ACCO Brands Corp (ACCO) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q2 2013 ACCO Brands Corp. earnings conference call. My name is Marie and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded.

Now I would like to hand the call over to Jennifer Rice, President of Investor Relations. Please proceed.

Good morning, everyone, welcome to our second-quarter 2013 conference call. Speaking on the call today are Boris Elisman, President 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 refer to adjusted pro forma results including Mead for the entire prior-year period. Adjusted results exclude restructuring and merger-related costs and apply a normalized effective tax rate of 35% in the current quarter and 30% in the prior year. Schedules of adjusted results and a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures begin on page 8 of our press release.

During the call, we may make forward-looking statements; and based on certain risk factors and uncertainties, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of certain of these factors. Our forward-looking statements are made as of today's date, and we assume no obligation to update our forward-looking statements.

Following our prepared remarks we will hold a Q&A session. Now it is my pleasure to turn the call over to Boris Elisman.

Thank you, Jennifer, and good morning, everyone. Today we announced our second-quarter results. I am pleased to report that, despite the challenging marketplace, our school and office product businesses delivered solid results; sales momentum improved in our North America and International segments; and cost savings and integration synergies contributed to expanded margins.

Free cash flow remains strong, and we fully expect to deliver $150 million of cash for the year. Good working capital management has allowed us to minimize the seasonal short-term borrowing that we have traditionally done during this period in prior years.

On a pro forma basis, including the results of Mead Consumer & Office Products business in both periods, sales decreased slightly less than 6% in the second quarter, driven primarily by lower volume. Adjusted income from continuing operations grew 4% to $22 million or $0.19 per share, compared to $21 million or $0.18 per share in the prior year quarter despite a 500 basis point increase in our normalized tax rate. Our sales decline significantly moderated in our North America and International segments as we started to further lap some of the declines of last year, particularly in Europe.

Our cost-savings initiatives and merger cost synergies are on track and materializing according to plan. As a result, we saw strong margin improvement in both segments, with North America operating income increasing 18% and margin expanding 280 basis points, and International operating income increasing 29% and margin expanding 210 basis points.

Despite the tough demand environment, I am pleased with improving sales momentum in school and office in both North America and International segments, especially in the US, Europe, and Mexico, and we have seen continued strong sales execution in Brazil. We're making progress with sales synergies and have begun shipping Mead branded products into Mexico and Europe, the Middle East and Africa, and have expanded ACCO Brands and Kensington SKU assortments in Brazil. I am especially pleased with our performance in Europe, where we saw flat sales and strong profit improvement compared to last year, and also in our print finishing solutions business, where a planned change to our go-to-market model delivered substantial profit improvements in the quarter.

In the Computer Products business, which is 10% of our global sales, sales declined 17%. As has been widely reported, sales of personal computers have fallen dramatically this year for a variety of reasons. In addition, there have been very few launches of impactful mobile devices in the first half of the year, which typically drives sales of accessories. Consequently, our sales of security devices, peripherals, and mobile accessories were down, deleveraging our costs and driving this segment's profit decline.

In anticipation of release of new mobile products in the second half, we have high expectations of our own product launches supporting these devices. But we will be watching this segment closely and making appropriate adjustments to ensure we have the right strategy and investment approach in this business.

So I am pleased with our progress in our core business, but I am cautious about Computer Products business for the balance of the year. With regard to our forecast, we continue to expect 2013 free cash flow of approximately $150 million. Now believe 2013 full-year pro forma sales will be down 3% to 6%, and pro forma 2013 adjusted earnings per share to be $0.90 to $0.95 due to softer Computer Products sales. This still represents an adjusted earnings improvement of 10% to 16% versus prior year, driven primarily by the realization of $20 million of cost synergies and $25 million of productivity improvements.

And now, Neal will provide a more detailed review of the quarter. Neal?

Thank you, Boris. Good morning, everyone. Our second-quarter performance is recapped on our slide deck.

Reported sales increased slightly to $440 million on a pro forma basis. Including the results of Mead C&OP for the full three months in both periods, sales decreased slightly less than 6%, driven primarily by volume, which declined 5%.

The volume decline was mainly in North America, which was the result of soft demand and our proactive exit of $7 million of low-margin sales. We also saw continued declines in Computer Products.

Adjusted income from continuing operations was $21.8 million or $0.19 per share, compared to $21 million or $0.18 per share in the prior-year quarter. The improvement was driven by cost savings, synergies, and lower interest expense, which more than offset the increased tax rate.

In terms of margins, we made great progress on both our cost synergies and productivity initiatives. Gross margins, as detailed on slide 4, increased 110 basis points to 31.1%, driven by cost savings and synergies, which added 220 basis points in the quarter. This more than offset adverse mix and sales deleveraging, which had a 100 basis point impact on gross margin.

SG&A expenses were down in the quarter, but as a percentage of sales increased 60 basis points to 19.4% due to the continued impact of sales deleveraging. Cost savings and synergies were a 150 basis point benefit to SG&A margin; but sales deleveraging and incentives impacted by 260 basis points.

In all, operating income margin improved 70 basis points to 10.4%, driven by executing against our cost savings and synergy objectives, which more than offset the impact of the top=line decline.

Turning to an overview of our pro forma segments, in North America, pro forma sales decreased nearly 6% due to lower volume. Half of the volume decline was due to our decision to exit some low-margin sales. The remaining decline was due to soft demand, including some share loss.

North America adjusted operating income increased 18% to $40.8 million in the current quarter, compared to $34.7 million in the prior-year quarter, and operating margin increased to 14.2% from 11.4%. The gains in profit and margin were primarily because of productivity improvements and cost synergies.

In our International segment, net sales decreased 2% on a pro forma basis. The decline was driven by lower volume and negative foreign exchange, partially offset by higher pricing.

The decline in sales was primarily in the Australia and Asia-Pacific regions, where demand was weak. Europe's sales were flat year-over-year, a notable change from being down double digits over the last year.

International adjusted operating income was $10.3 million, compared to adjusted pro forma operating income of $8 million in the prior-year quarter, including a $2.6 million gained from the sale of a property. Operating margin increased to 8.9% from 6.8%.

Computer Products net sales decreased 17% to $37.2 million. Volume and mix decreased 14%.

The absence of new mobile device launches in the first half of the year and increased competition led to lower sales in tablets and smartphone accessories. We also continue to be impacted by the continued decline in laptop shipments, which impacted demand for security products and computer accessories.

As a result of the sales declines, particularly of higher-margin security products, and lower royalties, Computer Products adjusted operating income was $3.6 million compared to $10 million, and operating margin decreased to 9.7% from 22.2%.

Turning now to our balance sheet and cash flow, the second quarter had our normal seasonal cash outflow related to back-to-school shipments. However, the outflow was lower than expected due to improvements in our inventory and accounts payable and lower sales volumes, which reduced working capital needs. Therefore, we feel very good about our free cash flow target of $150 million for the year, which is net of spending $30 million for restructuring-related cash expenses. As we saw last year, the main quarters when cash is generated and can be used for debt reduction are Q3 and particularly Q4.

With that, I will conclude my remarks and move on to Q&A, where Boris and I will be happy to take your questions. Operator?

(Operator Instructions) Brad Thomas.

Yes, hi. Good morning, Boris, Neal, and Jennifer. I wanted to start off first with a discussion of just the outlook for top line in the second half of the year. Obviously a challenging quarter here in Computer Products in the second quarter. But as it relates to your new guidance, could you just take us through the thinking in terms of top line in the different segments in the back half of the year?

Sure. If you look at our North America segment, our assumption is that we are going to be slightly down versus prior year in the second half. If you look at our International segment, the assumption is we're going to be slightly up, with growth in Brazil really offsetting flattish performance, or maybe even slightly down in Australia, but flattish everywhere else.

And then the assumption for Computer Products is that we are going to be slightly up in the remainder of the year versus prior year. If you remember, last year at this time, especially in Q3, we saw weak Computer Products sales. So from a compare perspective, we think we're going to be slightly up versus prior year.

So on Computer Products, it is the comparisons, coupled with some new product launches that should help you?

Exactly. We are expecting new tablet and smartphone launches late in the third quarter or in the fourth quarter, and we expect that to drive a substantial improvement in sales in our Computer Products. But it is it very volatile, and clearly if some of those anchor devices launches move then it will also affect our sales.

Right. Then I wanted to ask a second question around the expense and productivity opportunity ahead of the Company. This year looks like a very big, successful year in terms of pulling costs out of the business, between the synergies with Mead as well as productivity improvements in general. That is really, I think, in the DNA of ACCO.

Boris, maybe you could -- and Neal, if you want to chime in -- maybe you guys could talk a little bit about how you are thinking about the opportunity in 2014 and beyond to continue to improve the cost structure of the business.

As you mentioned, this is something that we have been doing for a few years now and something that we will continue to do, as the best companies do from just a cost-reduction, Lean Six Sigma, productivity improvement perspective. Certainly, most of the synergies that have been derived from the merger will benefit us in 2013.

Some of that will bleed over into 2014 just from a timing perspective. Some things that we have done in the middle of second half of this year will obviously benefit us in 2014, but we will see a little of the benefit from that.

But outside of that, we still expect to drive significant productivity improvements in 2014 and 2015 and beyond. This is something that we expect from our organization on an ongoing basis.

We have people who are dedicated to that. We have a system and processes who are monitoring that and making sure that all of the projects get implemented and appropriately measured. So we feel very good about our ability to achieve that.

And as you saw in our Q2 release, we have -- before we talked about $20 million to $25 million of productivity improvements; now we feel that we definitely got the $25 million identified, so we are narrowing to $25 million for this year. So we are certainly making progress in that area.

All right, great. Thanks. I will turn it over to somebody else, but thanks so much, Boris.

Arnie Ursaner, CJS Securities.

Hi, good morning. Your basic business model is leveraged to volume improvement. So maybe you could expand a little more of how you are achieving even greater productivity, given that volume trends are going the wrong way.

You know, we have a fairly large, diverse business. We have lots of suppliers. We have several different manufacturing facilities. We have roughly 5,800 people in the organization.

So with all of that, there is lots of opportunity for us to streamline, to consolidate, to leverage processes, to centralize, and to drive costs out of the business. Best companies have a goal of 2% or 3% of COGS in annual productivity improvements. We are on the way there; we're not there yet.

We are making improvements every year. We are striving towards that goal. And as I mentioned, we have solid plans with hundreds of projects identified that allow us to achieve substantial savings.

Okay. Neal, two specific questions for you. One, was there any reversal in the quarter in the SG&A line for previously accrued cliff bonus payments?

No, actually, incentive payments were an increase of about $2.7 million in the quarter.

Okay. And your stock-based comp jumped almost $3 million from Q1 to Q2.

That was the $2.7 million I was referencing. It was stock-based comp that was the main jump. In terms of annual incentive, it was flat year-over-year.

Arnie, it is because we are doing better in generating cash versus our goals than prior year, so that is what is driving the incremental stock comp.

Okay. Final question for me if I can. The back-to-school season, you do have some key customers that are going through a consolidation process. In your opinion or view, do you think they have already begun to reduce inventories in anticipation of the merger?

You know, it is hard to tell, so I am giving you an opinion only. But in my opinion they're being careful in how much inventory they stock for back-to-school.

Okay, thank you.

Chris McGinnis, Sidoti & Co.

Good morning. Thank you for taking my questions. Just a couple questions. One, you talk about loss of share in North America in your remarks. Can you just maybe expand on that, of maybe who you are losing share to?

Sure. I think we have -- we're talking about losing share in certain small parts of our business. I think we lost a little bit of share in our dated business; so this is calendars, organizers, time management. We still have a very, very strong market position, but I do think we lost a little bit of share especially in more fashion-oriented parts of that business and lower price points.

I also think we lost a little bit of share -- and this is not just in this quarter, but over time -- in our notebook business. We have a very, very solid position in premium notebooks; but a lot of that market is going down to lower price points where we don't have the assortment that we need to have.

So this is one of the things we're trying to fix, both for dated and for notebooks. We have done that over the last year in Brazil and were very successful in growing significantly faster than the market and gaining substantial share on the shelves. And this is the strategy we are pursuing in the US as well.

Also, as Neal mentioned, in our binder business we walked away from some business. And it is a share loss, because our share is low as a result; but we have greatly improved profitability by doing that.

Sure. Just that -- I think you referenced the three-tier program or three-tier offering. You are bringing that into the US now? Is that what you are speaking to?

Yes. The open price points, mid-tier and the premium price points, yes. We are working both with our factories as well as with our customers to expand our assortment and bring lower-priced products in dated goods and in notebook categories to the US.

Correct. We're working on that right now.

Okay. Then just can you maybe just speak about the margin profile on the Computer segment going forward? Obviously it is down pretty substantial. But with the volume coming back, how does that impact the margin in that segment as well?

Yes, if you compare the margin this year so far, it is roughly 10%, slightly -- a little bit south of 10%, versus 20% last year. 20% was not a sustainable operating margin for the Computer Products, and we knew that. Everybody else knew that.

Our goal, our long-term goal is to be in the mid-teens for Computer Products. We talked about in the 17% range or something like that.

We still think that that is an achievable goal. Obviously, it is just going to be -- will have to be achieved at a higher volume, because some of the costs in that business are fixed.

Now that we are going to a back-to-school season and a holiday season, which traditionally have been stronger for Computer Products, we do expect that to improve our margin profile in that business. And longer term, we still have the expectations that it will be a mid-teens business for us.

Thank you very much.

Bill Chappell, SunTrust.

Good morning. I just wanted to -- I guess just first on the currency, can you give us an impact what they did on both top and bottom line for the quarter? And I assume it is all on the International division.

Actually, North America includes Canada, so there is a tiny piece that impacts that. And obviously, Computer Products is also -- perhaps half the business is outside the US. So FX affects all three segments.

From a top-line perspective, we saw a big reduction on the impact on the business. If you remember, Q1 was negative by about 1.5; Q2 top line was only negative by 0.4.

From a bottom-line perspective, again Q1 was adverse, Q2 was slightly favorable. And the net position at the end of Q2 is basically no bottom-line impact on the business.

As we all know, it is a question going forward of where currencies are going. And if I could predict them better, I would be doing a different job.

But there are a lot of -- there is a lot of volatility in the forecasts of currency, and it is anywhere from no impact at all on the business to a small impact, which is why we excluded it from our guidance.

So based on current spot rates, would you expect it's got a minimal impact for the second half of the year?

If current spot rates continued -- and they have been improving of late, so we don't think that they are going to -- the worst we would see would be about $0.02 impact on the bottom line.

Okay. Boris, help us on the Computer Products business. What gives you confidence that it can turn, stabilize?

And when I say that, are you already shipping now as we are getting into August products for some of these new launches in the fall? Or is that just you've got them built; you're sitting on the sidelines and hoping things show up?

There's several parts to your question. We have been in this business for a long time, and we have seen the ups and downs of the business. That is just the nature of technology.

We are a little bit on the receiving end of this business, because we are in the accessories business so we have to accessorize hosts or anchor devices, and so we depend on how hot they are and when they're going to be introduced and how much demand there is for them.

But we are seeing -- this quarter or last quarter is not unprecedented. We've seen these things before.

We are expecting fairly significant launches in the end of Q3, early Q4, from the device makers. We are preparing for those launches. We have many tens of products ready for those launches.

We are in the presale process right now, and we are getting positive feedback from customers. But we can't really ship until those products are launched, the devices are launched.

So that is why I am being a little bit cautious, because there is still some volatility associated with when the devices will be introduced and when we can ship our products. And maybe it will be in Q3, but maybe all of it will be in Q4. So there is some uncertainty around that.

But you see enough to get comfortable that the business can grow in the second half?

We are expecting slight growth, as I mentioned, roughly mid-single-digit growth in the second half. And I feel pretty good about that, yes.

Then switching back to the core business in Brazil, are you seeing any slowdown, weakness just with some of the macro trends hitting that region?

We haven't seen the slowdown in our business. It is still very, very strong.

Obviously, we are fully aware of what is going on in Brazil and some of the demonstrations, but we haven't seen it impacting our business. We are monitoring very, very closely, but no signs of an impact in our business.

And in Brazil, Q2 is their smallest quarter, so now is the time when a real season starts in Brazil, so we will be monitoring very closely. I am going down there next month just to personally see how we are doing for back-to-school. That team has been executing great for us, and we had very, very high hopes for the second half.

Great. Last one for me, just in the core US, are you seeing any -- and you have mentioned this -- the difference in sales from the consumables versus durables? And does that tell you anything in the outlook for the back half?

Nothing specific. What we have seen is there has definitely been a slowdown in government purchases in a lot of our durable machines, especially in the print finishing solutions business. So this is wide-format laminators, big shredders go to government, and that has been slow.

But other than that, Neal, have we -- consumables versus durables?

No, in both cases, it has been much more a question -- this year has been heavily impacted, as we discussed in Q1, there was a lot of inventory channel change which impacted our business a lot in Q1, didn't impact in Q2. And a lot of that was around the durables side, as you would imagine.

From a general business point of view, they are both looking weak at the moment, and we look for an improvement as we get into the second half.

I guess it is good to know that government is shredding fewer documents, but (laughter) thanks so much.

Helen Pan, Barclays.

Hi, good morning, Boris, Neal, and Jennifer. A couple questions. Were there specific regions or customer segments that you expected to recover in the second quarter that didn't? For example, maybe in Australia, Asia, the government, some businesses. And can you explain what happened there?

It is really not customer specific. The biggest change to our second quarter versus expectation was in the Computer Products business. If I look at all of our other businesses in North America or International, it is close to expectations, give or take.

I think the sales were a little bit softer, just a little bit, but we were able to drive our cost reductions to offset the lost gross profit from the sales. So from an International and the US, North America perspective, things are pretty much to expectations.

The Computer Products were definitely weaker than we expected, and that was pretty much across the board. The PC market was weaker than expected and that drove lower sales of PC accessories. The tablet marker was weaker than was expected and that drove lower sales of tablet and smartphone accessories.

So then in the Computer Products Group, what are you doing beyond preparing for the launches in the second half to strengthen that segment? Are you getting any traction with selling perhaps security products related to maybe tablets and smartphones?

Security products are actually doing okay. They are doing to plan.

We have a high market-share position there. We don't believe we have lost any share whatsoever even though we have been off patent for six quarters now. Obviously, we lost the royalty that went along with it in prior years, and that drove some of the margin decline in the quarter.

But we have maintained our presence in security. We are doing category management with some of our OEMs for that, which is continuing to drive good sales for us going forward.

The PC accessories market outside of securities, we are also -- given just the overall market weakness we are pretty close to expectations. I think the biggest issue was in the tablet space.

And we're a little bit in between launches here. So what we are doing is we are preparing for the launch; we are selling our existing products; we are expanding internationally.

We are fairly strong in the US and Europe but fairly weak outside of those two major areas, so we are going after sales in Brazil. We have launched 100 SKUs in Brazil. We are going to have -- every quarter they did better in Q2 than in Q1, and we have incremental plans to expand distribution in Brazil in the second half.

We have reorganized how we go to market in Canada to try to take advantage of our Canadian organization in driving Computer Products sales. We have changed our go-to-market model in Japan as well to try to provide more focus on Computer Products.

So we are changing how we are attacking the business from a sales and marketing perspective. But from a product perspective we really do need these new devices to launch to add some excitement to the category and to create demand for accessories.

Okay. Thank you.

Karru Martinson, Deutsche Bank,

Good morning. When we look back at the MeadWestvaco acquisition, I think we were talking about a $320 million EBITDA number post-synergies, top line around $2.1 billion. Given the slowdown in the Computers and some of the shifts there, do we still feel that we can get to those numbers with the costs saves?

The $320 million we certainly absolutely believe we can get to. The $2.1 billion is going to be difficult just given the weak demand conditions.

So the economic headwinds will need to change for the $2.1 billion in sales. But the cost savings are ahead of plan and it should help mitigate the margin decrease that comes from lower sales.

Okay. When do you feel that -- I realize that cost savings are a continuous part of your culture and that is something that is going to be flowing through for some time to come. But when do you feel that the bulk of those synergies and cost saves will be reflected in your numbers?

On the synergies, the bulk is in 2013. So the $20 million is 100% of our commitment. We will probably overdeliver to that because there will be some bleed over into next year. But that is not going to be nearly what we have delivered this year.

So the bulk will definitely be in 2013. From a productivity improvement perspective, I expect us to build on that every year, so my expectation is that we will be able to improve on that number every year.

Okay. When we look at the back-to-school season, there has been some headlines here, just expectations being a little bit softer. How do you feel that will play into your sell-in that you've had and the inventory that is actually on the shelves at retail?

It's too early to call back-to-school right now. We are now second week.

We are pleased with the sell-in. Our sell-in in the second quarter both in the US and Canada were comparable to what we did last year.

We do think we have a better assortment on the shelf, and we think we have a better demand generation plan than last year. So we have high expectations going into the season, but we will be able to only tell you at the end of Q3 how we did.

Okay. Just lastly, given the strong free cash flow here, you guys made some voluntary prepayments in the first quarter of last year -- of this year. Is that how we should think of the uses of free cash flow going forward?

One of the things that we have said continuously is that we do generate a lot of cash, and one of the things that we believe is it would be appropriate for us to reduce our leverage. So we are actively focused on reducing our leverage. It is the primary use of our cash flow.

And again, we are very seasonal in terms of how we generate that cash. So the majority of our cash that we can use to pay debt down comes in at the end of Q3 and more so in Q4. So that will be our focus.

Thank you very much, guys. Appreciate it.

Okay, thank you. Now I would like to turn the call over to Boris Elisman, President and CEO, for closing remarks.

Thank you, operator, and thank you, everyone, for joining us this morning. To summarize, we are pleased with Q2 progress in North America and International businesses and are on track to generate $150 million of cash for the year. We have now entered our strongest selling season, and I look forward to speaking with you on our back-to-school results at the end of Q3.

Thank you. Have a great morning.

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us and you may now all disconnect.