ACCO Brands Corp (ACCO) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 ACCO Brands Corporation earnings conference call. My name is Jeannette, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Miss Jennifer Rice, Vice President, Investor Relations. Please proceed.

Good morning, and welcome to our first quarter 2014 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 quarterly results, we refer to adjusted results. Adjusted results exclude restructuring and merger-related costs, and apply a normalized effective tax rate of 35%. Schedules of adjusted 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. In particular, our business outlook is based on certain assumptions we believe are reasonable under the circumstances. Please refer to our press release and SEC filings for an explanation of certain of these risk 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.

The first quarter is typically our lowest-revenue quarter, so I'll keep my comments brief. We were pleased with our execution during the quarter, and are managing the challenges of the industry well. We met our own quarterly sales and earnings expectations, and are reiterating our outlook for the full year.

Net sales decreased 6%, or 3% on a constant currency basis, primarily due to lower sales volume. The adjusted loss from continuing operations improved to $0.05 a share from $0.07 a share, primarily because of lower operating expenses and lower interest cost.

On a segment basis, we performed slightly worse than our own initial expectations in North America, with sales down 8% at constant currency. Soft demand and customer inventory reductions had an impact on our sales in January and February, although we saw some recovery in March. On the positive side, the adjusted operating loss in North America was cut in half due to effective expense management and productivity improvements.

Our International segment continued to demonstrate better-than-expected top-line performance, with sales growing 6% at constant currency. Once again, we saw double-digit growth in Brazil, as back-to-school season came to a strong close. Mexico and Asia-Pacific contributed improved sales, and Europe's turnaround story continued into the first quarter. Unfavorable foreign exchange caused a slight decline in adjusted operating income in our International segment, but overall, I continue to be pleased with how this segment is performing.

Computer Products ended the quarter about where we expected. While the overall sales declined 8%, we saw an improvement in the trend for demand for security and PC accessories. We did, however, see continued weakness in the tablet and smartphone accessory categories.

As I said on the last quarte' s call, we are sharpening our Computer Products strategy to refocus our investments on higher value, higher-price-point tablet and smartphone products, while no longer investing in commodity categories such as smartphone cases. We are also leveraging more of the expenses with the rest of our business to improve profitability.

Looking forward, we are reaffirming our 2014 sales guidance of a decline in the mid-single digits and adjusted earnings per share of $0.70 to $0.76. We are also reiterating our free cash flow forecast of approximately $140 million. We believe this year's back-to-school season will be a step up from last year, and we will benefit from an improved product assortment and major placements at several mass merchandisers, although we think there will continue to be a shift in sales from the second to the third quarter as end users delay their spending until closer to the beginning of the school year.

With that, I'll ask Neal to provide additional detail on our first quarter results. Neal? Audio at 4:51

Thank you, Boris.

Good morning everyone. Our first quarter performance is recapped on pages two and three of our slide deck. Q1 sales decreased 6%, or 3% at constant currency. The decline was driven by lower volume in North America and Computer Products. Adjusted loss from continuing operations was $6.2 million, or negative $0.05 per share, compared to negative $0.07 in the prior-year quarter.

Looking at the specifics -- gross margin decreased 70 basis points in the quarter to 26.8%. We made great progress on both our cost savings and productivity initiatives, which together contributed 60 basis points to gross margin. This was offset by unfavorable sales mix, which adversely impacted gross margin by 100 basis points, and inflationary pressures of 40 basis points.

SG&A expenses were down in the quarter, and at the margin level decreased 20 basis points to 24.9%. Cost savings were 120 basis points favorable, which more than offset the deleveraging effect of 70 basis points and foreign exchange impact of 30 basis points.

Interest expense was down $3.9 million in the quarter, to $11.3 million, a benefit of $0.02 per share due to the refinancing and debt reduction.

Turning to an overview of our segments for the quarter. In North America, sales decreased 9%. The underlying decline was due to soft demand and some channel inventory reductions. North America adjusted operating income improved to a loss of $1.2 million, compared to a loss of $2.5 million in the prior-year quarter. Adjusted operating margin improved 60 basis points to 0.7% [loss]. The improvement was a result of cost savings and productivity improvements.

In our International segment, net sales decreased 2%, but on a constant currency basis increased 6%. We saw growth in most of our major geographies, Brazil led the way with growth in the teens, Mexico, Chile, and Asia-Pacific saw high single-digit-growth, Europe had low single-digit growth, and Australia a small decline. International adjusted operating income declined slightly, however, to $8.1 million, from $8.6 million last year and margins contracted 30 basis points, primarily as a result of the $0.7 million negative effect of foreign currency movements.

Computer Products net sales decreased 8%, driven by reduced pricing and lower volume for tablet accessories. As a result of the sales declines, Computer Products adjusted operating income was $2.2 million, compared to $3.4 million a year ago, and adjusted operating margin decreased to 6.5% from 9.2%. We did see some stabilization in the PC and laptop accessories space, particularly in security products.

Turning now to our cash flow and balance sheet. We had positive cash flow generation of $42 million during the quarter. This was down from the prior year due to forward-buying of paper, and starting our pre-build of back-to-school inventory and creative materials earlier this year. Last year this occurred in the second and third quarters.

For 2014, we still expect free cash flow of approximately $140 million. The year-to-year difference is mainly less benefit from working capital, adverse foreign exchange, and an expected $2 million increase in cash contributions to our pension plan, partially offset by lower interest rates. Once again, we expect our main cash generation in the third and fourth quarters.

Q2 will be a cash outflow quarter as it was last year due to the North American back to school season.

Our sales and earnings guidance for the year make assumptions regarding currency. Our guidance was based on February 4 spot rates. Recent spot rates have not changed materially.

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

Thank you. (Operator Instructions). Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Hi, good morning. Boris, can you expand a little about it more on your International sales? Obviously we've been talking about revenue synergies you hope to achieve by cross-selling in various borders. Obviously the trends in Brazil are pretty favorable, Mexico seemed to do well. Can you expand a little bit more on how the revenue synergy strategy is working?

Good morning, Arnie. We are seeing more uptick on the revenue synergy side. We're seeing increased sales in Brazil, for our Kensington products to the order of doubling versus last year. We're seeing some sales in Europe of legacy Mead products. We saw actually a pretty good sales in Asia of Mead decorative calendars and some of the notebooks in Q1.

So we are certainly making progress toward our goal of generating about 1% to 2% of sales from positive sales synergies. The majority of growth in the International segment has been in our legacy categories in all of the geographies, and we're just taking shares still in a tough environment.

And then expand a little bit, you mentioned you -- and you have talked about this before, reshaping your strategy in the Computer Products, and I think you said you hoped to leverage some expenses with other units. Could you be a little more specific about the timing and steps you do hope to take in 2014 to improve results there?

Yes, and specifically in 2014, part of our structuring announcement back in December of last year involved Kensington, and we're leveraging our infrastructure to reduce the cost on the finance, some of the finance functions, some of the customer support functions, and some of the supply chain functions. So that is in process, and happening as we speak, and I expect most of that work to be completed by the end of the second quarter.

We probably won't be done yet. There will be more things that we'll be looking at leveraging from a G&A perspective and an infrastructure perspective from Kensington. Right now we decided to keep the go to market and product development focused on that product line, and as we progress in our strategy and measure it, our results, we'll take the appropriate steps at that time to see if we need to leverage more.

And typically if you're going to have products that affect smartphones or tablets in the back half of the year that are really value-added products, you would have them developed and already be introducing them to your customers for their review and acceptance. Is that process unfolding?

That process is unfolding, but I want to temper everybody's expectations. Changing a product strategy is not a one quarter or one season type of issue. We're going to be moving in the right direction, and we will be introducing some of the new products but it will take us some time to completely revise our product approach in the tablet and smart phone accessory space, and move from, more skewed towards the commodity end of it to more skewed towards the premium and value-added end of it.

Thank very much.

Thanks, Arnie.

Your next question comes from the line of Bill Chappell with SunTrust. Please proceed.

Thanks.

Good morning, Bill.

Good morning. First, just kind of looking at the destock issues in January quarter and then the shift from 2Q to 3Q. I assume we're seeing just kind of another shift where the season and the whole category really revolves around kind of August to December. Is that the right way look at it?

If you're seeing a current shift of retailers who are just really focused on the key season and defocusing the off season, and so is there any way to quantify that? Are we now having 60%, 70% of the business sold in that time frame versus what it was in the years past?

Well, the peak of the season is always late August, early September. It starts ramping up in early August, but the peak is really late August. So what's happening this year is the major resellers or certainly the majority of the resellers who are driving our back to school are setting just a little bit later in the season. So they're still setting in July, but a little bit later in July. And they're taking their inventory from us in the very late June but most likely in the July time frame. So as opposed to last year, we had a little bit of recognition of the revenue in Q2, some of that revenue I believe this year will shift into Q3.

We still feel very, very good about the overall back to school season, which for us is really four months. It's June, July, August and September, if I look at those four months. But we just believe that it would be a little bit more skewed towards Q3 versus Q2 this year versus last.

Okay. And then can you talk to -- staying on North America, I think we heard from Mr. Richards and United Stationers and even you that there was some improvement in March. I'm just trying to understand was that, do we see that in April, as well? Are we seeing kind of stabilization in sell through or was that just January, February were pretty rocky and so we're seeing back to normal?

No, we're seeing stabilization in April, as well. So really the tough period was January through Valentine's Day. And I'm speculating here, but most of that I believe was associated with just very, very bad weather in major parts of the country. But after Valentine's Day things started to improve and March was better, and April is continuing on the same trend.

Got it. And one last one, I'm not sure you can be this specific, but kind of an update on what you're seeing in terms of Mexico and Brazil.

Yes, we are continuing to outperform the market and our competitors in Brazil, as Neal mentioned in his prepared remarks. We saw team growth in Brazil during back to school season, which is a phenomenal performance given that the economy is growing at about 1.8%. In Mexico we're turning the business around. As we discussed, last year we had a flat year in Mexico due to some external factors, both customer and government external factors, but we're back to high single digit growth in Mexico in Q1.

Thanks for the color.

Thanks, Bill.

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed.

Thanks. Good morning, Boris, Neal, and Jennifer.

Good morning, Brad.

Couple of quick questions on the North America business. First with respect to Office Depot, I was wondering if you could just give us an update on how things are progressing in terms of the timing of negotiations with them, anything that you've learned about? Have you figured out what new terms you'll have with them and what placements you'll have with them? And then when might we see an impact from a P&L standpoint?

So they are in the middle of their line reviews and their integration process. We've had two line reviews so far, and we won one and we lost one. There are many more to come. I do believe that they put -- will put out most of their business out to bid, to try to consolidate between different suppliers. All of that, all of the known impact is built into our guidance.

What's not in our guidance are things that we don't know about, such as if they plan to close lots of stores later in the year, and we'll just have to learn from them and react to that when we -- when that is announced. But you know, the process is proceeding as expected, and there's nothing unanticipated that we have seen so far. They remain a very key customer for us, and we're aggressively going after the business there, but we doing it prudently and making sure that we're making money in the process.

Great. And then with respect to back to school, obviously we're still a ways away from knowing what a sell-through would look like there, but at what point will you have locked in the placements for back to school? At what point can you have greater confidence that you've won back some shelf space that you may have lost last year?

Today. We feel good about our back to school placements and about the sell-in. But as you mentioned, we don't know what the consumer demand is going to be, what other issues are going to be out there. So it's premature to call back to school, but we are pleased with the selling and the placement.

That's great to hear. And then just lastly, from an acquisition perspective, can you give us -- what you're seeing out there in terms of any new availability of new countries or partners? How does the acquisition pipeline look today?

It's similar to what it was before. We believe it is a consolidating space. There are assets out there that are available to be consolidated. But we have a very disciplined process, and we'll only act on it if it makes sense for us, either you know in emerging geographies, which I mentioned before is a priority for us, or if there's a very accretive consolidation opportunity we'll look at that, as well. But things haven't changed as far as the M&A environment is concerned.

Good. Well congratulations on a good quarter here in a difficult environment and best of luck.

Thank you. Thank you, Brad.

Your next question comes from the line of Chris McGinnis with Sidoti & Company. Please proceed.

Good morning. Thanks for taking my question.

Good morning, Chris.

Just quickly two quick questions -- one just on the gross margin, kind of coming down a little bit. Is that mix is that still a headwind for the rest of the year, you see that kind of trade down? Is that trade down or can you maybe go through that, the mix issue?

Sure. I'll let Neal answer that question.

So part of the -- part of the business challenges we're facing right now are within the Computer Products space, where we've seen obviously margin contraction, particularly around the tablet product categories where we've been getting ready for range change-outs. And so we've been lowering our pricing and therefore our margins in that category, and that obviously impacts negatively the mix of the business.

And then in our international markets, where we buy products out of China and sell them in local currencies, one of the challenges we have been having is obviously the movement of the USD versus those currencies. And there's always a bit of a lag before we can change pricing to catch up with that.

And we did change pricing at the beginning of the year, but those currencies moved a lot more than we expected, and one of the problems we always have in this industry is the advanced notice we have to give our customers, which creates this lag effect between what happens in the real world and what happens to our pricing. So both foreign exchange and Kensington are the two big drivers of the negative mix that we're seeing at the moment.

Great. And just on the computer side, how much of the, I guess maybe in this quarter itself, was the impact of exiting the tablet, or the phones and the lower margin business?

We certainly expect that will improve our margin in Computer Products, and we'll get back to the averages. Traditionally if I look at our weighted average Computer Products margins that are in the 35% range, give or take, so we expect to overall get -- get to that number. As Neal mentioned, in Q1, not just from us but from everybody, it's been a very, very competitive space and lots of competitors have been fire-selling their product.

The overall market is -- has actually declined in Q1, as you probably have seen from Apple's announcement. So that definitely put pressure on our margins. So I do expect that to return to normal in the remainder of the year. Probably not in Q2 because we'll still have some lag in Q2, with some of these fire sales, but certainly in Q3 and beyond.

And just Chris to just -- the second part of your question was you know do we expect the overall margins to continue in this level. They will recover, but they will recover probably in the second half of the year. We do expect some of this FX pressure specifically in the tablet and the accessories pressure to remain with us a little bit into Q2, as well.

Great. Thank you very much.

Thanks, Chris.

Your next question is a follow up from the line of Arnie Ursaner with CJS Securities. Please proceed.

Hi. Couple of quick follow ups -- you mentioned you're seeing channel inventory reductions. Could you try to give us a little better feel whether -- two things related to that. One is it across the board between the distributors and the large superstores? Why don't we start with that, if you don't mind?

Yes, it was similar, Arnie. I think it had to do with just a poor January. Typically the way things work in our industry, especially on the commercial side, January is a very, very heavy sell-through month, as businesses buy. It's called the back to business season. So our customers stock up on inventory in December in preparation for that season. This January the sell through was clearly weaker than expected, and then they had to rationalize their inventory and we saw a very significant takeout in the first couple months of the year, across the board.

Well, that was really where I was heading. You track your final sales versus inventory replenishment, so --

Yes, correct, and we saw sales out significantly higher, significantly higher than sales in.

Got it. And could you expand a little bit on your end market and talk a little bit about the trends you're seeing in stores versus internet? Internet where you're seeing a lot more of your product has been moving out through that channel -- can you update us on what you're seeing there?

Yes. Again, the trends from last year, actually last couple years, are continuing. We are seeing a shift from the brick and mortar environment to the internet. Our sales on the -- for the internet e-tailers are continuing to grow significantly, and even though the volume, the revenue, is fairly significant revenue, not meaningless anymore, it's a big number, the growth percentage is unabated, so we are very pleased with the progress we're making on the e-tailer side. And you know, retail, brick and mortar retail is continuing to have a tough time, especially more in the big box specialty retailers.

And just remind us again of the margin impact as this shift continues to unfold?

It should improve our margins. So the e-tail space is a higher gross margin space for us than the big box retail.

Thank you.

Thanks, Arnie.

Your next question comes from the line of Kevin Steinke with Barrington Research. Please proceed.

Good morning.

Good morning, Kevin.

Good morning. Could you just -- could you give us an update on what you're seeing in the government market? I think you talked about some softness there last year. So any thoughts on that would be helpful.

We saw softness in end of Q3 and early Q4 of last year, due to some of the government shutdown issues, but that has recovered. So I -- there's nothing special either positive or negative that we have about the government markets, they're kind of back to normal.

Okay. Well, that's all I had. Thanks.

Thanks, Kevin.

And at this time we have no further questions. I would now like to turn the call back over to Mr. Boris Elisman, President and CEO, for any closing remarks.

Thank you, everybody, for participating in our call today, and for your questions, and I'm looking forward to speaking with you at the end of our second quarter in three months. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.