ACCO Brands Corp (ACCO) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ACCO Brands first quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the meeting over to Jennifer Rice, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to our first quarter 2016 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 our quarterly results, we may refer to adjusted results. Adjusted results exclude transaction costs, restructuring and other one-time nonrecurring charges 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&A session. Now, it is my pleasure to turn the call over to Boris Elisman

Thank you, Jennifer, and good morning everyone. The year got off to a great start with our business delivering constant currency sales growth, gross margin expansion and growth in earnings per share. Overall, net sales declined 4% versus the prior year, but on a constant currency basis, sales actually increased 1%. Our adjusted net loss improved to $0.01 per share from $0.04 a share a year ago.

A highlight of the quarter was the great performance of our North America business where sales increased 1% on a constant currency basis and operating income nearly doubled. We saw sales growth in both the US and Canada. Our focus on faster growing channels is paying dividends with increased sales to mass and e-tail channels more than offsetting lower sales in the consolidating office superstore channel. Our results are especially impressive considering that office superstores closed 16% of their North American retail locations over the last two years.

Looking forward, we feel good about North America back-to-school as our customers have seen the value of our strong brands during the past couple of seasons, and as a result, we anticipate broader and deeper penetration in mass retailers, continued share gains in e-tail and stronger presence with office superstore customers. We are optimistic that this year's back-to-school season will be at least comparable to, if not better than, our last year's performance in North America.

International also posted constant currency sales growth in the quarter of 2%, and operating income growth of 15%. The sales increase was primarily due to pricing to recover higher dollar denominated costs, market share gains and stronger replenishment orders during back-to-school in Brazil. While we are pleased with Q1 results in international and encouraged by improving FX rates, the overall environment remains difficult and we won't have further clarity on the year until September, where we start to see orders for 2017 back-to-school and back-to-business seasons. Europe sales were quite soft due to customer inventory reductions and weak export sales to Africa/Middle East, as well as the timing of the Easter holiday this year.

Computer products sales declined 4% in constant currency and operating income declined 11%. We're at the end of transforming the business away from consumer and retail channel focus to a business and commercial channel focus. During this transformation, we exited most retail and low value-added product categories, primarily tablet accessories, which historically contributed close to one-third, or $50 million, of revenue to that business, albeit at lower margins. The remaining business is focused on security and computer accessories for office or home professionals. We're making good progress in the transformation but still feel the drag from product exits.

Many of you saw our announcement in late March, that we're acquiring the remaining interest in our Pelikan Artline joint venture in Australia and New Zealand. The details are provided on pages 3 and 4 of our slide deck. Our combined business in Australia will have a significant presence in the region, doubling our current size in terms of sales and bringing together leading brands in business, academic and consumer products.

With the acquisition we can become a better partner to our customers and offer more relevant brands to our consumers. We can also leverage scale and best practices to provide better returns to our shareholders. I am very excited about this transaction, which we expect to close in the coming days. We don't expect this transaction to affect our capital allocation strategy or capacity and we still plan to use our strong free cash flow for share repurchases, debt reduction and additional acquisitions.

As result of the expected completion of the Pelikan Artline acquisition and more favorable exchange rates, we're increasing our sales and earnings guidance for the year. We now expect sales to increase low single-digits and adjusted earnings per share to come in between $0.78 and $0.82. This includes approximately 5 percentage points of incremental revenue and $0.04 of incremental earnings from Pelikan Artline.

We've also now assumed only a negative $0.02 impact from foreign currency versus $0.03 in our initial guidance. Exchange rates have improved since we gave our guidance in February, but due to the seasonality of our business, and particularly our international businesses which have a strong weighting to Q4, we're only factoring in a portion of the improvement from translation at this point.

In closing, I'd like to reiterate I'm very pleased with our overall performance in the quarter and optimistic about 2016 sales and earnings outlook. With that, I'll ask Neal to provide additional detail on our first quarter results. Neal?

Thank you, Boris, and good morning, everyone. Q1 sales decreased 4%, but on a constant currency basis increased 1%. Net income was $4.8 million or $0.04 per share and included a $7.4 million tax benefit resulting from realizing a foreign exchange loss associated with repayment of a long-term inter-company loan. Adjusted net loss was $900,000, or $0.01 per share loss, compared to an adjusted net loss of $4 million, or $0.04 per share loss, in the prior-year quarter. Foreign currency translation negatively impacted both operating income and net income by $600,000 in the quarter.

Looking at the specifics, gross margin improved 190 basis points in the quarter, to 29.6%. The improvement in gross margin is detailed on page 5 of our slide deck and was primarily driven by cost savings and productivity initiatives. SG&A expenses were down 2% in the quarter due to foreign currency translation. As a percent of sales, SG&A increased slightly, 50 basis points to 25.6%, primarily due to higher incentive compensation expense.

Turning to an overview of our segments for the quarter. In North America, sales increased 1%, or on a constant currency basis grew 1%. We saw continued growth with e-tailers and mass merchants. North America adjusted operating income margin improved a strong 310 basis points, to 6.2%, primarily the result of cost savings and productivity improvements. The improvement was also due to lower costs compared to the prior-year where we incurred costs as a result of the West Coast port strike.

In our international segment, net sales decreased 10%, but increased 2% on a constant currency basis. The underlying increase was primarily due to price increases. Volumes were down, primarily in Europe, as Boris noted. This in part was driven by the timing of the Easter holiday, which was in Q1 versus Q2 last year. Our international business managed costs well and posted profit improvements.

Throughout 2015, we raised prices to help offset the impact of the weak local exchange rates on the cost of products that were sourced in US dollars and sold in local currencies. As a result, international operating income margin expanded 100 basis points to 4.5%.

Computer products net sales decreased 6%, but on a constant currency decreased 4%. The decline was due to low margin tablet accessories. Computer product's adjusted operating income declined $300,000, due to lower volume.

Turning now to our cash flow and balance sheet. We had positive cash flow generation during the quarter and free cash flow of $48 million. This was $6 million more than the prior-year first quarter, due mainly to the later timing of capital expenditure this year. For 2016, we still expect free cash flow of approximately $135 million. 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 seasonal working capital build-up of the North American back-to-school season.

The Pelikan Artline business is a strong cash flow generator January through April, following its back-to-school season and cash flow cycle. The remaining 2016 cash generation of this business is anticipated to be offset by restructuring and transaction-related payments.

Page 8 of our slide deck includes other assumptions for 2016. These assumptions have not been updated for the Pelikan Artline acquisition given the minimal impact currently anticipated on our 2016 cash flow. 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)

Bill Chappell, SunTrust.

Thanks, good morning.

Good morning, Bill.

Congratulations on the nice quarter.

Thanks, Bill.

Boris, just a question. Some of the quarter and the outlook had to do with favorable pricing and just didn't know if what your expectation with commodities being more favorable and maybe currencies being more favorable, if you're going to get pushed back or have to have a mid-year adjustments that may do that? Or if you expect pricing to hold as we move through the year?

I do expect pricing to hold right now. While foreign exchange rates are getting better, if you look on average, we were still down significantly versus Q1. The average exchange rates that we track were down 14% versus Q1 of 2015. So, we do expect it to moderate and to be more benign, but we're not yet in the position, or at least I don't expect us to be in the position, that would have to pass through price reductions because of currencies.

Okay. And then second on Pelikan. Just a little more color there? I think we've been talking about bolt-on acquisitions for four years or five years, six years now. So, nice to see one happen, but didn't know if there were more either specifically, in Australia and New Zealand that makes sense? Are there others out there or if you're largely done? And also, with this deal, what percentage of your sales now comes from that region?

We've always liked Australia. It's been a very successful geography there for us. We were present in Australia, both through ACCO Australia, our own business, as well as we had a joint venture with Pelikan Artline and we recognize net income, or dividends, from that joint venture through equity methods. So we really didn't benefit from the sales or gross profit associated with that business.

And from a go-to-market perspective, it wasn't the most efficient way to go-to-market because we were duplicating costs. But we were always interested in potential consolidation opportunities with Pelikan Artline, but have had to wait for the right time and the right price. That happened in the last six months and I'm very, very pleased that we are able to get this acquisition.

As I mentioned in my prepared remarks, this does not take away from our ability or capacity to do other deals as long as they are a strategic fit and right price and good returns for our shareholders. So, we're still very interested in potential opportunities. As you mentioned in your question, it does take some time to get these things going. They are serendipitous when they come, so if something interesting is available, I'm sure we'll take a look at it.

Got it. And last one for me. Is it still an expectation that if anything comes of Staples/Office Depot, any real impact will be 2017?

That's right. We expect that due to the timing of this deal, if it were allowed to proceed, we think the impact on 2016 would be minimal and that we would have to understand what the impact on 2017 would be. But as we mentioned in a couple of prior calls, at the high level, we expect it to be of similar revenue magnitude as Office Depot/OfficeMax merger.

Great. Thanks so much.

Thanks, Bill.

Brad Thomas, Keybanc.

Good morning, Boris and Neil, and let me add my congratulations here on a great quarter as well.

Thanks, Brad.

I wanted to follow-up on the topic of the North America sales, and just hoping Boris, you could give us a little bit more color around how baked at this point the sell-in orders are? And perhaps any additional details or quantification you could give us around perhaps, how much sales could benefit as you continue to pick up share and capitalize on your momentum in that segment?

We feel very good about the initial sell-in orders. This is on the back of two successful back-to-school seasons in the US. And the success that we had in prior years gave our customers ability to trust us with both more products and deeper placement in their stores. So the orders are pretty much all there and there's not much risk in that.

What we don't know is how much will be in Q2 versus Q3, because when we speak about back-to-school, it's the full back-to-school, which stands both quarters for us. And then obviously, we don't know how much we'll actually will sell through and what replenishment will be. So we're very optimistic. We expect it to be at least as good as the prior-year, but we really have to see what happens at the end of Q2 and Q3 before we can fully count on our success.

Great. And then on the topic of revenues, you've quantified Pelikan as being about $100 million in annual revenues. From a seasonality standpoint, how much of that would we expect to see in 2016 if the deal does close here in the next few weeks?

We expect about $75 million to $80 million to be this year. Their business like our business in Australia, is more of a Q3, Q4 business. So, that's why we'll see most of the revenue this year.

Great, and if I could add one more follow-up on the topic of the Staples/Office Depot transaction? Obviously, within the US, there will be a lot of similarities between the Office Depot/OfficeMax deal from a few years ago. But now, there's a long list of divestitures that look they'll come up. Obviously, selling the wholesale piece to Ascendant, divestitures in Europe. As you all look at your relationships with some of those wholesale customers and as you look at your relationship with Office Depot Europe, any other color on how those divestitures might change things?

No, Brad. We expect those to be neutral. We have great relationships with all of our major customers. Certainly includes Ascendant and Office Depot Europe. So, if those things get materialized, I'm sure it will be neutral to potentially beneficial to us. I don't expect that to be a negative. The negative would be synergies and store closures and DC closures in the US. But if they are selling Office Depot in Europe to somebody else, probably neutral and the business that would go to Ascendant, would probably be neutral as well.

Great. That's very helpful. Thank you, Boris.

Thanks, Brad.

Kevin Steinke, Barrington Research.

Good morning. Congratulations on the good results.

Good morning, Kevin.

So in terms of the increase in sales guidance, you mentioned the contribution from Pelikan of 5%, then also some currency benefit. But did you bake in anything to the sales growth guidance increase just from better operational improvement in North America on the organic sales front?

Not really, no.

Okay.

We still have three quarters left, three of our biggest quarters left. And we want to see how we do in back-to-school as well as in Q4. We are optimistic, but it's too early to be changing things.

Sure, makes sense. So the gross margin expansion was very good and you called out 200 basis points of cost savings contributing to that, which is actually a little bit of a pickup from the pace you did last year of 150 basis points. So, could you just talk to your cost savings initiatives? Are you in line with your expectations thus far in the year? Are you a little bit ahead, because I was impressed with that gross margin expansion?

Hello, Kevin. Yes, we continued to drive a very strong internal cost reduction focus. We do have a little benefit in Q1, which is we incurred some excess costs last year dealing with the West Coast port strike, which didn't recur this year. So that's why you see a little bit of a bump in Q1 in the run rate.

Okay

But also, as we mentioned Kevin, we have a $30 million productivity improvement goal for this year and we are absolutely on track to deliver that. So, it looks good.

Great. And could you just give a little bit more detail on the pace of synergies from Pelikan? You've said you realized -- expect to realize $8 million in total, but is that all in the first year after close or is that just partial in the first year and then a full year run rate comes a little later?

It's hard for us to give additional color on that right now because haven't really done specific integration plans yet since we haven't closed the deal. So, what I would prefer to do is to give you a lot more color at the end of Q2 when we would know how much will be this year versus next year.

Alright, fair enough. Then lastly, a little bit more of a housekeeping question in terms of the equity and earnings of joint ventures that you report on your income statement. When the Pelikan deal closes, is that line eliminated completely or is just reduced by some amount?

Eliminated completely and it gets moved up into the consolidated results of the business. So it will show at all the line items rather than just the net income. Obviously, we'll keep the Q1 through April period, so there will be a little bit in Q2. But after Q2, you'll see nothing in there.

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

Thanks, Kevin.

William Reuter, Bank of America Merrill Lynch.

Hello, this is actually Jen O'Neill on for Bill today. Thanks for taking my questions.

So, on the last call, you mentioned you expected moderate gross margin expansion of around 30 basis points during the year. However, obviously, margins expanded almost 200 basis points during the quarter. So, do you anticipate higher margin expansion for the year, or do you expect margins to decline in coming quarters?

We're obviously off to a good start. Not ready yet to change our forecast for the year. But certainly, if it continues, we should be higher. But it's just too early to tell. We have yet to deliver 100% of our earnings and 80% plus percent of our revenue in the remainder of the year. So let's work through it and then we can discuss it at the end of each quarter. I'm not ready to change the forecast yet.

Okay, great. And then, you mentioned softness in Europe and the international side of the business, I was wondering if you could talk about which regions you saw particular strength at in that business?

We did really well in Brazil, and that's all us. I'm sure everybody on the phone reads the papers and knows how tough it is in Brazil. So we don't expect that this can continue. Certainly, we don't -- we're not counting on it to continue every quarter. If it happens, great, but I'm not counting on our overperformance in Q1 to continue. But Q1 was fantastic in Brazil.

We did really well in Asia in Q1, and especially in Japan, by taking significant share and again, I'm cautious and don't anticipate that a lot of that will continue in the remainder of the year. And we grew in Mexico as well, but was probably closer to the overall market.

Europe was a little weak for us, and a lot of that had to do with what is happening in the channels in Europe and consolidation that took place last year and some different channel dynamics that are driving inventory management strategies for our European partners. We had a fairly strong Q4, and Q1 was a little weaker as they reduced their orders in order to sell through the inventory they were carrying into the year. And then our exports from Europe to Africa and the Middle East, remain very soft and they were down from a year ago. And that had to do with weak currencies in the regions, as well as the price of oil and geopolitical issues.

Great. I'll pass it on. Thanks.

Thank you.

Kevin Ziets, Citigroup.

Hello, good morning. Thanks for taking my questions. First is on the Depot/Staples merger. I guess it's been such a protracted process. I'm curious if it doesn't go through, or even if it does go through, has there been positioning amongst the retailers in terms of their inventory to kind of -- that may make it not as impactful as the last mega merger? And obviously, if it doesn't go through, is there upside in lower inventory levels that they are carrying?

We haven't seen anything unusual from either of the customers. Office Depot is obviously still in the process of consolidating their OfficeMax merger, so they are taking (technical difficulty) off from the combined entities as they close DCs and consolidate DCs. And we expect that to continue. That's part of our forecast. We haven't seen anything unusual from Staples and it's kind of too early to speculate on this particular issue.

Let the process take place. It will happen soon enough. We do expect a decision from the judge by May 10, and then we will know. And then we'll know what they plan to do and then we'll be able to react to that.

My second question is on the product wins that you've gotten for the back-to-school season. Is there anything you can comment about mix, the level of price points that you're selling or that you've picked up?

I don't have the price points, but what's doing really well is Five Star. That's where we are getting a lot of incremental placement in many of our customers. And that particular brand spans our notebooks, school notebooks, as well as backpacks and portfolios. So we really are taking a significant share we believe with that particular brand.

Okay, great. And then on the computer products business, in recent quarters, it's even where sales have lagged, there's been a mix shift as you've moved away from some of the lower margin products. It looked like margins were down this quarter, year-over-year, if I read it right. So, I'm just curious why that would be?

Margins were down a little bit. Gross margins were roughly flat, but we had some of the leveraging associated with the drop in volume. The tablet accessories segment is becoming fairly insignificant, so I do expect that decrease will stabilize.

As I mentioned during my prepared remarks, that total market has declined substantially over the last several quarters. So we expect it to be completely out of it last year, but still have the tail hanging as the sell through has declined. And the drag obviously, is hurting our sales and is hurting our margin through sales to leverage.

Okay, but I know there's a lot of the year to come, but if we were to look forward for the full-year, would you expect that -- the dynamic of margin improvement in that segment to continue as it did last year?

I would expect the dynamic of margin improvement to continue. That's correct.

Okay, great. And then last is just on the acquisition front. I know you've mentioned about maybe doing some acquisitions outside of the core office space. Is that still a focus? And then just in general, should we look at the multiple that was paid for this JV as instructive on what you would be looking to pay for other acquisitions?

And then lastly, I know you said you're open to doing additional acquisitions, but are you considering at all dialing back on the share repurchases as these become a greater portion of the strategy?

As far as acquisitions are concerned, we're looking at all of the above, consolidation acquisition, extending in emerging geographies, as well as adjacency. So everything that we talked about before is still in play.

The multiple is deal specific. So I wouldn't read anything more into the multiple than we paid for Pelikan then that's the multiple we paid for Pelikan. All of the deals that we are looking at, we look at from a return on vested capital perspective. We want to make sure that is accretive from that perspective versus our cost of capital. And each deal has different dynamics and will drive a different set of multiples.

And lastly, on capital allocation, our priority remains as we discussed before to be balanced between debt reduction, share repurchases and acquisitions. We do want to drive to a lower net debt to EBITDA ratio. We mentioned before between 2% and 2.5%, so if we are greatly exceeding that, certainly, it will change our allocation to pay down more debt and reduce the ratio.

Okay, that's super helpful. Thank you, guys.

Thank you.

Carla Casella, JPMorgan.

Hello, one question (technical difficulties) on the capital structure. Given your expectations for free cash flow, is your priority to invest in further M&A and building the business? Or, would you consider looking at the bonds now that those are coming callable to refinance?

Yes, Carla. I would rather not comment on that. Our priority is to balanced, but be more specific, I'd rather not go into that detail.

Okay. And then, the West Coast port strike, can you remind us the impact that had on the first quarter of last year? The magnitude of it?

It was around $1 million of adverse cost.

Okay. And it didn't trail into second quarter? It was just in first?

No, it trailed again into the second quarter. We had more expense in the second quarter. We had to bring things in through alternative lanes and couldn't reach all of our deadlines, so we had a lot of excess costs in both quarters.

Okay. Great, thank you.

Thanks, Carla.

That concludes our question-and-answer session for today. I would like to turn the conference back over to Boris Elisman, for any additional comments.

Thank you. In closing, I'd like to thank you for being on the call this morning. We were very pleased with our performance this quarter and are well prepared for our all important North America back-to-school season. Have a nice day and we'll speak with you next quarter. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.