said what the normal ratios are for the relative revenue of our businesses in where we do compete side by side and then apply that to where one of us competes and the other doesn't, it's hundreds of millions of dollars. We do think that the sales synergies are very, very significant.

We haven't quantified those yet. Our expectation is we will talk about that in August when we do our next quarter call. I will tell you it's clearly been a focus of the integration planning to get new product into new markets as fast as we can. As soon as we feel like we've got our arms around it a little bit, we will be happy to talk.

Then it looked, at least from what I can tell, as you are going through refinancing you probably took on a little more debt than you had to take and I understand it's favorable markets, but is there a plan to use that additional capital any time soon?

I think we've been pretty outspoken about the fact that our strategy is to be the number one branded player in the categories that we serve and clearly part of that strategy is that we are going to acquire branded competitors in our categories. We don't see anything substantial, and substantial being anything of this kind of magnitude, for at least a couple of years because the opportunities for us to go after organizations of comparable size to this, frankly either the economic opportunities don't exist in the near term or we don't expect they will would be available in the near term.

We will be open to opportunistic about tuck in opportunities, frankly, going forward at any point in time that they presented themselves. I think our financing allows us the flexibility to do that. But it would truly be opportunistic in the near term.

Mead will actually be a cash use for the rest of the year of about $30 million. As you know, our cash comes in Q4, so we will still have that outflow.

One last thing, I know you will put out the historicals but as we are modeling for the back half, is it safe to say that the September quarter is bigger than the December quarter for the combined business? Just with back to school?

No actually I think you will still find Q4 is still the biggest one. Part of the reason for that is if you think about their business in Brazil, not only does it have the same characteristics as the other Mead business, but they both occur in Q4 because you have back to school in the southern hemisphere in December and you also have the calendaring business that occurs in December. For them, Brazil is a dramatic Q4 event and really it should still make Brazil a bigger business. Their US business you would be correct, Q3 is slightly larger.

Brad Thomas, KeyBanc Capital Markets.

Congratulations on getting the transaction closed.

Thanks. We are excited about that.

We are excited for you. I wanted to follow up on the topic of synergies. Bob, we've had a chance to talk at length about the international opportunities. I presume that you've had a greater degree of learning over the last week or so now about the US opportunities as the two companies have come together. How did the two revenue opportunities shape up as you look at that opportunity to capitalize on the relationship here in the US versus the international opportunity as you look over the next 12 or 18 months or so?

I think the opportunity is that we will just have much more consistent coverage across all of the relevant channels. I think we worked very hard over the last several months to ensure that our investors had an understanding of the business and I think one of the things that was a common topic in all of the discussions was how dramatically the channels had changed in this industry over the last three or four years. Where three or four years ago the conversation was dominated by the office product super stores, and now the mass channel is a significant part of that discussion and the wholesalers are a significant part of that discussion, and the independent dealers are a significant part of that discussion, and e-commerce is a significant part of that discussion. We think Mead complements ACCO extraordinarily well by bringing a strength in the consumer and academic and mass channels.

As volume has shifted from one channel to the other, unless it shifted to a commercial channel in the last three or four years, we likely lost share in that. We think the opportunity to go in and present our combined entity to a channel is significantly better. Our expectation is we are going to leverage that. We have announced the first couple of levels of organization changes in this past week and in the next week or so we will get down, frankly, to the customer level in terms of representation and then I think we will start see some things change.

In terms of a few financial housekeeping items, I appreciate the pro forma capital structure that is in the power point presentation. What does the cash balance look like today on a pro forma basis?

Net debt at close was about $1.14 billion, allowing for the remaining expenses to get paid out. It ought to be paid. As I mentioned earlier, Mead will be a cash use between now and the end of the year. We did receive cash from Meadwestvaco as part of the working capital adjustment, which was part of the negotiation. They contributed $53 million to the business and that was to achieve an average level of working capital within the Mead business. As I mentioned earlier, Mead then absorbs cash as it builds its working capital to its peak at its year end and that peak point is obviously why it generates all its cash in Q1.

As we think about the second quarter with it being the first quarter you will get combined results, what factors should we pay attention to as we are modeling out the quarter?

Two things, number one, obviously we will actually only have two months of Mead, not three months. But, importantly, we will get the most important Mead month, which is June. June is the most important month in Q2 for both businesses, which is always one of the interesting things with back to school because we don't have much control about when our customers take back to school. There is always a volatility around where the Q2 or Q3 shows the demand.

The second thing that you will see that kicks in, in Q2 is we will have to take on all of the additional costs that we anticipate immediately for having a larger Board, being a public company, et cetera. Those all negatively drag a little bit in Q2, although we expect them to be offset for the year as a whole. As Bob had mentioned earlier, what you saw in Q1 with the compression of computer products margins, we would anticipate that also flowing into Q2 as a trend that you will see all year. In fact, it will actually accelerate slightly in Q2 because the royalty that we used to get on the security products drops off in Q2, Q3, Q4 and that is a $5 million impact over the last three quarters.

Arnie Ursaner, CJS Securities.

Bob, when you were on the road show I think you mentioned that Brazil could be similar in size for ACCO Brands in 2013 and I think we are all asking you the same question, perhaps in a different way. You put in no revenue synergies, I believe, in your 2013. If you in fact could get Brazil to be similar in size to ACCO as an example, how much incremental could that add to 2013?

Again, there is nothing in our 2013 number for sales synergies. We absolutely anticipate and believe that Brazil should be a couple hundred million dollar market for ACCO over time. It's not a snap your fingers make it happen kind of thing. It literally -- because of the distribution operations down there, it will be 9,000 independent discussions with the popularity owners and it will take some time. It is front and center on our to do list.

I think on the road show you also mentioned that there is greater seasonality as a combined entity. I think you said 65% of your EBITDA typically would be in the back half of the year. We are all trying to form models that make some sense. You've spoken a lot about Q2, but you also indicated Q4 would be even larger than Q3. If I think about the 65% you spoke about on the road being in the back half, how would you try to split that piece up between the two quarters?

Clearly from -- I can't issue pro formas until I can finish going through all of the audit work that I have to do to do all the finalization of reevaluations of opening assets. We will get those pro formas issued prior to the end of June and we will do it as soon as we can and that will help people. Fundamentally, in rough numbers, the business approximates to an EPS that is a couple of cents lost in Q1, something around $0.20 EPS pro forma Q2 and then $0.40-ish in Q3 and slightly higher than that in Q4. That's how you get back to $1 that we gave as a approximation for how to model it. That's very rough and it will -- it's something that we will give more guidance on. I wanted to give you an approximate view as to where to think.

My final question as a clarification, I think you mentioned in your prepared remarks greater than $150 million of free cash flow this year. I also think you mentioned Mead would be a use of cash of about $30 million. If I think about 2013, is it easy to conclude that we could be north of $180 million of free cash flow?

What we said is on a full year run rate the right way to think about our cash is somewhere between $150 million and $180 million, and the variation depends on how much we can spend on capital and restructuring. We will have some restructuring cash that will go out in 2013 and we will have some of the extra IT CapEx that goes out, which is how we have a slightly larger CapEx than the two businesses have been running at. We will model then to the lower end of that range in 2013 which is my view.

Remember, ACCO will generate a great deal of cash still in Q4 and that will still occur. As you will have seen, we had our traditional cash outflow in Q1 and our guidance for the year for ACCO generating $50 million to $60 million is still true. From a close modeling point of view, if you take our cash outflow in Q1, approximately $5 million of that was Mead expenses. If you back that out, you will get the net cash outflow from ACCO in Q1 and then effectively add that to the $50 million and $60 million we gave you for ACCO in total and you have a good view where my cash should be in the end of the year, because it will be slightly south of $1.1 billion in terms of net debt on the business.

Gary Balter, Credit Suisse.

You guided to or -- obviously without synergies, you mentioned that you expect flat revenues for the rest of the year. What are the assumptions built in from a macro perspective in terms of either business improvements, et cetera, into that assumption, first of all?

The assumption that we have in terms of our reported numbers is an assumption that we are going to see negative translation effects from foreign exchange and that's a couple of points adverse impact. When we talk about the top line being flat for ACCO's, our guidance was to get some underlying growth in ACCO offset by foreign exchange and the guidance for Mead has traditionally been a flat business, but they will have adverse foreign exchange. Year-over-year they will get slightly smaller in terms of reported.

Macro being essentially not as mover one way or another, essentially same scenario we are seeing now in terms of macro demand?

Yes, we think the scenario you see today is with a we expect going forward. We think the US business environment is steady to slightly positive. We think that Europe is extraordinarily challenging and will continue to be so and it's a three headed monster out there right now. You have a very, very challenging macro environment. You've got austerity measures that are being imposed, but largely being imposed across the government sector who happens to be a very large user of traditional office products. Then you have an awful lot of change going on in our distribution partners. There have been leadership changes at Depot and at Staples, and at Lyreco and organizational changes at Spicers and at Vow.

It's challenging and it will remain so and that's our expectation. We think the interest rate control in Brazil would suggest that, that market is going to be slightly stronger this year than it was last year. We think Australia, from a macro environment, looks healthy, but it's largely almost entirely driven by the mining sector and consumer confidence there, we think, is lower than we've seen it frankly in awhile. We think that will be a little more challenging market than it has traditionally been. It's usually our strongest market. We think Asia/Pacific is growing and is a reasonably healthy market. That's our world view.

Gross margin down 90 and you explained in the slides mix and et cetera. How should we think about gross margin and not that, that's crucial because we are focused more on EBITDA. How should we think about where gross margins trends over the next few years?

Q1 is always an interesting quarter for us. Remember for us foreign exchange not only hits translation, it also hits cost of goods in many of our overseas countries. What we saw in Q1 is a combination of factors. The big swings in foreign exchange that occurred in the second half of 2011 really hit into our cost of goods in the first -- in the beginning of 2012. We also, in a number of countries, lowered our prices because of what they had seen in terms of foreign exchange gains prior to that. In a number of our international markets margins were squeezed significantly in Q1.

There also is a delay that we always see when we do raise prices in the impact that you get in the first quarter where that occurs. With a number of customers there are staggered timings and there are also orders in hand that don't get the price increase. The other big driver of cost increase we saw in Q1 was fuel, of course. You've seen fuel cost goes up and you've seen also significant changes in the international freight rates, particularly Asia to Europe.

You asked about where we see it over three years and our expectation is that we are still probably 150 basis points lighter than we think we can get to from a traditional ACCO product set. That is mostly cost take outs and efficiency improvements, and we have programs in place to try to get that. We think there is still gross margin expansion opportunities in the core ACCO business.

The follow-up on Meadwest had some tough compares in Q1 due to some year ago sell-ins and I'm not sure, maybe ACCO had a little bit of spillover from sell-ins also into the first quarter. Can you talk about how to think about that going forward? Do those tough compares subside and should we see at least a moderation in some of the sales rates? Is there an immediate bounce back that we should see going forward?

From a top line perspective, one of the big impacts they saw was on foreign exchange as the Brazilian real is a big FX factor. The other issue that they had was they had a Brazilian issue the year before which was associated with merging the former (graphics) business, it shifted business between Q4 and Q1. Generally their business is in line with our expectations, which is it is a business that gets gross in the Brazilian market and a little bit of decline in the US market and that's pretty much how Q1 was without that exception.

I think that we have one more specific tough compare and that's on Kensington in Q2, on the top line they had a big quarter on security. Last year they introduced a new product and had a big hit. This is just a tough business to forecast on a quarterly basis. The Q2 is driven or not driven by the timing of back to school shipments either being June or July, and that's frankly our customers change their mind during the course of the quarter about whether they are going to go early or whether they are going to respond. We have a very hard time. We think we are very comfortable about how we are positioned for the year. We are no better than we've ever been about predicting it on a quarterly basis.

Thinking about the core business for a second, just the ACCO stand alone if it were still stand alone. There has been nice improvement in that business from an EBIT and an earnings standpoint for the past several quarters. You telegraphed pretty nicely last year of when some of the changes you made would kick in, and that sort of worked out nicely. First quarter there was a little slippage, which there were some unusual events that happened. Can you help bridge Q1 to the rest of the year in which you are predicting or expecting that similar 30% of earnings growth from the core and how -- what were some of the items to think about and then the timing of some of the savings that are supposed to kick in this year?

We took restructuring charges in Q1 and they will have an increasing benefit as the year goes on. Again, mainly in the second half we will see most of that benefit kick through. We do still have a year-over-year benefit from what we did last year which runs through Q1 and Q2. You will see favorable benefit again in Europe for Q2. We mentioned earlier from a timing perspective that a lot of Kensington's new products will benefit them in the second half and Q2 is going to be a particularly tough compare for them, both in terms of certain sell-ins that occurred last year. While we feel good about Kensington, it certainly has more of an issue in the first half.

We also have cost savings coming out of our Lean Six Sigma program and, again, those build as the year goes on. Also, the back to school, while we never can predict the timing of it, we feel good about it. We have actually got some additional placements for back to school in the ACCO business. While we are always nervous about when that goes, we are feeling good about the total size of back to school.

Kevin Steinke, Barrington Research.

I wanted to ask about cost synergies. Your 2012 adjusted combined EPS guidance does not include cost synergies, but 2013 does. Does that assume you reached the full $20 million run rate in 2013?

Pretty much.

By the end of the year. We won't see all of it at the beginning. We will see that go in, particularly in the back half of 2013.

Our synergies perhaps tracking a little bit ahead of your initial expectations when you announced the merger, I believe before you said you wouldn't reach the full run rate until 2014.

Yes. I think we are very comfortable that we will deliver the $20 million next year.

Part of what we tried to say is you won't see the full P&L benefit in 2013 because of the fact you won't see it particularly in Q1.

How are market share gains progressing overall, as well as in some of the various product categories that you have been targeting?

We are very pleased and we have an annual target of $50 million. We believe we are well on track to deliver that this year. Mostly in the US we think that's very strong when you look at it on an net basis because of the products that we walked away from. Europe will be down obviously year-to-year.

Congratulations.

Karru Martinson, Deutsche Bank.

When we look at Europe and the turmoil that we've had there, do you feel there are additional areas where you could cut if you needed to or are we at a point where we have to grin and bear it?

No. We think we are capable and willing to take actions if in fact the market softens beyond where it is today. We also believe that, at the end of the day, we are sub scaling that marketplace and that marketplace ultimately should represent a significant opportunity for us, and so it's not a market that we have any intention of ever abandoning. We would like to grow into our infrastructure a little bit. We don't think that's going to happen in the next couple of years, but we have more things that we could do if we had to do them.

It's also worth remembering that most of our business is in northern Europe, so it's in the UK, France, Germany, Holland, Scandinavia Island as opposed to southern Europe.

When we look at the free cash flow going forward and you have $150 million and $180 million and looking at your cap structure with the new cap structure, there is not a lot you can do with that. What are your planned usages for free cash flow?

We are going to deleverage the business or use it for acquisitions.

When you look at the portfolio now, combined I think you said you were at 80% is coming from number one or number two market share products. Are there plans here to call some of the underperformings and divestitures of the horizon?

People often have about what that 20% is. Quite often that 20% is products in other markets are in the number one or two position, but they are in growth mode in certain markets. I think that's an important piece to understand about that metric.

You talked about Kensington coming out with 60 new products in the second half here. How is the rest of the new product pipeline looking for both you guys and for Mead?

We feel good about it. Just to be definitive about your last question that we have no plans to divest any part of our business. I know people look at paper based calendars and believe that they are secular decline. We appreciate that they are. The decline is low to mid-single digits, which is offset to some degree by pricing. It's a very, very profitable product set. It's one where we have synergy opportunities as we combine the manufacturing operations of the two businesses, and so it will be more profitable. We are not looking -- we are going to manage it as a cash cow. We aren't looking to get rid of it.

In terms of the new product pipelines?

It's strong. Kensington is clearly leading the way. I think the way we think about product development is there is three groups of product development when you look at the high end of our durable product line it's one that we want to refresh every three to four years. We did that with shredders over the past year. You will see our laminating products have the entire category refreshed this year.

You look at Kensington on the other end of the spectrum, and that's one where we look and say, we need to innovate most of the product line annually. We are doing a very good job of doing that. In between you have our core products that have to be updated on a regular basis with style and design and licensing and things like that. Frankly, that's one of the things where we think Mead is going to bring substantial benefit to our business because we think that they do a better job on that kind of stuff than we ever done before. Frankly, they have been, historically been better marketing partners with our customers than we have and they will help us do that better.

I will turn the call to Mr. Robert Keller, Chairman and CEO, for closing remarks.

I appreciate everyone's attention this morning. In closing, we expect that the external environment, the demand environment is going to remain very challenging, but we were confident that we can continue to win in that environment. I think we demonstrated that we will manage this business closely. We intend to continue to do that.

We feel very good about how we were positioned and we feel great about the merger with Mead. We think it significantly strengthens the Company across a variety of perspectives from a marketing perspective, from a geographic coverage perspective, from a channel perspective. I think Neal and his team did an incredible job on the refinancing of the business. We are just a much, much stronger company financially and we look forward to talking to you about our progress next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.