ACCO Brands Corp (ACCO) 2014 Q2 法說會逐字稿

Good day to you, ladies and gentlemen, and welcome to the ACCO Brands Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. The conference call is being recorded today, July 30, 2014. (Operator Instructions.) I'd now like to turn the call over to Jennifer. Over to you.

Good morning and welcome to our second 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, merger-related and debt refinancing costs, and apply a normalized effective tax rate of 35%. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these 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 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. As you know, we reported our second quarter results earlier this morning, and overall we are pleased with our performance. Net sales declined modestly, minus-2% at constant currency, and earnings per share were flat, at $0.19. These were both slightly better than our expectations due to improved trends in North America, including expanded placements in back-to-school categories, as well as disciplined expense management and a relentless focus on cost-reduction initiatives.

Back-to-school in North America was a highlight in the quarter, with a significant uptick in placements, particularly in the mass channel. We?ve broadened our product assortment to respond to consumer preference for lower-priced products, and we are taking full advantage of our U.S.-based manufacturing capability to market many of our products as American-made. It?s still a bit too early in the season, but we are cautiously optimistic that sell-through in these product lines will be positive.

We are also pleased with our execution against the ongoing retail channel shift from office super stores to the mass channels and e-tail, as well as the consolidation and store closures taking place across the office super store channel.

Brazil remains a great market for us, and we saw net sales grow there in the second quarter despite the distraction of the World Cup, which slowed consumer and business activity across the board in the last two weeks of the quarter. We are looking forward to another strong back-to-school season in Brazil, which primarily impacts our third and fourth quarters.

In our Computer Products segment, we continued to refine our product portfolio and carefully manage our exit from low-margin and commodity categories such as smartphone cases. We are also beginning to benefit from a reversal of sales declines in the PC and laptop categories, which helps our security business, still our most profitable category in Computer Products. In addition, we are leveraging our Mead and Trapper Keeper brands to create tablet cases that evoke iconic designs from the 80s and we expect incremental sales from these products in the third and fourth quarters.

Finally, we are now benefitting from the restructuring actions that we announced late last year and began implementing in the first quarter. Most of our restructuring activity is now complete.

As we did in the last quarter, we are reaffirming 2014 sales guidance of a decline in the mid-single digits and adjusted earnings per share of $0.70 to $0.76. And we continue to expect free cash flow generation of $140 million.

With that, I?ll ask Neal to provide additional detail on our second quarter results. Neal?

Thank you, Boris. Good morning everyone. Our second quarter performance is recapped on pages 2 and 3 of our slide deck. Second quarter sales decreased 3%, or 2% at constant currency. The decline was driven by lower volume in our Computer Products and International segments. Adjusted net income was $22.6 million, compared to $21.8 million in the prior-year quarter. Earnings per share were even with the prior year at $0.19.

Looking at the specifics, gross margin was down slightly, 60 basis points to 30.5%. We made great progress on both our cost savings and productivity initiatives, which together contributed 80 basis points to gross margin. We also had positive effects from pricing, product costs and FX, which combined were a benefit of 70 basis points. But these items were offset by unfavorable sales mix of 130 basis points, which is partly due to some profitable product sales moving to later quarters. Gross margin was also offset by tablet accessory inventory charges and other items totaling 80 basis points.

SG&A expenses were down in the quarter, and at the margin level improved 40 basis points to 19%. Cost savings were 150 basis points favorable, this more than offset the impact from the non-repeat of the $2.6 million gain on the sale of the building in the prior year, sales deleveraging, and other items. Interest expense was down $3.1 million in the quarter, to $10.2 million, a benefit of $0.02 per share.

Turning to an overview of our segments for the quarter. In North America, sales decreased 1% and were flat on a constant currency basis, a much improved trend from the previous quarters. Share gains and price increases were offset by sales declines at a large customer that recently merged. North America adjusted operating income increased 21% and adjusted operating margin expanded 310 basis points to 17.3%. The

improvement in profit and margin was due to cost savings from restructuring and other productivity improvements.

In our International segment, net sales decreased 4%, but on a constant currency basis declined 3% largely due to a decline in Europe, where the environment is choppy. International adjusted operating income declined to $5.2 million from $10.3 million last year due largely to the non-repeating benefit of a $2.6 million gain on the sale of a building in the prior-year and lower volume.

Computer Products net sales decreased 12%, driven by lower volume and reduced pricing for tablet accessories. Computer Products adjusted operating income and margin decreased as a result of the sales declines and charges for the write-down of tablet accessory inventory. We did, however, continue to see stabilization in the security PC and laptop accessories space, which now represents 80% of the segment sales and essentially all of the segment profit.

Turning now to our cash flow and balance sheet. As expected, we had our typical seasonal outflow of cash in the quarter due to the North American back-to-school season. It was negative $46 million, or negative $4 million for the six months. Once again, we expect strong cash flow generation in the third and fourth quarters and for the earlier investments we already made in inventory to cycle through in the second half of the year. We remain confident in our ability to generate free cash flow for the year of approximately $140 million.

One final point before closing. Our sales and earnings guidance for the year make assumptions regarding currency. Our guidance was based on February 4th spot rates and recent spot rates have not changed materially.

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?

Thank you. Ladies and gentlemen, your Q&A session will now begin. (Operator Instructions.) We have our first question today from the line of Arnie Ursaner. Over to you, Arnie.

Hi. Good morning. My question relates to timing of some back-to-school. Obviously back-to-school, you had hinted before a lot of things would shift from June to the July quarter or July timeframe but yet indicated it was quite strong. Is there any way you can try to measure whether some things shipped earlier in the quarter or earlier in the back-to-school season versus your expectation? And maybe tie it into a formal comment that Neal made about possible -- profitable sales moving to a later quarter?

Good morning, Arnie. You know, there's lots of puts and takes in the quarter and things move around all the time. Bigger picture though, nothing has changed. We told you a quarter ago that we believe that compared to prior year this back-to-school will shift more from Q2 to Q3. That is still the case. Even though we are pleased with how the back-to-school went in Q2, we do expect Q3 to be stronger than -- or the seasonality between Q2 and Q3 to be stronger this year than last year due to some shift in shipments to a large customer from June to July. So that -- if your question is did we pull something in from Q3 into Q2 and is Q2 or Q3 going to be weaker relatively, the answer is no.

Perfect. Thank you. And then just Neal, could you expand on the profitable sales that moved to a later quarter, what area they're in and maybe give us a feel for the types of products involved?

Yes. They actually were nothing to do with back-to-school. They're to do with the dated calendaring products that we have and are, as I'm sure you'd appreciated, are a higher margin in the mix and they will ship later in the year this year.

Okay. Neal, just one more quick one while I have you. You obviously got a credit agreement which gives you dramatically more flexibility for share repurchase and you do expect significant free cash flow in the back end of the year. Just remind us of your priorities for free cash?

Well right now, Arnie, as you know, we don't have the authorization from the Board to buy back shares. Clearly given the stock price and given that we do have the ability now to buy up to $60 million of stock, this is something that we will review with the Board. The priorities still remain to de-lever the Company. If we have acquisitions that are very accretive we will look at them as well, but now we have a third aspect to that mix of delivering value to shareholders and we will seriously look at that.

From just a timing of cash, we don't get free cash until the end of Q3 so we have time to make the appropriate evaluations of what we need to do.

Thank you very much.

Thank you. Next question is from the line of Brad Thomas of Keybanc Capital Markets. Over to you, Brad.

Thank you. Good morning, Boris, Neal, and Jennifer, and congratulations on a good quarter here. Just to follow up on the North America business and the outlook for the third quarter, we don't have too much history of the merged company with ACCO and Mead. Could you just give us a sense of how you think of the seasonality of the third quarter relative to the second quarter for sales and operating income?

Typically for North America third quarter and second quarter are roughly similar from a revenue perspective in that June is roughly similar to July and then it starts dropping off as back-to-school passes.

It's typically a little bit better from a margin perspective. As Neal mentioned, we ship more calendars in Q3 than Q2, and that has a big effect on the margin in the quarter.

And obviously we're coming off of a very good operating income quarter for the North America business. Would there be any reason for that to not repeat this year and to see operating income down in the third quarter relative to the second quarter?

That is not our expectation.

Great. And then just with respect to the international business, could you give us a sense of how soft Europe has gotten relative to what you're expecting and what the trends have been in Brazil and Mexico?

Sure. Europe was a little bit softer than we expected. As Neal mentioned in his prepared remarks, it's very choppy. One quarter may be a little bit better, one quarter may be a little bit worse, and I wouldn't be surprised if in the subsequent quarters we also see some of that volatility in Europe.

Year-to-date we are on track to our plans in Europe because Q1 was a little bit better than we expected and as I mentioned Q2 was a little bit worse. So from a macro perspective we noticed that Europe was a little bit weaker overall in the second quarter, but it's still within the broad span of our expectations.

Brazil had a good quarter. It slowed down as we mentioned in the last couple of weeks of the quarter as Brazil pretty much shut down to watch World Cup and to go to the Games, but Q2 is a relatively small quarter in Brazil. Even with that slowdown we still saw strong high single-digit growth at constant currency.

Mexico was a little bit slow in Q2. Some of that has to do with World Cup as well and some of that is just they had a really strong Q1 so it was just a catching up from the first quarter.

Okay. And then just one last housekeeping item. You mentioned a write down on some of the tablet accessory inventory. Could you quantify what that drag was?

The drag was significant. We effectively made no money on that segment or subsegment of Kensington as a result of taking higher charges. And the total impact on the year or the total impact was about 80 basis points for the whole Company as opposed to just the Kensington segment, but the lion's share of the impact obviously ran through the Kensington segment.

Got you. And so as we look to the back half, is that all out of the system at this point and so should we be looking for better results, perhaps even a year-over-year improvement in operating income in Computer Products?

You know the worst of the repositioning of that piece of Kensington is behind us we believe and it was a significant drag on Q3 and Q4 last year, and it's been a significant drag on Q1 and Q2 of this year. But we think we're largely through annualizing the negative drag impact of that subsegment of Kensington.

I just want to add on to what Neal just said, and the other thing is we feel we have -- feel very confident that the rest of the business will be able to overcome whatever volatility we may still see in the Kensington part of the business. So it remains volatile. As Neal mentioned most of the bad things are behind us, but you know, you never know what the future holds. But I do feel very, very confident that how we're performing in the rest of our businesses we'll be able to subsume that.

Great. Well it feels like you have a lot to be excited about for the back half and best of luck.

Thank you. The next question is from the line of Bill Chappell of SunTrust. Over to you, Bill.

Good morning. Thanks. Can you just maybe give us a little more color on I guess the excitement on back-to-school? I'm just trying to understand maybe produce placements. Is it more at the mass channel? Is it more product placements in specialty channel? Is it more Mead related versus the legacy ACCO, kind of consumables versus durables? And kind of give us some more color on what gets you so excited over the next few months.

It's all of the above.

Great. Then we're done.

No, let me give you more color. It's definitely driven by more placements, more placements primarily in notebook, calendars, and school accessories such as locker accessories. There's more placement in mass and big of the -- big mass chains. More placement in drug stores and significantly more placement in sell through the online channels. So the channels that are growing are getting more placement, we're getting increased share.

It's still too early to talk about sell-through. We're very, very early in the cycle, but there's significantly more placement this year than last year.

And is that driven by kind of new product introduction or are you taking share from smaller players?

It's both. It's driven -- we introduce new products every year. New colors, new textures, new designs, but there's over 1,000 SKUs being introduced every year for back-to-school. So we are taking share from big and small players.

Okay. And then switching, you said in the release that the merger of OfficeMax and Office Depot did have an impact on the quarter. Is there any way to gauge that for us? And then also is that expected to increase over the next few quarters of is this kind of inline with expectations?

It is in line with expectations. We had to rationalize some terms for Office Depot and OfficeMax which moved some shipments out of Q2 into future quarters. Their line reviews are still ongoing. We have now won two and lost one. But everything is proceeding to our expectations.

Just to remind you, they did mention that they plan to close at least 400 stores in the next I believe it's two years or so, and they said that 125 will close after back-to-school of this year. All of that is built into our guidance, so we're very happy with how the integration is going and how our team is doing managing the coming of those two store chains.

Got it. And then just the last one for me. Was there any way to quantify the Brazil kind of push out or was that always -- also in your expectations?

You know, it's such a small quarter for Brazil. Even though we did see a meaningful slowdown in sales for them, overall from an enterprise perspective it didn't make a difference.

Got it. Well it's nice to see things stabilize.

Thank you. The next question comes from the line of Chris McGinnis of Sidoti & Company. Over to you, Chris.

Good morning. Thank you for taking my questions. Just quickly I guess a follow up on the strength in North America. Is there any other markets that were better or can you point out just outside of the back-to-school that may have helped in the quarter?

All other markets were within the expectations. North America, and this is both US and Canada, was slightly better as I mentioned in a previous answer, where our placement is a little bit better, we're taking a little bit more share. And our channel partners are being a little bit more aggressive this year, at least so far, in driving back-to-school than they were last year. So it is primarily driven by North America.

Okay. And then just to touch on the Computer side. Obviously it's a small piece of the business, but is there a point where maybe -- is there most cost cuts to come or do you feel that with the improvement you're starting to see that maybe there's a better profit profile there going forward?

No, you know fixing our Computer Products business is a long-term fix. So there absolutely will be more things that we'll need to do to not only stabilize that business but to reignite the growth of that business, and I expect that will take several quarters for us to do.

As Neal mentioned in his prepared remarks, we are pleased with the progress on the PC accessory side. We saw growth this last quarter, and it's a stable part of the business and we just need to leverage that into more success. And then obviously we need to fix the tablet accessories part.

So I do expect more fine-tuning and changes in the Computer Products business.

Great.

Q3 and Q4 are seasonally much more important and stronger profit quarters for the Computer Product segment, particularly in security and PC accessory space. So we do feel very confident that the second half of the year, just because of seasonality, will be much stronger than the first half of the year.

Great. Thank you very much. Appreciate it.

Thank you. And the next question comes from the line of Kevin Steinke of Barrington Research. Over to you, Kevin.

Good morning. So advertising and SG&A expense was actually down a little bit sequentially, and just wondering how you're thinking about the second half of the year, if we could expect continued stable expenses or if there's more investments to make or if they can actually come down a little bit in the second half?

The sequential decline that you are referring to is due to the restructuring activity that we implemented earlier this year. Second half we should see similar SG&A spend to the second quarter. As I mentioned on previous calls, we believe right now our ratio of SG&A of around 19.5% is in the ballpark of where it needs to be in the long term. So we should see something similar.

Okay. And the decline in Europe you saw, it sounds like that's just kind of economic or market-related. I know you've been pleased with performance there lately so just any additional color on Europe if you could?

Yeah, it's a little bit economic and market-related and also a little bit year-over-year compares. Last year Q2 was very, very strong, atypically strong for Europe. So comparing this year it looks a little bit weaker than it is. But it is within the scope of the overall expectations and I'm not overly concerned about it.

Okay. And the stabilization you saw in PC security and laptop products, would you attribute that to just stabilization in the overall market or do you feel like you made some share gains there?

We think it's more market-related. The PC market, especially the commercial PC market, is showing a little bit of growth and we think that's helping us then drive PC accessories and security accessories into that market.

Great. And lastly, what are you seeing on the acquisition front, specifically I think you've talked about in the past that you'd like to do more in emerging markets? Are you seeing opportunities there? So yeah, I guess that's the question.

We do see opportunities in emerging markets, but as we mentioned we're going to be very prudent and diligent in reviewing that and making sure that it's the right thing for our Company and for our shareholders. So there's no change in the number of opportunities that exist out there.

Great. Thanks for taking my questions.

Thank you. And the next question is from the line of Kevin Ziets. Over to you, Kevin.

Hey, good morning. I had a followup on the amendment. I was curious what the ability to do share repurchases I guess up to 4 times leverage with the $60 million. Will you -- is there a change to your preferred leverage target or maybe more importantly than that, sort of how quickly you think you'll get to that target?

There is no change in our target. We want to be in that 2 to 2.5 range. Given the additional flexibility to buy back shares, it may change the timing. So this is something that we need to still discuss with the Board and analyze, but it may change how quickly we get there.

Okay. And is it -- with the cash you're generating and the flexibility you have, is it an either/or decision in terms of whether you'll do share repurchases or acquisitions, or is there potential that you might do both in a sort of balance?

We don't think it's an either/or decision. We think we generate enough cash to de-lever and potentially do acquisitions, and if the Board decides, potentially do share repurchase as well. So we think we can do all three.

Okay. And can you say sort of generally where purchase multiples or where acquisition multiples are these days in terms of the types of opportunities you're looking at or is it too wide of a range?

It's too broad of a range, and we can't really comment on that.

Okay. In terms of the placements that you've picked up, can you quantify in terms of, I don't know, shelf space or some other metric how much space you think you've gained going into this back-to-school season?

We don't have a number to share with you. It is a meaningful pick up in terms of shelf space, but the most important thing that we still have to see is how all this stuff will sell through, and that's why it's really important to help our channel partners sell it through, make sure that we have the right merchandising and the right promotional programs, the right advertising in place. And then at the end of Q3 we'll be in a better position to determine how successful all that is.

Okay. Are they generally existing customers or have you picked up some new relationships along the way?

No, they're all existing customers. We are very, very broadly distributed so it's very difficult to find customers who don't carry our products.

Sure. Fair point. And then you also mentioned that you were responding to demand for lower price points. (Technical difficulty.) My question was about you mentioned you were responding to demand for lower price points that you saw last season. I'm curious if you think you've narrowed price gaps between yourselves and private label and sort of if there's anything you can quantify about that or at least comment?

Rather than that, I think we're able to work with our channel partners for them to present a better assortment to their consumers, a more balanced assortment that covers a range of price points from entry level where we still don't really participate to mid price points where we now do participate with a much broader assortment, as well as premium price points.

So it's really changing the merchandising mix that we were able to work our channel partners on, away from very low end to a more balanced portfolio that really drove this incremental placement and hopefully will drive an incremental sell through as well.

Okay. So it sounds like maybe you filled in some mid price points that didn't exist?

Yes, that's correct.

Okay. And my last question on the restructuring activity. You mentioned that that was coming to an end. I'm curious if you fully run rated it, if you're at a full run rate in the second quarter or if we'll see that in the third quarter? And then secondly on cash restructuring costs, when they wind down?

So in terms of the actual -- we issued good guidance about the timing of the benefits we anticipated when we first issued our restructuring. We're in line for that, and so from an executional point of view, we're about two-thirds of the way through the execution of the restructuring that we were doing in North America. There is still a third of the execution that will occur in the second half of the year, and so there's a significant benefit that extends into 2015 and also there will be a higher run rate saving that goes into the second half of the year.

Just as a reminder, what we said is we're going to realize $16 million in benefits this year and another $8 million in benefits next year. And we're on track to deliver that.

Thanks so much.

Thank you. I will now turn the call back over to Boris Elisman, President and CEO, for closing remarks.

Thank you. In closing let me thank you once again for joining us this morning and I look forward to speaking with you on our third quarter call and providing more detail on the results of our back-to-school initiatives. Enjoy the rest of summer. Thanks.

Thank you very much, ladies and gentlemen. That now concludes your conference call for today. You may now disconnect. Thank you.