ACCO Brands Corp (ACCO) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2013 ACCO Brands earnings conference call. My name is Grant and I'll be your operator for today. At this time, all participants in listen-only mode. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Miss Jennifer Rice, Vice President, Investor Relations. Please proceed.

Good morning and welcome to our fourth 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 and annual results, we refer to adjusted results. Adjusted results exclude restructuring and merger-related costs and apply a normalized effective tax rate of 35% for the current quarter and year and 30% in the prior-year periods.

2012 full-year results include the results of Mead as though the acquisition had occurred on January 1, 2012. Schedules of adjusted and adjusted pro forma results, as well as other non-GAAP financial measures and a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, are in this morning's press release.

During the call we may make forward-looking statements and, based on certain risks and uncertainties, our actual plans, actions, and 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 them going forward.

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.

We reported in January that our fourth quarter and full-year results were in line with our overall expectations. Our North American business delivered to expectations, International segment performed slightly better, and Computer Products was slightly worse. Significantly, we generated $157 million in adjusted free cash flow, which we used to reduce our debt.

In the fourth quarter, net sales declined 5%. On a constant currency basis, sales were down 2%, driven primarily by lower volume and unfavorable product mix. Adjusted income per share increased 5% to $0.39 per share, with cost synergies and productivity improvements more than offsetting the negative effects of currency.

For the year, sales declined 7%, or 5% on a constant currency basis, primarily because of lower volume and unfavorable mix in North America and Computer Products. Adjusted income per share was $0.76, compared to $0.82 last year, driven by $0.03 of currency and lower sales, but partially offset by cost synergies and productivity improvements. Specifically, we achieved our 2013 goals of $20 million in cost synergies related to the Mead acquisition and an additional $25 million in productivity improvements.

Neal will provide greater detail on the quarter and the year in a few moments. I'd like to focus the rest of my comments on an overview of our strategy and expectations for 2014 and beyond.

Our strategy remains straightforward. We'll manage our mature markets for profit. We'll continue to invest in developing markets with an expectation of top and bottom-line growth. We'll use our cash flow to pay down debt, with an aim to reduce our leverage to 2x. We'll continue to evaluate value-creating acquisitions and ways to return value to shareholders.

Let me be more specific. In our mature markets, which include North America, Europe and Australia, we participate in a number of low-growth and declining categories. We are focused on market share gains, fueled by new products and new channels, and aggressive productivity improvements to drive profitability. Medium-term, we expect the top line in mature markets to be roughly flat, with market share and pricing offsetting secular issues. In mature markets, we will evaluate acquisition opportunities that are highly synergistic.

In emerging markets, where we saw a 7% growth in local currency in 2013, we will continue to invest in growth. We've been leveraging the combined strength of legacy ACCO Brands and legacy Mead in Brazil, Mexico, the rest of Latin America, and Asia, and have had great success introducing products in these markets or channels where one of us previously didn't have coverage. We will continue to do this in 2014 and beyond. We'll also look for acquisitions that can enhance our growth and presence in these markets.

In Computer Products, two-thirds of our business is driven by PC sales, which are projected to decline over the next few years. We will focus on product categories such as security accessories, trackballs, and presenters, where we have established profitable market positions and can innovate to capture incremental share. One-third of our business is tablet and smartphone accessories, and that market, while growing, is rapidly commoditizing. We will refocus on higher-value, higher-price point tablet and smartphone accessories, but will stop investing in commodity categories such as smartphone cases and the like. We will also reduce costs and better leverage ACCO Brands shared services to improve the returns of our Computer Products business.

These strategies should enable us to grow our revenues in the low single digits at steady state, and generate low-teen free cash flow percentage returns. In the near term, our priority remains to use the cash to delever the business, absent a value-creating acquisition. This should put us in a position in the next 18 months to evaluate other shareholder-value-creating opportunities, including share repurchases or a dividend, as well as continued delevering and acquisitions.

We finished 2013 with a bank leverage ratio of 3.3x net debt to EBITDA, but we need to reduce our leverage to below 2.5 in order to consider share repurchases or dividends.

As for 2014, we have tried to factor in a number of known variables, including the potential impact of customer consolidation and volatility in Computer Products. In terms of our guidance, we've made some general assumptions --

We have assumed that the macro environment doesn't change much -- it doesn't get dramatically better nor does it get dramatically worse. We've assumed currency at current foreign exchange rates, which are worse than averages for 2013. We assume some sales and margin reductions from the consolidation of Office Depot and OfficeMax. We've assumed the channel shifts that are occurring away from Office Superstores to Mass and e-tail will continue. And we've assumed the trend toward lower-end products will continue. Therefore, taking into account the factors I've just outlined, we are taking actions to significantly reduce our costs in 2014, including $16 million in cost reductions from the restructuring initiatives we announced in December, and an additional $14 million in productivity improvements.

We have planned for overall 2014 sales to decline in the mid-single-digits. This decline is largely driven by FX and volume declines in North America and Computer Products. Both segments could decline roughly mid-single-digits. We expect single-digit growth in our International segment in local currencies, driven by emerging markets.

We are forecasting adjusted earnings in the range of $0.70 to $0.76 per share at current FX rates. It's important to note that excluding the effects of currency our EPS guidance is similar to our finish in 2013, but allows for some volatility in the industry and the demand environment. Cost reductions and productivity improvements should offset the impact of the sales decline. Similar to 2013, our first quarter will have negative earnings, the second quarter will be positive, but small, and more than 80% of our earnings will come in the third, and particularly the fourth, quarters.

We expect approximately $140 million of free cash flow for the year. Our cash flow is also seasonal, with the majority coming in Q3 and Q4. The cash flow generation in Q1 will be essentially offset by the working capital investment for back to school in Q2.

With that, I'll turn the call over to Neal for a detailed rundown of our results. Neal?

Thank you, Boris.

Good morning everyone. Our fourth quarter performance is recapped on pages two through four of our slide deck. Q4 sales decreased 5%, or 2% at constant currency. The 2% decline was driven by lower volume and unfavorable mix. Pricing was favorable by 1%. The volume decline was in North America and Computer Products.

Adjusted income from continuing operations was $45 million, or $0.39 per share, compared to $42 million, or $0.37 per share, in the prior-year quarter. The improvement was the result of synergy savings and productivity improvements which offset lower sales volume, adverse mix, and $0.02 of adverse currency.

In terms of gross margin, we made great progress on both our cost synergies and productivity initiatives, which together contributed 190 basis points to gross margin. This offset unfavorable sales mix, which adversely impacted gross margin by 140 basis points, and inflationary pressures of 40 basis points. From a segment perspective, gross margins improved in both North America and International, but were offset by 610 basis points of contraction from the Computer Products Segment. All in, gross margin increased 10 basis points in the quarter.

SG&A expenses were down in the quarter, and at the margin level decreased 150 basis points. Cost savings and synergies as well as lower incentive compensation were 210 basis points favorable, which more than offset the sales deleveraging of 60 basis points.

In all, operating income margin increased 160 basis points to 15.7%.

Interest expense was down $4.5 million in the quarter, to $12.2 million, a benefit of $0.03 cents per share. However, the benefit was offset by the higher tax rate, which had a negative $0.03 impact on the quarter.

Foreign exchange reduced EPS by $0.02.

For the full year, Sales decreased 7%, or 5% at constant currency. Pricing was favorable by 1%, but volume and mix were down 6%. The volume decline was in North America and Computer Products.

Adjusted income from continuing operations was $88 million, or $0.76 per share, compared to adjusted pro forma earnings of $94 million, or $0.82 per share in the prior-year quarter. The decline was primarily the result of the reduced profitability of our Computer Products segment and $0.03 of adverse FX. The effects of the volume decline in North America were offset by cost reduction benefits.

In terms of gross margin, which increased 10 basis points for the year, we made great progress on both our cost synergies and productivity initiatives, which together contributed 200 basis points of benefit. However, unfavorable sales mix largely offset these benefits, as it was a 190 basis point impact. From a segment perspective, gross margins improved in both North America and International but were offset by 610 basis points of contraction from the Computer Products Segment.

SG&A expenses were down for the year but as a percent of sales were up slightly, by 10 basis points. Cost savings and synergies were a 120 basis point benefit, mostly offsetting the sales deleveraging, which impacted SG&A margin by 130 basis points.

In all, operating income margin was even for the year. The improvements in the International and North American segments were offset by the declines experienced in our Computer Products segment, where competition in the tablet accessory market accounted for more than half of our reduced profit.

Interest expense was down $16 million in the year, to $53 million, a benefit of $0.10 per share. However much of the benefit was offset by the higher tax rate, which had a negative $0.06 impact for the year.

Foreign exchange reduced EPS by $0.03 for the full year.

Turning to an overview of our segments for the quarter -- In North America, fourth quarter sales decreased 7%, with a quarter of the volume decline, or $7 million, attributable to exiting unprofitable business. The underlying decline was due to soft demand and some lost product placements. North America adjusted operating income increased 14% to $46 million, compared to $42 million in the prior-year quarter, and operating margin increased 270 basis points, to 17.2%, from 14.5%. The increase was due to synergies and productivity improvements.

In our International segment, net sales increased nearly 0.5%, but on a constant currency basis increased over 6%. We saw growth in each of our major geographies, with Brazil leading the way with 10% growth in local currency. International segment adjusted operating income showed strong improvement, increasing 17% to $35 million, as a result of the sales growth and restructuring actions, with margin expanding 270 basis points, to 18.8%, from 16.1%.

Computer Products net sales decreased 12%, driven by volume loss and reduced pricing. Increased competition in tablet accessories accounted for two-thirds of our sales loss. The market decline in laptop shipments, which impacted demand for our computer accessories and security products, drove the remainder of our declines. As a result of the sales declines, particularly of tablet products, Computer Products adjusted operating income was $5.4 million, compared to nearly $11 million a year ago, and operating margin decreased to 11.8% from 20.5%.

Turning now to a highlight of our year and quarter -- our cash flow and balance sheet. We had strong cash flow generation during the quarter and $157 million for the year. We paid down $151 million of debt, and, as Boris noted, finished the year with a net debt to EBITDA ratio of 3.3x based on our bank covenant definition.

For 2014, we expect free cash flow of approximately $140 million. The year-to-year difference is mainly foreign exchange, which, at recent spot rates, is very negative to last year, and an expected $2 million increase in cash contributions to our pension plans. Once again, we expect our cash generation in Q1, Q3 and Q4.

Q2 will again be a cash outflow quarter due to the seasonality of North American back to school. I should note, that our free cash flow estimate is net of $21 million of payments for cash restructuring. Page six of our slide deck contains a number of other assumptions that factor into our free cash flow, including capital expenditure, which is expected to be $30 million, cash interest, which is expected to be $42 million, and working capital, which is expected to be neutral.

We've also included a slide detailing our guidance, on page five. I'd like to point out that currency has become a significant headwind, using February 4th spot rates, it would have had a $0.03 negative impact on 2013 EPS and a 2% impact on 2013 sales. Our 2014 guidance uses these spot rates.

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

(Operator Instructions). Your first question comes from Brad Thomas from KeyBanc. Please go ahead.

Hi everyone, this is [indiscernible] in place of Brad Thomas. You mentioned a headwind from customer consolidation. I was wondering if you could give us an update on the Office Depot/OfficeMax merger and what your guidance assumes in terms of the impact on earnings and margins. And also, have they started negotiating price increases with you, or where are you in that process? Thanks.

Good morning. The Office Depot/OfficeMax merger is proceeding. The companies have combined and right now they are appointing/have appointed/are in the middle of appointing the management structure down to the merchandiser level. They have started the process of consolidating the suppliers for the duplicated categories, and we're going through that process with them as we speak. So far, all of our discussions and negotiations are consistent with our assumptions.

We have assumed in the plan a fairly meaningful reduction to both sales and an impact on margins, just due to the analysis that our teams have done on our category penetration in both accounts, pricing in both accounts, as well at the experience that we've had with the Staples/Corporate Express merger. So that's incorporated into our guidance.

I don't want to give a specific number, because we are going through the negotiations with Office Depot, so I don't want to be proscriptive in that, but it is baked into our guidance.

Okay. Fair enough. And this is obviously been a difficult year for you guys, and I think you done a good job in what you can control despite that environment. So as we look out to 2014 guidance, what level of certainty do you have with that guidance and what do you see as the major risks?

Well, it is a forecast, so as much certainty as forecasts contain. We try to be fairly conservative in our assumptions. I went in my prepared script I went through certain assumptions that we made in terms of the macro and the currency, and the consolidation of the channel, and just the things that have happened in 2013 in terms of the shift to lower-end products and the shift to more mass and e-tail will continue. So we're not assuming any improvement in any of those areas. But we can go back to my first point, it is a forecast, and things may happen that are outside of our control or some variables that we haven't predicted.

As we have demonstrated the last few years, when things like that happen, we react and we either adjust our cost structure or change the way we do business, or do something to make sure that we still continue to improve our profitability and deliver the appropriate value to the shareholders.

Okay. Thanks.

Thank you for your next question. Our next question comes from Arnie Ursaner from CJS Securities. Please proceed.

Hi.

Hi, good morning.

Boris, I compliment you for taking a very realistic view of 2014 in your prepared remarks. In midyear 2013 or towards the end of Q3, it was very clear, and you made it clear on your October conference call last year, that the consumer preference had shifted away from the premium-branded model that's driven your company towards more price lower price points, and in a sense you talked then about how you would have to reset your business model to adjust for that. Could you comment more on the structural changes you're likely to make in 2014? And to be as specific as I can be, you had about $200 million of SG&A in North America. With this change in the business mix, how should we think about that number on a go-forward basis ?

Well, following that Q3 discussion, we've announced $24 million in restructuring activities primarily focused on North America, and within that most of it is actually US, where we're seeing predominant shift to these lower-end products. So at that time, as we discussed, we reducing mainly the headcount that we have focused on the North American business by about 12% of our salaried employees. We are consolidating the coverage from a go-to-market perspective, so that we are improving productivity on a per person basis, and we're focusing on a lower product development and marketing resources on the areas that we think where we can add value and where customers are willing to pay for the value, and trying to, you know, really strip the cost out of more commoditized categories, where we know we will have to compete to some extent but we don't want to burden ourselves with any of the additional costs.

That $24 million, $16 million will come through in 2014, and are embedded in our guidance. And then in addition to that, we've had a fairly successful Lean Six Sigma productivity initiative in the company for over three years now and we're continuing that, and we are assuming another $14 million in Lean Six Sigma efforts, and a lot of those are also focused on North America. So you know, combined we feel that we have adjusted our cost structure to align with the consumer buying preferences, but as I mentioned to the previous questioner, if we need to do more, we're prepared to do more.

And how should we think about your gross margin, given the various changes in your business? What's a reasonable expectation for the upcoming year? And can you get enough cost reductions to see any improvement in your operating margin?

Right now we're assuming that our gross margin will improve slightly versus what we did in 2013, and the SG&A will stay roughly the same as a percent of sales. So you will see a little bit of a margin expansion in 2014, or you should see a little bit of a margin expansion in 2014.

I just want to clarify -- did you mention in the Computer Products area you're going to move away from the commodity stuff towards the more higher-end? And if so, hasn't that been a place where people have traded down?

Well, you know, the computer accessories market is huge, it's actually significantly bigger than the office products market. And there's plenty of space for all kinds of consumers -- the ones that are focused on more commodity products as well as the ones that are more value added stuff. We just feel there's so much competition in the commodity space and most of it is coming from Asia sources, undifferentiated and a lot of the stores go there -- stores' private label brands go there shopping. So we don't feel that we can effectively compete in that space. It will be with a majority of the market is, but we need to drive value and we can't do it through participating in those particular markets.

Thank you very much.

Thank you for your question. Our next question comes from Bill Chappell from SunTrust. Please go ahead.

Good morning. Boris can you just --

Good morning, Bill.

How are you? Can you tell me a little bit more about the year outlook for the computer product segment in general? I mean would you expect the segment to continue to kind of have this trajectory as we move through? Are we starting to -- even this quarter starting to see a bottom where you feel things can flatten out? It's tougher to gauge how you're looking at it.

Yes, I think that in the -- I'll make comments on the industry overall and then on our participation there. So I think in the industry overall. I think the broad trends in the computer industry will continue, I think there will be some decline in the PC space that market is fairly saturated and when we buy our third and fourth and fifth computer we don't really need all the bells and whistles that we have historically needed. So most of us will tend to go with tablets to supplement our PCs. The PC market will decline. The tablet market has grown and will continue to grow, and it's actually -- not in 2014 but in 2015, it's projected to overtake the PC market in terms of units sold.

In terms of our business computer products business, we believe that the worst is behind us, because we just had such a successful business for so many years delivering 20% plus operating profits, which are really unheard of in the computer accessories industry, and none of our competitors have delivered historically these types of profits. Now we think we're more where the trend line and the average is in the industry will be going forward.

From the PC market space, we are anticipating that that space will continue to decline, and our PC accessories will probably decline proportionately. We have developed over time strong niches within that space, in our security business, in our trackballs and our presenters, and some other PC accessory categories and we will continue to participate there, differentiate, introduce new products there, and participate profitably in that space. That will probably be a negative growth space for us, but it's still a very, very profitable space.

The growth for us will have to come from the tablet and smart phone accessories space. We did not grow in 2013 in that space. Some of it happened in the industry, and some of it is our execution on the particular line. We are in the process of addressing that and fixing that in 2014. I'm expecting things will be better because we have a stronger products assortment today, and we also have plans to continue to improve that assortment going forward.

But also, the competition in that particular space is getting tougher because everybody just like ourselves everybody is realizing that's where the growth is coming from, and more and more players are beginning to participate in that particular space. And that's why we need a more differentiated way of addressing the tablet and smart phone accessory market than we have historically done and we're in the process of defining and implementing that.

And just to clarify, do you feel like your R&D pipeline has the products this year to come out, or you're still kind of in the process of building that?

We have some products this year, but I don't think we're finished in our innovation, and I think we'll need to do more on the go-forward basis. And frankly, Bill, that's just how the technology industry is. Your stuff gets copied all the time so you always need to innovate and drive forward.

Sure. And then just switching to International, and I may have missed this, the strength Brazil, is it more Mexico? And is it more the Mead business, having the traction or are you seeing some synergies as you bring more of the legacy ACCO products into the market, or especially Brazil?

So for Q4 the strength was pretty balanced across the board. As Neal mentioned in his remarks, we have seen revenue growth in Q4 for every international segment, including Brazil, and Mexico, and Asia, and in Europe, so it's been pretty broad. Brazil has been strong all year, and there have been taking share. As you know, the Brazilian economy has not been in a great shape for the last couple of years, and we don't anticipate that that will change. But our team has done a terrific job introducing new products, getting new licenses there, and moving into the mid-price points for notebooks and other products while securing the premium categories. So we captured a lot of share. Mexico had a -- going back to 2013 Mexico had a slow first half due to some channel issues, and the government that changed that didn't just focus but affected the industry overall, but had a strong Q4 and we anticipate that they will have a good 2014, as well.

Got it. Thanks for the color.

Thanks, Bill.

Thank you for your question. Our next question comes from Karru Martinson from Deutsche Bank. Please go ahead.

Thank you good morning.

Good morning.

When we look at a longer-term 2x leverage target of 18 months to get there, and does that build in acquisitions of the tuck-in variety? Or is that kind of off the table until we get to those kinds of levels?

Yes, so just to be clear, we didn't say we're going to get to 2x leverage in 18 months. What we said is our projection is if nothing changes and if the trends continue as is, in about 18 months, we will be in a position to do other things with our cash, other than just paying debt or do acquisitions. So namely we'll be able to repurchase the share or issue a dividend, and we have to get to 2.5x debt to EBITDA ratio to do that, not 2x. I think 2x is further out than 18 months, that's point number one.

And then point number two is the 2x is our goal to get to steady state. It won't be 18 months. We believe for us to be in a position to, on a continuous basis, be able to return cash to the shareholders in the best way possible, namely through either EBITDA growth, or acquisitions, or share repurchases, or dividend at steady state, we should be at about 2x, around that rate. So that's the comment about 2x.

Okay. Thank you for that clarification. Sorry for misunderstanding that.

When we look at the industry and the challenges that you're facing, given that you guys are the larger player here, what are you seeing from the competitive stance of folks who may not have the breadth of product to weather the storm that you're seeing out there?

Folks are retrenching and you know trying to find their niches and protect their existing business. It is a tough industry. There's a lot of pressure that's coming on the industry through consolidation. You're seeing some players, or you saw some players over the last year or so abandon the industry, and kind of letting their parts of the business consolidate with other players. So it's tough for all of us, and I'm not saying that as a big guy it's any tougher for us. We're all trying to compete and deliver value in a very, very tough industry and a tough environment.

And what's your abilities to kind of compete on that low-end private-label side? That's something that has kind of come in and out of the strategy over the last couple of years. What's the ability to kind of expand that side and go after that market?

We're structured to compete there. We're just as capable as competing there as anybody else is. The question is when and how do we want to compete there? And what we're saying is we want to compete there when we manage the whole category. We don't -- it doesn't make sense for us to only offer a private label, in fact we don't think it makes sense for our customers to only offer private label because it just moves the consumer down and doesn't offer them appropriate choice.

But where we do the overall category management as part of that, we have lower-end products and medium-price products and higher-end/high-feature products, then as an overall mix it makes sense for us. And we have over the last several years he said that is part of our strategy and we're willing participants in the strategy. In fact for a lot of our customers we do that, where it doesn't make sense for us and again I believe it does not make sense for our customers if the only choice is private label, because I think that does not give a good choice to the consumer.

Thank you very much, guys. Appreciate it.

Thank you.

Thank you for your question. Our next question comes from the line of Chris McGinnis from Sidoti & Co. Please go ahead.

Good morning thank you for taking my questions.

Hi Chris.

Just to follow up on the previous question -- how much of your business is kind of the lower margin price point?

Chris, I don't have -- I don't have an answer for you. I know that private label for us as a company is around 5%, but we also have branded products that are fairly lower price, as well. So it's difficult to say how much is exactly in that lower price point range.

Sure. All right. And then I guess just thinking about the negative mix. Is that being predominantly driven by the shift to the internet, away from the brick and mortar?

No, no. The negative mix is predominantly being driven by the choices that our big customers make in the assortment they want to introduce, primarily for back to school or back to business. That's really what drives the mix. And what we've seen in the last couple years is for back to school, some of our customers that are our meaningful customers for us actually a customer that is a meaningful customer for us has tended to skew their mix, their assortment very, very low and that drove the mix for us, and it drove the margin degradation for us. So for 2014 we're assuming nothing is going to change, the same thing will happen. We're taking costs out of the business to make sure that we're aligned with that particular structure .

All right.

Just appreciating the big change we saw in the gross margin in the Computer Product segment that had a lot of the negative mix that we saw in the fourth quarter.

Sure. All right. And then you may have already answered this, and apologize if you did, how are you better competing? I know in 2013, at least some of the headwind was -- this move to private label. How better positioned are you or do you feel this year going into the school season and just your product mix and you know how you're targeting the customers maybe a little bit better?

Yes, let me answer that. I want to make one comment on your previous question. E-tail space in general is actually driving a higher margin and better mix than the house average. Actually, it benefits us to move more to e-tail than to retail.

To your current question, we are in the process of finalizing the assortments with our customers for the 2014 back to school. We are pleased with where we are. We believe that we have gained some incremental business versus the 2013. It ain't over until it's over. So we won't be able to celebrate until the back to school season is finished. But from an assortment perspective, we are in decent shape and I feel good about our position there.

And then as I mentioned, we are structuring and preparing ourselves as if nothing will change. So we are making sure that we take the appropriate costs out of the business, so that if and when it doesn't change we're still delivering the profits to our shareholders.

Sure. Thank you for taking my questions.

Thanks, Chris.

Thank you for your question. Our next question comes from the line of Kevin Steinke from Barrington Research. Please go ahead.

Good morning.

Good morning, Kevin.

Just wondering what the next steps are to get more revenue synergies out of Mead, and if you're including assumptions of additional revenue synergies in your 2014 outlook?

We are. So going back to 2013, we delivered somewhere around the $15 million range in revenue synergies from the merger, which is -- which was less than 1% we wanted to be around 1%, so a little bit below our target. Our goal, and what we have baked into our guidance, is revenue synergies in the 1% to 2% range. And they're going to come from same places that we've seen before and just with better execution, more time. These are -- unfortunately for us, these take a long time because you have to displace people from the existing shelf or market positions, in Brazil and Mexico and US. In Europe and Asia and Australia, we've had successes where we've taken each other's products into the strong channels and gotten placement and got some sell-through and we just need to continue to build on that and increase the product penetration in those areas. So that is part of our 2014 plan.

Okay. And thanks for all the detail on your assumptions behind the 2014 outlook. I just wondering if you could share how you think margins might trend for each segment in 2014.

The general view in the business is that you look at the overall margins for the business, our SG&A is going to be a flat performance. The reason for that is because what we have is an assumption that while we've taken SG&A costs out overall we have to -- we have two issues which are negative to that. One of them is the fact that we have to reinstate our incentive earnings, and the second one is there's some adverse leverage on the business on the assumption that the top line is challenged. The margin improvement overall is going to come through in the growth margin area, and most of that assumption is coming out of where we're seeing progress already, which is on North American and International business, I think, our Computer Products business is an area where we're going to look for stability.

Okay. Thanks. That's helpful. Thanks for taking my questions.

Thanks, Kevin.

Thank you for your question. Our next question comes from the line of Helen Pan from Barclays. Please go ahead.

Hi, good morning.

Good morning, Helen.

I just had a few follow up question on the online business. Can you tell us how big that is currently for you, as a percentage of sales?

It's difficult to say because very few of our online partners buy direct from us. Most of them in fact buy through the wholesalers, so we don't get to see that. But it's a meaningful number, especially in the US, where the e-tail channels are more developed. I would hesitate to give you a number, but it's tens of millions of dollars.

Okay.

And it's growing very, very rapidly.

Right. And then you mentioned that online is better margin. Can you perhaps talk about how that margin has changed, though, for you as online sales have increased over the past couple of years?

Well, without talking specifically about the online customers just in general, the smaller the customer the better the margin, and the bigger the customer the worse the margin gets. So I'm sure that what you're going to see is as these customers become larger and more sophisticated and we become a bigger part of their sales they're going to push for more program and lower costs. That's just something that we'll need to manage.

Counter to that, as our existing customers get smaller, some of the programs and costs that we spend on them will go down, so overall I think that that shift that happens pretty much in every industry will be fairly neutral, just from the shift. They'll be fairly neutral to our margins.

The other thing about the online business that is beneficial to our margins -- online resellers are very interested in selling branded products and not private label products. So that helps the overall margin mix for the online business.

Okay. Thanks for that color. And then one last question on your overall guidance. You're guiding to overall sales down mid-single-digits. That includes International up single digits. Can you perhaps speak about North America and Computer Products and what sort of declines you're assuming for those two segments?

Yes. We're assuming a mid-single-digit decline for each one of those segments.

Okay. Thank you.

Thanks, Helen.

Thank you for your question. Our next question comes from the line of Kevin Ziets from Citi. Please go ahead.

Hi, good morning.

Good morning.

I was curious about -- you talked in the past about consolidation impact being, some part of it being more or less temporary from excess inventory in the channel. So I'm wondering if you're still expecting that or are you -- are you seeing this as sort of an opportunity for these two customers to sort of reset their -- I guess be more aggressive with their merchandising to lower price points?

Kevin, inventory tends to be much more of an issue from quarter-to-quarter rather than for the year as a whole. What we do think is one of the negative impacts of the Depot/Max merger will be ultimately they will lower the amount of the inventory in the channel because they're going to take down the number of stores they have and they're going to consolidate their supply chain. It doesn't change end-user demand, and I think that's the important thing. It creates short-term fluctuations in our business, which some quarters like Q1 which is so small can be quite magnified and so we have to talk about it in the context of the quarter. They tend not to be big features in the context of the year.

Okay. So the -- I guess the part about consolidating suppliers is not the bigger part of your expectations for 2014, or?

You mean consolidating suppliers as part of Office OfficeMax strategy, to consolidate suppliers?

Yes.

Is that what you're asking, Kevin?

That's right.

We look at that, we can either lose or win. We are very broadly penetrated across each one of those customers, so as they come together we are in a very, very strong position to retain our business across the board. And we have some opportunities actually to expand our presence. So all of that without judgment applied is part of the guidance that we have provided.

Okay. And then I guess looking at International for a second, it seems like a lot of the growth there has been more on price than necessarily on volume. I'm curious, is that a mix shift or is that actual pricing actions that you're taking? And sort of do you expect that dynamic to be able to hold?

So, it's important to understand that markets like Brazil are high-inflation markets, so they tend to have a need to have high price increases to keep up with that inflationary experience in the market. But generally what we're seeing in a number of international markets is the need to respond to the movements in the relative price of the US dollar in their local currency. So that's the other factor driving price increases in other markets.

It's not mix, it's actually a price.

Okay. And you think that's -- I guess that will continue going forward then?

Well, it's the converse of the US dollar headwind that we get as a translation issue. The two are driven by the same fact.

Okay. And then I guess just touching on acquisitions again, is the -- I guess the long-term trend of wanting to get below 2.5x or down to 2x, is that -- does that make it more likely that an acquisition will be more of a tuck-in variety than necessarily a strategic, a larger levering transaction?

Not necessarily. The goal to get to 2x is a long-term goal. It will not be in the way of us doing acquisition, if that makes sense for us. So you shouldn't think of it in that way.

Okay. Do you -- do you think of sort of leveraged limits that -- sort of how you would take leverage in a particular acquisition or is it more just the nature and the attractiveness of the target?

It's more of the latter, but we need to be pragmatic in running a business, so of course there will be some natural limits to what we'll do from a leverage perspective.

And just I guess thinking of the converse of that, is there -- I guess is there a point which you would look to sell assets to get your leverage down to a point where you could begin to return money to shareholders? I know you're still intent on sort of driving the improvement in the computer business, but I was thinking of that in particular. Is there an opportunity or a point at which you would look to sell that?

We think we have a good portfolio right now. We're pleased where we are, and we're not looking to sell anything.

Okay. Thanks.

Thank you, Kevin.

Thank you. We have no further questions at this time. I would now like to turn the call over to Mr. Boris Elisman, President and CEO for closing remarks.

Thank you everybody for joining us this morning. I look forward to speaking with you next quarter in about three months. Thank you. Bye-bye.

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