ACCO Brands Corp (ACCO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter 1, 2015 ACCO Brands Corporation earnings conference call. My name is Tracy, and I will be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder this call is being recorded the for replay purposes. I'd now like to turn the call over to Jennifer Rice, Vice President of investor relations. Please proceed, ma'am.

Good morning. And welcome to our first quarter 2015 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 of quarterly results, we may refer to adjusted results. Adjusted results exclude restructuring 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.

Forward-looking statements made during the call are based on certain risks and uncertainties and 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 and assumptions. 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 and A session. Now it's my pleasure to turn the call over to Boris Elisman.

Thank you, Jennifer and good morning everyone. As I remind you each year this time, through sales seasonality the first quarter is typically our lowest revenue quarter, as well as the one that generates a small loss. We earn all of our profit in the second through fourth quarters. With that in mind, I'll keep my comments relatively brief on this call.

In total, the quarter came in about what we expected. North American computer products were in line or even slightly better than our expectations, but international results were worse than expected. Overall, net sales declined 12% versus the prior year. On a constant currency basis sales decreased 6%. Our adjusted loss improved to $0.04 a share from $0.05 a share a year ago primarily because of our continuing disciplined approach to managing costs.

On a segment basis, North America sales were down 3% or down 1% on a constant currency basis. The 1% decline was achieved despite more than 300 retail store closures by our two largest customers and the US West Coast port destruction which impacted many companies importing finished goods from Asia and which impacted both our North America and computer products segments.

Profits in North America improved significantly, by $6 million, driven by cost reduction and productivity initiatives. In the US, sales were flat as growth with wholesalers, independents, mass and retail offset declines in the office superstores. Looking forward, we're expecting a good back to school season from selling perspective, at least comparable to what we experienced last year in North America.

The international segment was the biggest driver of the quarter sale decline. Total sales were down 24%, or 12% on a constant currency basis. Brazil accounted for the majority of the decline. We saw a small decline in Europe and Asian/Pacific, with other markets relatively flat or slightly positive. International operating income was down $5 million, mostly due to declines in Brazil.

We have raised prices in our international markets to help offset the impact of foreign currency translation on our cost of goods sold. The benefit of those increases will be seen more as the year goes on. We will also try to delay the impact of currency movements in our inventory purchases through hedges. So while we are effectively managing the impact of foreign currency translation on our cost of goods sold, overall foreign currency translation is still expected to have a meaningful impact on our total company results for the year.

We commented on the slowdown in Brazil during the Q3 and Q4, 2014 earning calls. The slowdown is the result of the deteriorating economic situation in the country and lower business and consumer confidence due to a host of issues including high inflation, contested elections, a major political corruption scandal, and high levels of consumer debt. During last Q3 and especially Q4, we saw our sales growth moderate due to conservative inventory holding strategies that many of our customers pursued in light of these issues. In January, which is typically a strong back to school shipment and replenishment month, we saw much lower sales than in prior year as customers chose to be out of stock rather than hold excess inventory after the season. Our sales in Brazil were down almost $14 million in the quarter, or $11 million in constant currency. While we anticipate recovering some of those sales in the remainder of the year, we will not recover all of them.

Our computer products segment showed stabilization with constant currency declines slowing to 6% and operating income showing a solid improvement on a constant currency basis. We are pleased with our execution against our strategy of shifting away from commoditized tablet accessory products and focusing on higher margin value added products in that segment.

I'm pleased to report that we purchased 2.7 million shares of stock in the quarter and additional 1 million in April and we just completed an amendment to our bank facility which extends the maturity to five years, slightly reduces interest rates and increases the flexibility of our capital structure. Neal will provide more color on this in a moment.

In terms of our 2015 outlook, we reiterate our sales, adjusted earnings per share, and free cash flow targets. Foreign exchange rates have deteriorated a bit since the time we gave our initial guidance. But it's early to know how that will shake out for the year. North American back to school selling looks promising and will have a positive impact from the shares that we repurchased in April that could offset some of the weakening of foreign currencies. So net-net we're still comfortable with our range of $0.70 to $0.74 per share and reported sales declines in the high single to low double digits. With that, I'll ask Neal to provide additional detail on our first quarter results. Neal?

Thank you, Boris and good morning, everyone. Our first quarter performance is recapped on pages two and three of our slide deck. Q1 sales decreased 12%, or 6% constant currency. The underlying decline was driven primarily by our international business due to Brazil, as Boris noted. Adjusted loss was $4 million or negative $0.04 per share, an improvement from a loss of $6.2 million or negative $0.05 in the prior year quarter. Foreign currency translation had a $0.01 per share at first impact.

Looking at the specifics, gross margin improved 80 basis points in the quarter to 27.7%. The improvement in gross margin was primarily driven by cost savings and productivity initiatives which contributed 140 basis points to gross margin and more than offset adverse impacts from mix and foreign exchange as detailed in page three of our slide deck.

SG&A expenses were down 11% in the quarter. Foreign exchange translation reduced SG&A by $3.9 million or 5%. The underlying decline was due to the benefits from our ongoing cost reduction and productivity initiatives and lower pension costs of $1.7 million. As a percentage of sales, SG&A increased modestly 20 basis points as sales deleveraging of 160 basis points more than offset benefits from our cost savings and productivity improvements.

Turning to an overview of our segments for the quarter, in North America sales decreased 3% or 1% on a constant currency. The decline was primarily the office superstore channel. North America adjusted operating income improved $6 million to $5.1 million from a loss of $1.2 million in the prior year quarter, the result of cost savings and productivity improvements.

In our international segment, net sales decreased 24% or 12% on a constant currency basis. The decline was primarily in Brazil where volumes declined due to the economic slowdown, reducing both consumer demand and channel inventory levels. Europe, Asia/Pacific, and Australia had slight volume declines but they managed costs well and posted profit improvements. We raised prices in our international markets to help offset the impact of the weak foreign exchange on our cost of products that we sourced in US dollars. But due to the overall sales decline, international adjusted operating income declined $3.3 million from $8.1 million last year and margins contracted 300 basis points.

Computer products net sales decreased 15% or 6% at constant currency. The decline was due to the final stages of exiting low margin tablet accessories. Despite the sales decline, computer products suggested operating income would have improved at constant currency but was essentially even -- $2 million versus $2.2 million a year ago. Foreign exchange was a $900,000 adverse impact. Product mix is becoming more favorable as a result of our strategy to focus on higher margin value added products.

Turning now to our cash flow and balance sheet. We have positive cash flow generation during the quarter and free cash flow of $41.3 million. This was similar to the prior year first quarter. For 2015 we still expect free cash flow of approximately $140 million. Once again, we expect our main cash generation in the third and fourth quarter quarters. Q2 will be a cash outflow quarter as it was last year due to the seasonal working capital buildup for North American back to school season.

We used $21 million to reduce outstanding shares by 2.7 million shares and as Boris mentioned we have since repurchased an additional 1 million so far in April. As a result, the year to date share repurchase activity we have updated our expectations to 2015 share count on page six of our slide deck to 112 million diluted shares. This does not include any assumptions for future share repurchases.

Turning to the amendment of our credit facility that we just completed, the purpose was to extend the maturity of the revolver and the term loan back to five years. We also increased revolver to $300 million from $250 million. The amendment also changes a few other provisions such as increasing the foreign investment cap and accordion feature each up to $500 million. This increase the flexibility of our capital structure.

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). And your first question comes from the line of Bill Chappell from SunTrust. Please proceed.

Good morning, thank you.

Good morning, Bill.

Good morning. Just I guess first on maybe talking on the international side and Brazil. I think we kind of finished the back to school season or just finished there. And so I mean have you seen things actually deteriorate or are we -- are we kind of at just a stable level in terms of the office supplies and back to school supplies?

The season is finished. The overall season was down probably mid-single digits as far as the sellout is concerned. Right now in Q2 and Q3, those are pretty low quarters where we just supply regular office business at the end of Q3 it starts to build up again for selling for next year's back to school. But things are relatively back to normal. As we mentioned during the prepared remarks, the -- our customers chose to carry very, very little inventory and not to replenish at the end of the season. So right now the channel's pretty dry and the sales in April are actually pretty strong due to that very low inventory.

Okay. And then switching gears to kind of looking towards costs and pricing, I mean I would imagine you got some -- some cost benefit already from lower commodities this quarter. I imagine that will pick up as we move through the back half of the year. But at the same point I'm trying to understand kind of mid-year pricing adjustments whether you'll be able to hold on to those gains or whether you expect to have to take price drops and kind of what you factored in in terms of sales?

Commodity costs are fairly benign, some are down and some are -- and some are up. We're also incurring a few extra costs due to the West Coast port disruptions in the US. We have to ship through the east and that is more expensive for our back to school. And then on the international front, the very high appreciation of US dollar versus most of the international currencies is causing some pain for us and will take us a while to catch up with the price increases to make us margin neutral.

Okay. And then last one for me -- just on the share repurchase, it's certainly nice to see but I'm trying to understand on what your capacity constraints -- probably not the right word -- but what you're allowed to do in terms of share repurchase in the current agreement and what would need to happen and what constraints you have in expanding that going forward?

We are allowed to purchase up to $60 million a year as long as our net debt to EBITDA ratio stays between 2.5x and 4x. We finished last year at 2.9x. So within that range, we can purchase up to 60 million shares, or $60 million worth of shares. And then if it goes below 2.5x, it's unlimited.

So is there a rollover from last year or is it kind of --

It's an annual bucket.

Okay. Perfect. Thanks so much.

Thanks, Bill.

Thank you for your question. Your next question comes from the line of Jason Campbell from KeyBanc. Please proceed.

Hey, guys. How are you doing?

Good morning, Jason.

I wanted to talk about how much of a drag the office super store channel was for you in your North American? And then it seems like you did pretty well they're mitigating those losses. I'm just wondering where some of your gains and wins were outside that channel.

Sure. I don't want to give a number for the quarter. Overall, we said that during the year, we expect about $40 million in sales reduction due to superstore channel consolidation and store closures. And we're on track to be roughly in that range. The decrease in that channel is mitigated by growth pretty much everywhere else. Our independent channel and I'm including the whole channel and the wholesalers that supply them did pretty well, we saw positive sales growth there. The e-tailers did very well. We saw big growth there. We're seeing growth in drugstores and that's a change from last year. So we're gaining share in that channel. And then our mass -- mass did really well. So it's really across the board outside of the office superstores that we were able to mitigate all of the sales declines in that channel

And then real quick. When -- you mentioned some pricing increases on the international side. Can you talk about where those prices -- where those price increases were geographically and when they went into effect?

Yes. They're happening everywhere. The -- the currencies, international currencies weakened pretty much everywhere and we had to take pricing action in January across the board. We had to take pricing actions or have taken pricing actions in the spring and February and March in some of our countries to try to catch up. And then we're taking additional pricing in some countries in July. So give than on average the US dollar is 15% stronger this -- right now than it was a year ago, we can't catch up with just one pricing action, given that magnitude. So it will take us a couple of price increases to get interest and we're in the process of implementing all of that.

Okay. And then lastly, can you remind us when you kind of lapped the decision to kind of deemphasize these commoditized products in your computer products division? And then once you get past some of those head winds what's your outlook for fourth quarter and into next year for that category?

We should lap all of that in the second half of the year, beginning in Q3. Our assumptions are that first half of the year we'll still see a negative sales growth in computer products as we get out of some of those tablet accessories and we'll see single digit growth in the second half of the year and a significant profit improvement, as well.

All right. Thank you very much.

Thank you, Jason.

Thank you for your question. Your next question comes from the line of Jack O'Brien from CJS securities. Please proceed.

Good morning.

good morning, Jack.

I just want it take a quick question and talk about back to school and any detail you guys have on how that's shaping up. For North America.

Yes. As we stated in our prepared remarks, we're pleased with the current state of back to school sell-in. We believe that we will be able to at least comp what we did last year. And last year, if you remember, we had a very successful back to school. So it looks promising but remember we don't know how much is going to be Q2 versus Q3 so that's not known. And then the -- the -- the sell-out is the important part, and that has to be still delivered. But from a sell-in perspective, we're very, very pleased how -- how it looks right now.

Okay. Great. Thank you very much.

Thank you for your question. Your next question comes from William Reuter from Bank of America. Please proceed.

Good morning, guys.

Good morning, Bill.

I'm not -- I don't have history with you guys and price increases. Can you talk to me about historically when you guys have increased price on a per unit basis, what that does -- sorry yes on a per unit basis, what that does to your units?

You mean the units go down? Is that --

Yes. I'm wondering what's the net effect on revenues, meaning --

You know -- yes. Typically -- typically, we only increase prices to recover costs. So we're not trying enhance our margins from a pricing perspective. And given that both us and all of our competitors and most of our customers source from the same geographic regions, the cost increases that we're seeing are being seen -- are being seen across the board. So we don't really see a volume decrease as a result of that. Our products are very inexpensive from a consumer perspective. So you expect to be some price elasticity but it's not huge given the low cost of our products. So we don't really anticipate as a result of the price increases that we will see a volume decrease.

Okay. And then previously when you guys have talked about acquisitions, you had mostly been talking emerging markets. I guess can you talk a little bit about what you're seeing there and the breadth of opportunities and -- and what the probability is of you guys executing something this year?

Bill, I can't -- I can't give you any probabilities and numbers on that. That's just too uncertain. Just to remind you, we do believe that acquisitions are an important part of our growth strategy. We're looking at three types of acquisitions. You mentioned the emerging markets. We believe those are important. We're also looking at some consolidation opportunities if and when those come about and we're also looking to expand to some of the near adjacencies in some of our mature markets. So all of those types of acquisitions are on the table but the timing is too uncertain to comment on.

Okay. And then just lastly from me with regard to your restructuring, which is expected to save $30 million this year, I guess it sounds like you're on pace to achieve that. And just to make sure, that's what will be realized at the end of the year not the run rate at the end of the year? Is that correct?

That's correct. We have roughly $16 million of restructuring benefits that will be achieved during the year, and then we have an additional $14 million, $15 million of Lean Six Sigma productivity initiatives that will be achieved during the year. So the total is $30 million.

okay. Thank you very much.

Thank you, Bill.

Thank you for your question. Your next question comes from Chris McGinnis from Sidoti & Company.

Good morning. Thank you for taking my questions.

Thank you, Chris.

Just to follow up on the last question, if trends -- I guess at this level of sales trends, do you see any need for additional cuts or restructurings?

No. We're -- we're comfortable. Our -- our guidance, reiteration of guidance includes all the puts and takes that we see. So we're comfortable with the current level of trends. As I mentioned, we're actually pretty pleased with the back to school selling trends that we're seeing. Some of the FX effects that were so pronounced in the first quarter should mitigate as we go into the year unless something else changes. And if something else changes, that we will take the appropriate action. But right now, given what we know, we believe that the -- our current cost structure is appropriate.

Sure. And I guess just a question on markets share in Brazil and any expectation, obviously, you have a list, a laundry list of issues there. But just how your comfortability on your market share there and maybe even growth even in that difficult environment?

Overall, we think we held onto market share in the meat of the market. We on purpose chose not to compete at the very low end of the market last year, which we deemed not to be a good return on investment. But in the meat of the market, which is the mid-price point, high-end price points, we believe this we held onto market share. The decline in demand in Brazil is just a function of the overall market. It's not the function of our performance. And we think that the economic conditions in Brazil will stay difficult in the foreseeable future, we'll have to manage it to that effect.

Sure. Thank you.

Thanks, Chris.

Thank you for your question. Your next question comes from the line of Kevin Steinke from Barrington Research. Please proceed.

Good morning, everyone.

Hi, Kevin.

Hey. So it sounds like on currency, you're not really materially changing your expectations for the head winds in the year. I think before you were talking about a 5 percentage point in head wind.

Yes. We talked about exactly, and in that range currencies got a little bit worse since our initial guidance but we think both through operational performance improvements, as well as through the share buybacks, we should be able to hold to the EPS guidance range that we provided.

Okay. And then Neal talked about in his prepared comments employee benefit savings from, I believe, lower pension costs. Was that kind of a one-time thing or is that something that's changed going forward?

Our pension costs will be lower each quarter by a similar amount to the amount that showed up in the first quarter. It's fundamentally part of the strategy we've been following for a while to de-risk our pension plans and also to get them into a situation where they're less of a burden from a cash contribution. And that's, obviously, already rolled into all of the guidance that we gave.

Okay. Should we still think about the advertising and SG&A expenses roughly flat as a parcel of revenue and then you think you could get some gross margin improvement this year?

We think we'll get gross margin improvement this year comparable to when would he saw last year. And SG&A should be up a little bit versus prior year.

Okay. Great. Thanks for taking my questions.

Kevin, the dollar will be down but the percent will be up.

Okay. Perfect. Thank you.

Thanks, Kevin.

Thank you for your question. Your next question comes from the line of Sam Reid from Barclays. Please proceed.

Thank you so much for taking my question. A quick question with regard to cost savings and productivity improvement. Obviously, you did a great job of kind of levering those expenses from a gross margin line in 1Q. I'm curious how this plays out over the balance of the year from a relative standpoint? Any thoughts around that? And then I've got one follow-up.

We don't have a view of how this will go quarter by quarter, Sam. Overall we should see a 40 to 50 basis points improvement in our gross margin but how it will play out it's difficult it say.

Got you. Got you. And then circling back to some earlier questions around raising pricing in international markets -- looking at that question from a different vantage point, can you give us a sense to the size of those pricing mechanisms relative to those currency moves? Just trying get a sense of what those specific takes are. Thanks.

As I mentioned, currencies increased anywhere from 8% for the pound versus a dollar, a dollar versus pound to 17%, 18% for the euro or 17% for the Brazilian real. And given the magnitude of those changes, it's a couple of price increases, and some of them range 2% to 3% at one time and then 5% to 7% the second time and others range from 6% one time and 12% the second time. So we work with our customers, we see what the market's doing, what the conditions are, and we put the price increases through. The important thing is that we put price increases through. We have to recover our costs. And everybody -- every one of our managers knows that, and we have a disciplined approach for doing that, and we're well on our way to execute it in 2015.

Awesome. Thank you so much. I appreciate that.

Thanks, Sam.

Thank you for your question. I would now like to turn the call over to Boris Elisman, President and CEO for closing remarks.

Thank you, Tracy. In closing, I'd like to thank all of you for being on the call this morning. While we're pleased with our performance in the quarter, it is clear to us that foreign exchange and customer consolidation will continue to be challenging for the rest of the year. Nevertheless, I'm confident in our ability to meet these challenges through strong execution against our business plans. I look forward to speaking with you on our next call, and hope you have a great day. Thank you.

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