ACCO Brands Corp (ACCO) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference, Jennifer Rice, Vice President of Investor Relations. Ma'am, please go ahead.

Good morning. Welcome to our fourth-quarter 2016 earnings conference call. Joining us today are Boris Elisman, Chairman and Chief Executive Officer of ACCO Brands; 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.

When speaking to quarterly results, we may refer to adjusted results. Adjusted results exclude transaction costs, restructuring, and other one-time and non-recurring 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 earnings release, or the slides that accompany this call.

Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our adjusted earnings per share or effective tax rate guidance. For more information, see 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. Earlier today we issued our financial result, and I'm pleased to report that we capped a great year with an excellent quarter. The quarter revenues were up 6%, primarily due to our Pelican Artline acquisition in Australia. We expanded gross and operating margins, and we grew out earnings per share significantly, after adjusting for one-time items.

Our fourth-quarter performance was driven by our international business, both acquisitions of Pelikan, but also strong performance in Brazil and Mexico. This was despite the challenging macro conditions in each of those geographies. Productivity improvements helped our North American and international profitability, as well. Overall, I'm very pleased with our performance in Q4.

Our results for 2016 in total were also very strong. We met or exceeded nearly every operational and financial objective that we had set for the year. Each of our business segments contributed to revenue growth, profit improvement, and delivered strong free cash flow.

Within North America, we continue to grow and take share in the strategic mass merchandise and e-commerce channel. Once again, we experienced an excellent back-to-school season, expanding our placement in both mass and office superstores, and grew sales for school products.

While certain customers continue to close retail outlets as expected and others reduced inventories, we managed the channel shift exceptionally well. As a result, our sales for the year were roughly flat, and our profits grew due to operational efficiencies and lower expenses.

The Pelikan Artline acquisition drove much of the improvement in our international results for the year, but there were other highlights. In both Brazil and Mexico, sales and margins improved, despite continuing economic weakness, as well as political and currency volatility. In both countries, sales were up low double digits from prior year.

Our Asia Pacific region both sales and margin gained, with good growth in Japan and China. In Europe, and now-legacy ACCO Euro business had lower sales, as major customers reduced inventory in light of economic uncertainty in changes of ownership. Nevertheless, European gross margins were up significantly versus prior year.

During the year, we stabilized the computer products business, essentially completing the transition to higher-value products, and as a result, improved gross margins and overall profits. We have a robust new product pipeline for 2017 and beyond, including a number of proprietary product initiatives with our PC partners that address physical security needs for the evolving laptop, tablet, docking product.

Finally, 2016 free cash flow was very strong, aided by higher adjusted EBITDA and lower capital spend. We also paid down a significant amount of debt and refinanced our bonds in December, reducing future interest by $10 million per year, and extending maturities into 2024. We have an attractive capital structure, and should meet our operational and strategic needs well into the future.

This was a significant year for us from a strategic perspective, as well, because of the two acquisitions we announced in 2016. The acquisition of Pelikan Artline Australia is well into its integration, and is meeting our expectations. This acquisition added $0.03 to adjusted EPS 2016.

The acquisition of Esselte closed just three weeks ago. We are beginning integration activities, and I'm very excited about the opportunities for consumer, customer, and shareholder value creation that Esselte presents. We plan to update you regularly on the integration progress beginning next quarter.

For 2017 and beyond, our strategy remains consistent. We will continue to manage our mature markets by focusing on growing channels and categories, working to gain buying share and market share with those customers and in those categories. We will manage more mature categories and channels for profit.

We will continue our enlaboring commitment and rigor around execution and productivity initiatives. We will prudently invest in emerging markets, with an expectation for top- and bottom-line growth. As always, we will focus on generating strong cash flow.

Over the last several years, we have delivered significant margin improvement, and strong cash flow in a rather turbulent environment. Since 2012, foreign exchange translation, customer consolidation, have reduced our revenues by nearly $300 million. We have offset customer consolidation with sales growth with other customers, and with Pelikan Artline acquisition.

Over this same period, we have expanded our gross margin more than 200 basis points, and reduced our net leverage from 3.7 times to 2.5 times. We have also strengthened our business by adding strong end-user-relevant brands, increasing shared faster-growing channels, and developing a culture that consistently delivers results, even in difficult environments. I'm very proud of our Company, our team, and our accomplishments.

Looking forward to the next several years, we will aim to drive sales growth and continued margin improvement in our business. Based on the current product portfolio and mix of business, we believe over the next few years we should be able to deliver annual sales growth of low single digits, currency and acquisitions aside. We also believe we can expand the gross margins to 33% to 34%. This is up from our prior target range of 32% to 33%.

We also believe we can lower our SG&A to closer to 19%, down from high 19%-ish levels today. We expect to generate increasing amounts our free cash flow, which in the current year will primarily be used to pay down debt, but beyond 2017 will be allocated between debt reduction or other shareholder-friendly options, including share repurchases or acquisitions.

Specifically for 2017, our guidance is as follows. We expect sales to increase 22% to 26%, driven by our two acquisitions, and adjusted earnings per share to be in the range of $1.05 to $1.09. Foreign exchange should be modestly negative, and offset by small organic growth. We expect 2017 adjusted free cash flow of approximately $150 million, which we will used to pay down debt.

To summarize, we had a terrific year, one that exceeded our expectations. We continue to execute well, despite negative market conditions in many of our markets and some of our traditional sales channels. I'm very optimistic about our future, and believe our Company is well-positioned to deliver strong shareholder returns in the years ahead.

With that, I'll ask Neal to provide some additional insight into the quarter and the year. Neal?

Thank you, Boris, and good morning. Our fourth-quarter and full-year performance is re-capped on page 4 of our slide deck. Fourth-quarter sales increased 6%, with the Pelikan Artline acquisition adding 8%, and foreign exchange adding 1%. Underlying sales declined 3%, due to de-stocking by certain wholesalers, and declines at office superstores.

Operating income increased, despite one-time and restructuring charges of $5.1 million. Adjusted operating income increased 14% to $64.8 million, from $56.8 million in the prior-year quarter. Adjusted operating income margin increased 100 basis points as a result of improved gross margin and the Pelikan acquisition.

Reported net income decreased $6.1 million, or $0.06 per share, compared to $31.4 million, or $0.29 per share, in the prior-year quarter. The decrease was due to a $25 million make-whole premium, and $4.9 million charge for the write-off of debt issuance costs, both of which were related to the refinancing of our senior unsecured notes in December.

Adjusted net income increased 10% to $35.6 million, or $0.32 per share, from $32.5 million, or $0.30 per share in the prior-year quarter. The increase was primarily driven by the improved gross margin and acquisition of Pelikan Artline. Looking more closely at gross margin, which increased 170 basis points in the quarter to 35.1%, the improvement was primarily driven by productivity initiatives, which contributed 130 basis points.

SG&A as a percent of sales increased partly due to $4.5 million of one-time items. Excluding these items, adjusted SG&A as a percent of sales increased 50 basis points to 19%, primarily due to higher incentive compensation expense, which added 90 basis points.

Turning to the full-year result, sales increased 3%, driven by the acquisition of Pelikan, which added 5%. Foreign-exchange translation reduced sales by 1%. At constant currency, sales declined 1%. Strong sales growth in back-to-school and with the mass and e-tail channels nearly offset the declines we saw with certain wholesalers and at office superstore customers.

Gross margins improved for the year, due to strong execution and cost savings. SG&A as a percentage of sales was up slightly, due to higher incentive compensation expense. Operating income margin, while on a reported basis was down 10 basis points, on an adjusted basis increased 110 basis points to 11.9%. Reported net income and adjusted net income were both $0.87 per share, compared to net $0.78 per share in the prior-year period. The improvement was primarily the result of the Pelikan acquisition and gross margin expansion.

Turning to an overview of our segments, in the fourth quarter, North America sales decreased 4%. Strong growth in mass and e-tail was offset by de-stocking at certain wholesalers and declines in the office superstore channel. As a result of lower sales, North America operating income margin was down in the quarter. For the year, North America sales declined only 1%, due to strong growth in back-to-school that nearly offset the declines for certain wholesalers and office superstores.

Segment operating margin expanded a strong 60 basis points in the year, primarily driven by productivity improvements. In our International segment, fourth-quarter sales increased 29%. Pelikan added 26%, or $34.1 million. Foreign exchange added 2%. On a comparable basis, sales increased 1%, primarily driven by pricing and stronger performance in Brazil and Mexico.

International operating income increased due to the Pelikan Artline acquisition, which added $0.02 of earnings in the quarter. For the year, international sales increased 14%, with Pelikan adding 18%, and foreign exchange deducting nearly 3%. Underlying sales decreased 2%, driven by volume declines in certain markets, partially offset by price increases.

International segment operating income increased nearly $12 million. Adjusted segment income increased $19.2 million, and adjusted margin expanded 290 basis points to 12.4%, driven by Pelikan and cost savings. For the full year, Pelikan contributed $0.03 to EPS.

Computer products sales declined 7% in the quarter, and 3% in the year, driven by lower tablet accessory sales. Profitability continued to improve quarter over quarter, and we finished the year with solid margin improvement in this segments.

Turning to our cash flow and balance sheet, we again generated significant annual free cash flow. In 2016, we delivered $148 million, but this includes $11.6 million of cash costs related to acquisitions, and $6.5 million of accelerated interest payments related to our note refinancing. Excluding these two items, our adjusted free cash flow was closer to $166 million.

Improved profits, less-adverse foreign exchange, and lower capital spend drove the better performance. The Pelikan acquisition was insignificant to our 2016 cash flow, due to the timing of the acquisition and the integration costs. We reduced net debt by $11.8 million in the year, but this is net of adding $85 million of debt, in addition to acquiring $24 million of debt for the Pelikan acquisition.

In December, we completed the refinancing of our senior subordinated notes, replacing $500 million of notes that had a coupon of 6.75%, with $400 million of privately placed notes that have a coupon of 5.25%, and extends the maturity to 2024. This early refinancing triggered a $25-million make whole premium, $6.5 million of accelerated cash interest payments, and the write-off of $4.9 million debt issuances costs. However, our annual interest expense will be lower by $10 million, or $0.05 accretion to EPS. We were thrilled with the outcomes of this refinancing.

We finished the year with a net debt to adjusted EBITDA ratio of 2.5 times. Our capital structure has further evolved since year end, in connection with the completion of the Esselte transaction, as we refinanced our senior bank debt.

Slide 11 of our deck shows the updated capital structure. We now have a multi-currency facility of repayable debt, and a larger revolver, and our bank debt maturities are extended out 5 years. We are pleased with the current capital structure, as it is efficient and provides ample flexibility for both financial and strategic needs.

Lastly, we'll provide some additional information regarding our 2017 guidance. We have updated a number of modeling assumptions, as noted on page 9 of our presentation. These assumptions factor in 11 months of Esselte, and a full year of Pelikan.

The most notable items include our long-term effective tax rate, which due to the two acquisitions and the addition of foreign debt, is now expected to be 32%, down from our previous rate of 35%. This is a benefit of about $0.05 per share, which helps to offset the impact of higher share count and foreign exchange.

Diluted share count is expected to be 112 million. There were also be a higher ongoing level of cash taxes, due to the exhaustion of our US NOLs in mid-2017.

Finally, while we do not provide quarterly guidance, I would like to point out that we expect a similar waiting of our sales and EPS to last year, whereby our earnings will largely be weighted to the third and fourth quarters. We also expect the first quarter to be roughly break-even, as it was in 2016.

Our cash flow will also remain seasonal, with almost all of our full-year cash flow accumulated in Q3 and Q4. Our cash-flow generation in Q1 will be similar, but with the addition of the Pelikan business in Australia offset by cash restructuring costs for Esselte. For the second quarter, working capital investments for the North American back-to-school cycle will create a cash out-flow quarter, which is our normal cash cycle.

As a result of the Pelikan Artline and Esselte acquisitions, we will be realigning our business segments for financial reporting purposes, beginning in the first quarter of 2017. Going forward, we will continue to have three segments, but they will all be geographic segments.

One will be North America, which will include the US and Canada. Another will be EMEA, which will include Europe, Middle East, and Africa. The last will be International, which will include Australia, Latin America, and Asia Pacific. The existing computer products segment will be folded into the segments based on each region. We will provide historic restatements by segment by quarter in mid-March.

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)

Brad Thomas, KeyBanc Capital.

Good morning, Boris, Neal, and Jennifer, and congratulations on a great quarter and a great year.

Good morning, Brad, thank you.

I wanted to focus on one of your comments, Boris, if I heard you correctly. You talked about the goal to grow sales, constant currency organically in the low-single-digit range. I was hoping you could talk a little bit about more about both the organic opportunities that you have today, and maybe some of the opportunities you have in light of these recent acquisitions that you've done.

Sure. As I've mentioned, we expect sales to grow low single digits. The way that breaks down is flat to low-single-digit growth in our North America and EMEA business, and mid-single-digit growth in our international business. If you look at the last couple of years, we've been nearly offsetting the decline in our traditional channels with growth in mass and e-commerce. I expect that to continue, but I do expect that the traditional channels would reach some kind of a low asymptote, and either start declining at a lower rate or stop declining all together.

Also, with the acquisition of Esselte, our European business is now in a much stronger position for flat or low-single-digit growth. Legacy ACCO business in Europe has been skewed toward larger accounts such as Staples and Office Depot and [Nuraco], and especially larger accounts have been having a more difficult time in Europe growing. Most of the growth in Europe has come through smaller, local independents. Esselte is very strong with local independents, so with having them as part of our portfolio, we expect to turn around our sales there. That's the rationale for why we do expect to have low-single-digit growth in the --

That's very exciting. Thank you, Boris. If I could just add one follow-up about the mass channel in the US. You've had a lot of success the past few years. How are you feeling about the outlook for that channel in that group of customers in 2017?

Yes, we are in the middle of our back-to-school selling process. Actually, the presentations are all complete, but we haven't heard all of the decisions yet; but just based on what we know so far, we're optimistic that back-to-school 2017 would be at least as good, if not better, than back-to-school 2016, so we're in a good position, we think.

Very helpful. Thank you, and congratulations again.

Thanks, Brad.

Bill Chappell, SunTrust.

Thanks, good morning.

Good morning, Bill.

First on gross margin, appreciate the raising of the guidance, but maybe you can help us how we get to 34%, maybe 35%, over time? Is that more mix with the business? Is it more synergies? Are there more supply chain and other gross-margin savings you can find just on the core business? What's the pathway to 35%?

It's a combination of a couple of things. With the acquisition of Pelikan Artline and Esselte, our product mix is now getting skewed towards better end-user-centered brands, which have higher demand, better differentiation, and carry a higher gross margin. That's one of the reasons for the raise.

Second is our ongoing productivity initiatives. As you know, we've had six years of the Lean Six Sigma program. The Esselte organization also has a very mature lean program that they've implemented many years ago. We expect in combination to continue to take out costs from our businesses worldwide.

Then last but not least, we do expect $31 million of synergies between Pelikan Artline and Esselte acquisition. Part of that will be on the cost of goods side, which should also help with gross margins. We do feel pretty good that we should be able to expand and sustain the margins in that 33% to 34% level.

Okay. I think you've talked about Esselte having some better working capital inventory management. Is that possible to apply some of those methods to your business or to the legacy business this year and get working capital improvements, or is that more of a 2018-type thing?

Realistically, Bill, it's probably something that will affect 2018. This is definitely something that we want to do. As I mentioned on the call last quarter, Esselte is better than legacy ACCO at managing working capital, but we can learn things and implement in other parts of our business. We will certainly try to do that. That was not part of our investment hypothesis, so it's not baked into any numbers, but certainly is an up side for 2018 and beyond.

Okay, and then last one for me. I think you mentioned in the quarter -- I just want to make sure I understood this, that legacy ACCO Europe was a little bit weak because of change of control concerns. Was that at a customer, or is that you buying Esselte? If it's the latter, do you expect continued turbulence as you integrate that business?

No, that was because of the changes with customers. As you probably know, both Office Depot and Staples sold their European businesses at the end of 2016. Associated with that, there were some slow-down in purchasing on their side in Europe. That affected us, because they are big customers of ours.

Got it, and that's not really carrying over into 2017?

Not really, no.

Perfect, thanks so much.

Thanks, Bill.

Kevin Steinke, Barrington Research.

Good morning. I wanted to follow up on -- you talked about the strength in Brazil and Mexico. What exactly is working there? Could you get into how back-to-school went in Brazil? I think Neal made a comment about pricing helping growth there, so maybe the mix of price versus volume in those markets that was driving that double-digit growth?

Sure, so back-to-school in Brazil was great. I'm really happy with our performance for back to school, sales were up double digits, which is incredibly strong, given the economic situation in Brazil.

Basically, we took share. There's no other way to explain it by we just executed better than the competition and we took share. In a tough environment like that, we were the strongest supplier, the strongest manufacturer out there, that our channel partners could rely on to supply them with a good, quality product in a timely manner. So I'm very pleased with the results in Brazil.

As Neal mentioned, most of that was due to increased prices. As you know, Brazil just in general, is a high-inflation environment. Inflation there is high single digits. It's coming down now from what it was, but we did raise prices on the order of 8% to 9% last year, and most of that is what drove the growth.

Mexico also had a great year. Part of that was Mexico experienced also a weakening peso throughout the last couple of years, so we had to adjust our prices to combat that dollar-denominated inflation that was part of the reason. The second is the team executed really well there, as well. We had the right inventory at the right time for our customers. We had a great back-to-school there, which was similar to the timing to the US back-to-school; but overall had a great year and a great Q4.

Okay, that sounds great. In response to an earlier question, you talked mostly about the longer-term expectations for the North American and EMEA segments, but you also mentioned they had a goal of mid-single-digit growth in this new International segment. Can you just talk about what would drive that mid-single-digit growth, what the assumptions are behind that?

Sure. We think that we can grow sales in Brazil, Mexico, and Asia Pacific by mid-to-high single digits, and we can hold sales flat to low-single-digit growth in Australia. In combination, that's around mid-single-digit growth.

Okay, that's very helpful. Then you talked about the outlook for 2017. I think you said modest organic constant-currency growth. Did you mention what the assumption is for currency in 2017?

Yes, what we talked about is we expect currency to be a negative effect on our EPS by low single digits, $0.02 to $0.03, in that range. We expect the organic growth to offset that, so organically $0.02 to $0.03 growth in APS.

What does that imply for the top-line head wind?

For FX?

Yes.

For FX, 1% to 2%.

Okay, 1% to 2%. All right, got it. All right, thanks for taking the questions.

Thanks, Kevin.

William Reuter, Bank of America Merrill Lynch.

Good morning. The last handful of years you guys have laid out some productivity targets in terms of savings. Do you guys have a similar savings number that you guys are hoping to achieve in 2017?

We do. We believe this number -- the number for this year will be closer to $20 million, as opposed to regular $30 million number that we typically shoot for. The reason for that is we're going to be focused on integration in 2017. As a result, some of our productivity initiatives will be slowing down a little bit to make sure that we get the effectiveness of the integration right before we focus on the efficiencies. This year it will be a little bit lower, but I expect us to return to our typical rate, and actually probably increase it after the integration is under way.

Okay. Does that $20 million exclude synergies as part of the acquisitions?

It does. It excludes synergies.

Okay. You talked about growth in the North American market that you guys think you can achieve. I think you said low single digits, and I don't know if that was 2017 or over the next handful of years. But could you talk about what's going to fuel that growth, whether it's innovation, whether it's gaining shares? If you can talk a little bit about what you guys are seeing in terms of your total number of doors that you're in, in North America?

The low-single-digit growth for North America is a longer-term goal over the next several years. We still are in a more adjusting phase in 2017. What's happening in North America is -- and that's been happening for the last couple of years -- there's a huge shift in the way that consumers and businesses buy. We are at the forefront of that shift, and I think we've been managing it exceptionally well.

Consumers are going to mass channels such as Walmart and Target; and they're going online for their school and office supplies purchases, and less and less to specialty retail stores. That's what's really been affecting everybody's sales in this business, including ours. But we've -- as I mentioned, we've been managing it really well. As Neal said in his prepared remarks, sales in North America were down slightly less than 1%, because the growth in mass and [e-mail] nearly offset the declines in the traditional channels.

The other thing that as these changes happen, there are also fairly significant consolidation of distribution centers that happens. The channel partners who are not growing tend to reduce their inventories, which obviously affects the replenishment. That's what's been happening.

Now on our end, we've been growing mass and e-commerce, and we've been doing that by introducing new products, innovating in new categories, expanding our presence, really over-investing in marketing and product development to make sure we stay ahead of where the competition is. The plan is to continue to do that. The plan is to continue to invest and grow and innovate in categories and channels that are growing and that are attractive, and then prudently manage the channels that are transitioning.

We absolutely want to still partner with those customers. We want to support them, and we want to grow market share; but we need to do it in such a way that provides a good return for our shareholders. That's what we have been doing, and that's what we plan to do in the future, as well.

Okay. Just lastly, the number of doors that you guys ran in North America, will that number -- and this is just brick and I'm talking about -- will that number be up or down in 2017?

I think in general, we are -- we have fairly high market shares in retail. I can't think of a retail chain that sells school and office supplies that doesn't carry us. But if I look at just to count the number of doors, I do expect Staples and Office Depot to close stores in 2017, and they'll probably close more stores than Target and Walmart and others will open. The number of doors will probably be down in 2017 versus 2016, but our shelf space and our penetration would probably be up, because as I've mentioned on the previous answer, we do expect our 2017 back-to-school to be as good, if not better, than 2016.

Okay, very helpful. Thank you.

[Drew Martinsen], Jefferies.

Good morning. Just trying to reconcile the use of working capital. As you see consolidation in the industry and door closures, reduction of inventories. Is that just coming all from the mass and e-commerce, or is there something else that's changing in the market?

We saw a couple of things that occurred in the market. You saw in North America one of the wholesaler channel significantly reduce inventory. In addition to that, there's been a general shift to -- I'll call it more inventory-efficient channels. The mass channel and e-commerce channel carries a lot less inventory than traditional channels. As business has shifted over many years into that channel, we've seen a constant negativity of inventory in the channel decreasing. It just took a significant step down, more significant than prior year, in 2016.

Okay. We haven't heard anything on private label in a while, it seems like. Has that wave receded or plateaued?

I think plateaued is the right word. Private label is part of our industry. Every channel partner has some private label, and then depending on their approach and their strategy, they have more or less; but it's fairly stable, and it's overall it's around that, I'd say, 25% level in the industry. In some categories it's much lower, and in other categories it's much higher.

We manage it effectively. We participate in private labels if it makes sense for us from a category perspective. We tend not to do it if it's just private label for private label's sake. But I would say it's pretty stable in 2016 versus 2015, and I don't expect significant changes in 2017.

Okay, and lastly, I realize that it's early and there's a lot of fluidity on the subject, but in terms of the border tax potential, what are the implications for you all?

You're right. It is too early, and it would be improper for me to speculate, but it would affect our business certainly, if there's a border tax. It actually -- I believe we will benefit our business from a competitive perspective, because we do have US manufacturing facilities that could manufacture at scale. Today we manufacture about 40% of the products that we sell in the US, we manufacture in the US. If the cost of imports become significantly higher, then we could certainly shift to manufacture more in the US. Most of our competitors -- and certainly our customers who import private label from China -- certainly can't do that, so that would be a competitive advantage for us.

But on the other hand, if there is a border adjustment tax, I do expect it to affect pricing, to raise pricing, and that may certainly mute demand. That obviously would not be good for anybody. We have to see exactly what happens and how it happens and the details before we can truly understand how it's going to affect our business. But I think from a competitive perspective, we would be in an okay position.

Thank you very much, guys, appreciate it.

Thank you.

Your next question comes from (inaudible) Financial.

Hi, good morning.

Good morning.

Just wanted to ask you, first off, can you talk about how fast you can realize any revenue synergies from Europe that now you are able to sell to more of the smaller retailers, and if that's in any of your integration plans right now?

Revenue synergies were really not part of our integration hypothesis. We certainly do want to realize them, and we will be putting plans in place to see if we can take the products that Esselte offers pretty much exclusively in Europe, and bring in to other parts of our business. But exactly how much and how quickly is very difficult to tell, as you can realize this is not a green field. We have to go and compete against existing competitors. Our plans will be aggressive, but I want to be realistic and not counting on the victory before it actually happens. We certainly will work on it, but I don't want to give you a number or time frame.

No, I was talking about the other way around where you sell actually other ACCO Brands more with into the distribution networks that Esselte brings to you guys?

That is certainly part of the integration hypothesis, and I do expect traction on that in 2017. But again, just revenue, incremental revenue was not part of the hypothesis overall, so I don't want to put a number on it, but we will be acting on it in 2017.

Okay. The other -- just a clarification here is that in 2016, you ended the year with free cash flow $148 million, and then I think it would have been $166 million without the one-time events. Then on the previous calls you had been talking about Esselte adding about $20 million in the first year in cash flow synergies. Where does that show up in 2017, because it's only going barely up from $148 million to $150 million? I forget $166, though.

There are a couple of points to note. First of all, from an Esselte point of view, while economically we still will receive the benefit of $20 million of cash flow, the effective -- the closing balance sheet that we now know, because we acquired it at the end of January, is that the seller left more cash and more liabilities. The effect of that on the GAAP is that I'll effectively have $20 million more liabilities which will show up to offset the cash flow I would have got, and I'll have a $20 million lower purchase price. So Esselte will effectively contribute no cash to US in 2017.

The second point that really changes in 2017 is the comment I made about the US NOLs and our cash taxes rise significantly in 2017. That's from two causes -- obviously the inclusion of Esselte taxes, which adds half of the increase, and half of the increase is US taxes, which I'll have to start paying in 2017. The other issue is we spent very low capital expenditure in 2016. We deferred a large IT implementation into 2017, and so we will see that come through in 2017.

Okay, but does that changed the outlook as far as the three-year projection of getting $50 million in free cash flow synergies?

Not at all. If it wasn't for the way GAAP works, we are still effectively economically getting the $20 million of cash flow we anticipated in 2017.

Got it. Okay, appreciate it.

Thank you.

Kevin Steinke, Barrington Research.

Hi, do you have a specific target for debt reduction that's incorporated into the 2017 guidance?

We do plan to use most of the free cash flow to pay down debt, but typically we do it Kevin at the end of the year, because that's when most of the cash comes in. We don't expect any of the benefit to show up until 2018.

All right. Thanks, that's all I had.

All right. Thank you, Kevin.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Elisman for any closing remarks.

Thank you. To summarize, we had a great year and a great quarter. With the acquisition of Pelikan Artline and Esselte now behind us, and a new more favorable capital structure, I am confident that we're well positioned for even greater success in the future. Thank you for your participation today, and we'll talk to you again in the spring. Thank you.

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