ACCO Brands Corp (ACCO) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ACCO Brands Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Jennifer Rice, Vice President, Investor Relations. Ma'am, you may begin.

Good morning, and welcome to our fourth quarter and full year 2018 conference call. Speaking on the call today are Boris Elisman, Chairman, 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. We also posted a newly refreshed investor overview presentation to our Investor Relations website this morning.

When speaking to quarterly results, we may refer to adjusted results. Adjusted results exclude transaction, integration, restructuring costs and apply a tax rate of 32% for the current quarter and 30% for the current year. This is a change from our previous assumption.

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 and the slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking adjusted earnings per share, free cash flow, net leverage ratio or normalized tax rate guidance.

Forward-looking statements made during the call are based on certain risks and uncertainties, and our actual 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.

Good morning, everyone. Our fourth quarter results were somewhat mixed. Our free cash flow was higher than our revised expectations, but our sales and earnings were lower. The softer sales resulted from lower-than-expected orders in December, especially in the last 2 weeks of the month. Our adjusted earnings were lower than anticipated due to the adverse impact from a higher tax rate, which reduced EPS by $0.02.

Our results were also mixed for the year in total. Sales and profits were down in the U.S. and International, but we had an excellent year in EMEA. My comments this morning will focus on the main drivers behind our performance in 2018 and describe the actions we have taken and will take in response. I will also comment on our strategy for the new year.

I will begin with and spend most of my time on the U.S. since this is where we saw a significant degradation on our financial performance, which was disappointing to me and to my management team. Prior to 2018, our business in the U.S. had 4 straight years of profit improvements with moderate sales declines, largely caused by the office superstore consolidation. Our team did a great job managing the consolidation and associated channel transitions with growth in mass and e-tail channels, largely offsetting reduced sales to office superstores as they close retail locations and distribution centers. Office wholesalers and independents were relatively stable over those years.

On the cost side, U.S. inflation was mild during these years, and we were able to drive significant profitability improvements in our U.S. business through cost reductions and better productivity. It is largely the U.S. improvements that drove organic profit improvements in our total business prior to 2018.

But what was so different about 2018 than the preceding 4 years? On the revenue side, the major difference can be explained by the 2 office wholesalers. They were in merger planning throughout most of the year, and their actions to prepare for their merger as well as the uncertainty that merger created in the independent dealer community significantly affected sales. U.S. sales declined 7% in 2018, and roughly 4% of that was due to a sales decline with the 2 office wholesalers. Without that, our U.S. sales decline would have been around 3%, consistent with the range that we have seen in recent years.

Two other factors that impacted our U.S. sales and global sales, especially in Q4, were lost share in planning products and no end-of-year buying ahead of price increases, especially in December, as I mentioned earlier. Our U.S. gross margin was also impacted by lower sales to office wholesalers and independent, especially in the second half of the year, and higher sales to dollar stores or back-to-school as well as lower sales of planning products, especially in Q4.

On the cost side, we saw major increases in the raw materials and logistics costs beginning in the spring of 2018 with paper, steel, transportation and fuel up double digits from 2017 levels. In addition, beginning in April, we began to experience a progressive increase in tariffs on Chinese imports that continued through the year. All in, inflation and tariffs added approximately $15 million, 1-5, to our costs for the year.

It is normal in our industry to give notice to customers for price increases, so there's typically a 3 to 6 months lag time between our decision to increase prices and our ability to implement. As a result, in a rapidly rising inflationary environment such as the one we experienced in 2018 in the U.S., it was not possible to implement price increases fast enough to fully offset the increased costs. We raised prices in the U.S. in October, but that was based on the latest cost information available at the time of the pricing notification.

As costs kept rising and new tariffs went into place at the end of September, October increases weren't enough to recover margins. We are raising prices again beginning in January of this year in the U.S. and in most other countries. And if the U.S. tariffs stay as they are today and commodities oscillate within the expected ranges, we should fully recover last year's cost increases.

As you know, there's a possibility that the U.S. will further raise tariffs on Chinese imports beginning in March. And if that happens, we have already notified our customers that we plan to immediately increase prices on effective products in the U.S.

We have also taken several actions to reduce our operating costs in the U.S. In addition to ongoing productivity initiatives, last quarter, we communicated $5 million on cost reductions associated with reducing our U.S. headcount. We are now expanding our plans to reduce structural costs in the U.S. by another $6 million, which includes both headcount as well as improved manufacturing efficiencies. This brings the total of new structural cost reductions to $11 million, which we expect to realize mostly in 2019. In the U.S., we expect these and other actions will deliver flat to moderate sales declines and improved profitability in 2019. In terms of sales, we expect the U.S. channel environment to remain difficult. We expect wholesaler/independent dealer sales to be roughly flat.

A few months ago, we launched a program to incentivize independent dealers to buy directly from us. The purpose of the program is to make independent dealers more price competitive with e-tailers and superstores. The initial results from the program are very positive, and we plan to continue with activation with dealers in 2019. We expect office superstores to continue to decline, but their decline is expected to be mostly offset by growth in mass, e-tail and tech channels. We grew back-to-school sales 2% last year. And based on early customer information, we expect 2019 back-to-school sales growth to be comparable to 2018.

We continue to reorient our portfolio towards consumer-centric categories and brands, and back-to-school is an increasingly important part of our U.S. results. In addition, Kensington computer accessories grew 6% last year in the U.S., and we believe their growth through the tech channel will continue this year.

Turning now to EMEA. We have great results in that segment in 2018. Comparable sales were up approximately 2%, with broad growth of branded products throughout the region offsetting declines of private-label sales and the insolvency of a significant customer. We had especially strong growth with Rexel shredders, Kensington computer accessories and Derwent art pencils. We have expanded product listings in EMEA for 2019, which we expect to drive continued positive sales momentum.

Beyond sales growth, we realized substantial cost synergies from the merger with Esselte, and margins for the year were up significantly. I'm very pleased with our results in EMEA. We are positioned well strategically throughout the region. Our execution is very strong. And I'm optimistic to have another year of low single-digit organic sales growth and further profit expansion.

Our International performance was mixed, but we saw sequential comparable sales improvement every quarter throughout the year. We had another outstanding year in Brazil with sales up high single digits despite a difficult economy. Selling for this back-to-school season was very strong, and we are hoping for a solid sellout season. Business confidence in Brazil has improved postelection, and GDP growth is forecasted to increase.

Australia had a slow start to the year as 2 large customers merged, but comparable sales trends improved throughout the year despite the environment remaining challenging.

Mexico had a difficult year, especially in the first half, with our major customer implementing a more conservative inventory management strategy. On the other hand, we're very pleased with the initial 6 months from the GOBA acquisition and believe our combined Mexican business is positioned for strong growth in 2019. Asia also had a difficult first half but stronger growth in Q3 and Q4. There is improving momentum in International. And altogether, we expect mid-single digit growth in 2019.

Now to review our strategy. Over the last several years, we have been shifting our business through organic initiatives and acquisitions toward stronger brands, more value-added products, faster-growing geographies and a more diversified customer base. We've complemented these investments with ongoing cost reductions and productivity improvement initiatives, especially in more mature countries and with declining channels. As a result of the strategy, we were able to grow our free cash flow from $146 million in 2014 to $161 million in 2018 and returned some of this cash to our shareholders, initiating a share repurchase program in 2014 and a dividend last year. In total, we returned $216 million to shareholders over the last 4.5 years, including $100 million in 2018.

We believe we have the right strategy for our company. We'll continue to reorient our business towards faster-growing product categories and geographies, stronger brands and complementary channels, both organically and through acquisitions. We'll continue to drive aggressive productivity initiatives and scale our costs with revenues as appropriate. And we'll continue to use our free cash flow in a balanced way to reposition our business and reward our shareholders.

Neal will discuss our 2019 guidance, but I will review our longer-term business expectations. Beyond 2019, based on the strategies that we have in place today, we expect our company to deliver top line growth in the range of 0% to 2% compounded annually. We expect this growth to be driven by 0% to 2% growth in EMEA and a 3% to 5% growth in International. This will offset North America, which should be flat to down 2%. We anticipate our gross margin being in the 33% to 34% range and SG&A in the mid-19% range.

In summary, despite a challenging year in 2018, we remain confident about our future and continue to position the company for growth. As Jennifer mentioned at the beginning of this call, we have developed an updated investor presentation available in the IR section of our website that provides more granularity into our business and strategy and long-term targets, which we hope you will find helpful.

With that, I will hand it over to Neal to give you more details on our quarter.

Thank you, Boris, and good morning, everyone. Fourth quarter sales decreased 7%, and comparable sales decreased 5%, primarily due to lower sales in the U.S. Reported EPS decreased 50% to $0.34 per share due primarily to the nonrepeat of a $25.7 million tax benefit and lower operating income. Adjusted EPS decreased 15% to $0.41 in the quarter. We had a higher-than-anticipated tax rate in the year, which had to true up in the quarter, primarily due to our lower U.S. earning. Our gross profit was lower in the quarter, primarily due to the U.S. business.

Overall, our reported and adjusted gross margin declined 170 basis points to 33.5% as detailed on Page 10 of our slide deck. The decline was mainly attributable to adverse customer mix, product mix and off-suite inventory, which, together, accounted for 160 basis points of decline. Inflation, net of price increases, drove a further 50 basis point reduction year-over-year. These factors offset cost and synergy savings of $5.4 million, which were favorable by 50 basis points. We expect to continue to offset higher costs currently and in the future quarters with price increases and cost reductions.

We were able to deliver an improvement in SG&A in the quarter. As a percent of sales, reported SG&A was lower by 40 basis points, and adjusted SG&A was lower by 20 basis points. The improvement in adjusted SG&A was enabled by a 120 basis points benefits from lower incentive compensation expense and 10 basis points from cost reductions and synergy savings. These benefits more than offset the negative effect of lower sales volume, which was 110 basis points. All in, reported and adjusted operating income and margin both decreased due to the lower sales and gross profit, partially offset by cost reductions.

Turning now to the full year results. Sales decreased 0.4%, and comparable sales decreased 3% due to lower sales in the U.S. and International. Reported EPS declined 16%, primarily due to the nonrepeat of a $25.7 million onetime tax benefit related to the new U.S. tax code in the prior year. Adjusted EPS declined 4% for the year driven by lower sales and gross profit in the U.S.

Foreign currency had a $0.02 adverse impact on the year, while share repurchase was a benefit of $0.04, and lower full year tax rate was a benefit of $0.03.

Reported and adjusted gross margin declined 140 and 150 basis points, respectively, for the 12-month period as shown on Slide 12, driven by largely adverse mix and $15 million of inflation, including tariffs.

SG&A, however, showed improvement year-over-year. On a reported basis, SG&A was lower by 110 basis points and on an adjusted basis was lower by 60 basis points. The improvement in SG&A for the year was driven by lower cost, including $20.8 (sic) [$12.8] million or 100 basis points from lower incentive compensation expense and 50 basis points from cost savings and synergies. For the year, we realized a total of $32 million savings, of which $19 million was from productivity initiatives and $13 million was from acquisition synergy savings. For 2019, we have higher cost saving targets, and we'll also offset the cost to reinstating our incentive compensation.

All in, reported operating income was slightly up, and margins were flat. Adjusted operating income declined, and margin was down 90 basis points, primarily due to lower profit in the U.S. Reported and adjusted net income were down year-over-year due to the lower sales and gross margin.

Since Boris provided a lot of commentary on our segment results, I will just hit the highlights. In North America, fourth quarter sales decreased 9.6%, primarily due to the U.S. where we had lower sales to wholesalers and lower sales of calendar products due to lost market share. We did start to see the benefits of our October price increases, which added 2.5%. For the full year, North America sales decreased 6% as market share gains in back-to-school were more than offset by lower sales in the wholesaler channel and in calendar product.

North America reported and adjusted operating income and margin were both down in the quarter and the year. Margins declined due to unfavorable customer and product mix, specifically, lower sales to the wholesaler channel and increased sales to the DollarStore channel and lower sales of calendar products, along with more sales of composition notebooks. We also experienced inflation from higher material and transportation costs and tariffs. These impacts were partially offset by price increases and lower incentive compensation expense.

Fourth quarter results include the $3 million charge we noted last quarter related to actions to reduce our U.S. headcount, driving savings of $5 million, mostly in 2019. We will incur additional restructuring charges in Q1 related to the cost-reduction initiatives Boris has noted.

In our EMEA segment, sales decreased 6% or 2% on a comparable basis in Q4. The decline was primarily due to lower sales to our wholesale customers that became insolvent in some countries during the quarter. It's important to note that EMEA returned to growth this January.

For the year, EMEA comparable sales increased 2% driven by expanded distribution of legacy ACCO products, the Esselte customer base, with strong growth in shredders and computer accessories. For EMEA, operating income improved in the quarter due to lower charges. Adjusted operating income and margin declined slightly due to lower sales and higher costs, and the business has now increased prices in January to offset inflation. For the year, EMEA delivered a strong growth in profitability with adjusted margins up 200 basis points due to cost synergies, favorable product mix and higher volume.

In our International segment, fourth quarter comparable sales were flat. We continue to see growth in Brazil and Asia, offset by declines in Australia and our legacy business in Mexico where we continue to recover from the effects of substantial inventory reductions by 1 large customer earlier in the year.

For the year, International sales declined approximately 3% on a reported and comparable basis due to declines in Australia and in Mexico, particularly during the first half of the year, which offset strong growth in Brazil. International reported and adjusted operating income both decreased for the quarter and the year, primarily due to adverse foreign exchange.

Our normalized tax rate for 2018 was 30%, a point higher than what we previously estimated. The increase primarily results from lower U.S. earnings and finalization of the impact of the U.S. tax reform act.

Turning now to our cash flow and balance sheet. We continue to generate strong operating cash flow, allowing us to consistently invest in the business and return cash to shareholders. For the full year, we generated $160 million in free cash flow, and we paid $25 million in dividends, purchased 6 million shares for $75 million and repaid $62 million in debt. We paid $38 million for the GOBA acquisition from increased debt, and we ended the year with 2.8x net leverage.

In terms of working capital, our inventory balance was up year-over-year by $86 million, funded by payables, which were up $96 million. While both are impacted by FX and the GOBA acquisition, the predominant reasons for the increases were the strategic decisions we made to increase inventory to secure paper for the 2019 back-to-school season and to buy ahead of anticipated inflation, tariff-related increases and anticipated port disruptions. We also increased inventory to support new product launches and stronger sales of our computer accessories and shredders.

Because of these decisions, the cadence of our cash flow in 2019 will be different year-over-year in Q1 and Q2. We anticipate a large outflow in Q1 as payables unwind and less-than-usual outflow in Q2 as we won't need to build as much inventory for back-to-school. Our full year 2019 cash flow should not be impacted.

Turning now to our 2019 guidance. We expect sales to be flat-to-down 3%, including an adverse 2% impact from foreign currency translation using recent spot rates. We expect earnings per share of $1.10 to $1.20, assuming a $0.03 impact from adverse foreign exchange and assuming a 30% to 31% normalized tax rate. We estimate free cash flow to be in the range $165 million to $175 million.

At the segment level, we are expecting North America sales to be flat-to-down low single digits for the year, including a high single-digit contribution from pricing. We are expecting EMEA to be down low single digits because of foreign currency. Excluding currency, we expect EMEA sales to increase low single digits. And for International, we are expecting sales to be up high single digits with currency. Excluding currency, we expect International sales to increase low double digits due to the GOBA acquisition.

By quarter for sales, we estimate adverse foreign currency will be most pronounced in Q1, an approximate 5% to 6% adverse impact, lessening to about 2% in Q2 and 1% in Q3 and then a marginal impact in Q4.

Based on current foreign currency spot rates, EPS will be adversely impacted in the first half of the year by $0.02 in Q1 and $0.01 in Q2.

The quarterly cadence of our earnings should be somewhat similar to 2018 with acquisitions offsetting the negative effects of FX in Q1 and Q2. In Q3, we have a tough comp as we lapped the substantial release of incentive compensation accruals that had a $0.07 benefit in Q3 of 2018. As usual, we don't yet know if back-to-school shipments will fall more into June or July, but this timing could result in the shift of sales and earnings between Q2 and Q3. We have provided numerous additional modeling assumptions on Page 18 of our slide presentation.

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) Your first question comes from Brad Thomas with KeyBanc Capital Markets.

Wanted to ask, first, about the North America market and hoping, Boris, you give us a little bit more color about how you're thinking about the run rate of trends here in North America, to what degree is there may be some destocking that's going on as a result of some of the consolidation, how much might that pressure you as we start 2019 and what do you think kind of the underlying run rate of the market looks like.

Yes. We look at 2018 as a reset year for North America. There was a lot of inventory that came out, especially from the 2 wholesalers in 2018, and was just a lot of uncertainty given merger planning that happened between the 2 of them initially and then one of them and another company. So the whole environment on the commercial side was uncertain. As a result of that, the dealers were also sitting on the fence a little bit and not making significant investments in inventory. We have seen sales rebound in January, so the people are now buying to sell through. We think the inventory has pretty much come out, and we do expect normalization in 2019. So what that normalization means is we think that the wholesale and independent sales will be roughly flat, office superstores will continue to decline as they continue to rationalize their store base, and especially, in the retail end of their business, they are shifting more to private label and focusing more on services on their commercial end, so we do expect decline with superstores. And then the growth is going to come from major mass and e-tail channels, and we saw a similar growth in 2018. So the big change between '18 and '19 is really the inventory, significant inventory, coming out of the 2 wholesalers.

That's very helpful, Boris. And then if I could add a follow-up on the topic of acquisitions. I guess, could you give us any color on how the landscape seems to you for potential acquisitions? And is there any change, positive or negative, in light of some of the underlying trends around the world?

Yes. The trends look similar, Brad. We did 3 acquisitions in the last 3 years. The funnel is still very robust. We're still being judicious in the decisions we make. The strategy is still to -- through acquisitions, to reorient our business to more attractive categories and more attractive markets as we have done over the last 3 years. And my hope that we'll continue -- be able to continue to do that. Neal mentioned in his prepared remarks, we generate a lot of free cash flow, and we certainly would like to use part of that for acquisitions. So the strategy remains the same.

Your next question comes from Bill Chappell with SunTrust.

This is actually Grant, on for Bill. First one is just on EMEA and the customer that came and solved in the quarter. I don't know if you guys could quantify the impacts on the top line in the quarter. And then is there any potential impact going forward, as maybe that customer liquidates inventory or any other impacts on that market there?

Certainly. It's about a $3 million impact, and it was largely caused by them liquidating inventory in the fourth quarter. And so what we saw in January was a return-to-normal rates of business as either the channel or directly or the wholesaler is actually in certain countries, operating under bankruptcy protection and disabled order and paid for this again.

Got it. And then, actually, one clarifying question on the potential pricing actions in the U.S. If the tariffs do come through, will you be able to basically get that pricing through immediately? Or will there be that 3- to 6-month lag time to pass that through the customers?

Yes. It'll be something in between. Just the execution time will take probably 30 to 90 days for us to be able to execute a price increase, but we don't have to go through a 3 to 6 months notification process anymore. So it won't be in March, but it also will not have to wait until the fall time frame.

Your next question comes from Hamed Khorsand with the BWS Financial.

So first off, could you just talk about your paper supply in 2019, you we're talking about last quarter, and then what you're doing for 2020 given that Georgia-Pacific is now exiting the industry?

Yes. Paper supply for '19 remains tight. And to avoid issues that we had in back-to-school 2018, we actually prebought paper in the fall of 2018 in order to secure our supply for back-to-school, to guarantee the supply for back-to-school. So we're fine for 2019 back-to-school. What we're looking to do in 2020 is actually source -- potentially source product from abroad to supply the U.S. back-to-school, so that we don't have this issue. And we're initiating the -- that process very early. Given the exchange rates, we think that foreign sourced paper could be competitive with domestic paper for our needs, and that's the path that we are pursuing.

Okay. And then just talking about the U.S. size as far as the wholesalers go, is the entire industry shrinking? Or has this purely been a wholesaler-driven issue?

This is a wholesaler-driven issue. If we look at sellout, sellout is roughly flat to minus 1%, minus 2% in the categories. And as we mentioned in the prepared remarks, our sales in the U.S. were down 7%. So sales are significantly more affected than the sellout is, and that's because of the inventory coming out of the wholesale channel.

Your next question comes from William Reuter with Bank of America.

A couple of questions. First, your guidance for a high single-digit contribution from pricing in North America, however, sales are going to be flat to down low single digits, that implies a pretty big decline in terms of units. I guess, I would have been surprised that the unit declines in these categories would have been this great. Can you talk a little bit about those unit declines and whether it's due to share losses on your part or whether the units are declining that much?

Yes, Bill, this is the assumptions we are making on price elasticity for our products. We're assuming that everything that's going up in price will be offset in volume, and then there's going to be additional declines from just the channel shifts. As I mentioned, office superstores are expected to decline and not be fully offset with the growth in mass and e-tail and flat sales in wholesale and independent. So it's the assumption that we're making. We hope we're wrong. But we think it's the right assumption under the circumstances.

Okay. And then your expectation in International sales grow high single digits longer term, kind of mid-single digits, are these due to share gains? Or are the categories in these regions growing this much in terms of units?

Yes. The guidance that Neal has provided, the color, that was for 2019, and a lot of that is driven by the acquisitions that we made midyear and a little tuck-in that we made earlier this year. So that's what's driving the high single-digit growth, including currency and low double-digit growth, excluding currency. If you remove the acquisition, the growth will be more in the 3% to 5% range, which is our long-term view for that particular region.

Okay. And is this basically because some of these developing countries are actually continuing to consume more units or use more units than they had been?

That's correct. There is just positive demographics there with more people being educated, more people staying in school longer and a shift from blue-collar to white-collar workforce. All of that which is beneficial for our categories.

Okay. And then just lastly for me. You've repurchased bonds in the second quarter of 2018. Will you consider bond repurchases with your free cash flow in 2019? How do you think about that?

Please understand we don't give the right to comment on what we intend to do going forward. We look at all things opportunistically and make decisions from time to time, and that's much all the same.

Your next question comes from Hale Holden with Barclays.

I just had 2 quick ones. Boris, why do you think you didn't see any orders over the last 2 weeks of December? Because you guys are very vocal about taking price increases on January. I would've thought some guys would've bought ahead of that.

Yes, Hale, we believe it's a combination of things. If you remember the market environment in December, there are a lot of concerns about trade and U.S. Fed raising rates, so we think that played into it.

Government shutdown as well.

The government shutdown coming in at the end of December, exactly. And then the other thing is the inventory levels of our big customers as they brought in additional inventory ahead of tariffs, everybody thought that tariffs are going up to 25%, and all of those decisions were made probably in the September time frame. So when the U.S. government made the decision to keep the tariffs at 10% in December, it was too late. That inventory was already coming in. And we think there was just not enough space to take in additional products, so we think that played into it. And then the other thing that we think played into it is just the change in metrics for some of our customers who are -- have gone -- undergone an ownership transition and are just operating to different metrics or they either made their numbers and decide to delay until next year or they didn't make their numbers and had no reason to chase. So we think it's a combination of all those things that affected December.

Great. And then the second question is, you called out sourced sales in planning products in December. And I just wonder if you had seen that catch up in January or if that was just products that probably won't going to sell through this year or if it's even meaningful.

Yes. Our big planning selling season is November, December and January. And from a compare standpoint, we had placement of a lot of SKUs with 1 of the major retailers in the U.S. in 2017, and we didn't have that placement in 2018. So sales were down in December, and sales at wholesale were down a little bit in January as well.

Got it. But it's not -- this is not inventory this year getting stuck with necessarily. It's just a comparable issue.

Inventory issue, right.

Your next question comes from Karru Martinson with Jefferies.

In terms of the long-term 2x to 2.5x target, we're kind of close to that on leverage today. I mean, what's the timetable that you guys see yourself getting there and kind of maintaining that level?

We believe that with -- under normal conditions, we should get there in the next 12 to 18 months. But of course, how we perform is going to influence that. And if we're doing acquisitions is going to influence that. It is a priority for us to try to get to at least 2.5 because we will be able to have complete flexibility on when we do what, including share repurchases. But we're also not going to hold off on a strategic acquisition in order to get to that 2.5x level. We're very comfortable with where we are today at 2.8. We'd like to get to 2.5 in the near term, but we will apply business judgment to that as we go to it.

Okay. And when you guys talk about having a pipeline of acquisitions, I mean, it seems like the industry, every couple of years, goes through a major consolidation. Are these -- is this pipeline kind of tuck-in varieties? Or are we due for another wave of that industry consolidation?

Yes. The industry consolidation that we've been seeing is more on the channel side, so we don't really participate in that. The acquisitions that we have done recently is really expanding in the international markets where the industry conditions and market conditions are more attractive. So we see a lot of opportunities still on that end, getting bigger and faster-growing markets. There could be some consolidating acquisitions, but those, for us, would have to be very meaningful and very accretive. I think the chances of that are lower than just expanding in the international markets. And then we still continue to look at adjacencies. But as I mentioned on prior quarters, the evaluation there is a little bit too high for -- to make it meaningful for our shareholders.

Okay. And I realize that it's early days, but wholesale had -- wholesale distribution had been a stable category now, one of the big players being taken over. How does that change the dynamics in that segment of the market?

Yes. Karru, to your point, it's too early to tell. We kind of expect a continued normal behavior from the customers, at least, in the first few quarters. Over the long term, but we certainly do expect that there'll be some shift of purchasing from dealers, from 1 wholesaler to the other. We think net-net, it will probably be neutral for us, but there could be some quarter-to-quarter variations that may impact our sales. But in the near term, we expect normal behavior.

Your next question comes from Kevin Steinke with Barrington.

What were you able to find that enabled you to increase your target for the Esselte synergies?

We just -- we had -- I don't want to say conservative, but we had realistic synergy plans, and we executed broadly at the high end, at the top end of, really, of our expectations. I think it was all -- it wasn't any new initiatives that we have covered. But I'd say, our execution has been outstanding for the last 2 years, whether it's facilities consolidation or removing duplicate functions or duplicate costs in the business. Our European team has done a really outstanding job delivering and obviously, overdelivering to synergies. So that's really what drove the overperformance for the last 2 years. And we have raised our expectations for synergies now from $23 million that we had at the time of the acquisition to now $32 million that we'll deliver by the end of this year.

Okay, good. And on the small acquisition you did in Australia, could you offer any more detail in terms of the size or what it brings to you strategically?

It's a small tuck-in. It's not really material to our results. We bought inventory customer list and brands from a small company in Australia, and it allows us to get a little bit bigger in the categories where we are present and leverage scale. And it also allows us to increase our share in [jam sand], which is an attractive category in Australia as well as bigger participation in some of the higher-margin calendar products, which is also a new category for us in Australia. So we look at it as just a small tuck-in that's very, very accretive for our shareholders.

Okay, good. And lastly, as we think about incentive compensation, how much of a headwind is that to your 2019 guidance versus '18? Just the assumption, I guess, is that it's restored, I guess, on an EPS basis.

Yes. So it's about a $21 million impact in terms of cost that we didn't pay in '18. We hope to pay in '19. So if you just look at it in pure EPS, it'd be about $0.14.

Your next question comes from Joe Gomes with NOBLE Capital Markets.

I apologize in advance if I repeat some questions here, I had a little phone issues here earlier. But just on the competitive environment and you guys have raised prices here twice and just wondering, what are you seeing the competitors doing? So where, on a relative basis, are you still vis-à-vis your competitors in terms of pricing and everything?

Yes, Joe. We always look at competition when we adjust prices. We believe we are very price competitive with companies that we compete with. If we weren't, we wouldn't be adjusting prices. Everybody is using the same commodities. Everybody is seeing the same cost increases on steel and aluminum and paper and transportation and tariffs, right? So we think from a competitive standpoint, where we need to be. Raising prices is never easy. Our customers never liked price increases regardless of whether there's high inflation or low inflation. So that's always a challenging process, but this is something we absolutely have to do given the rising costs that we see in the U.S. and Canada and in many other countries of the world. So this is -- we have to recover costs, and our team, historically, has done a great job of adjusting our prices to make sure that we recover costs.

Okay, great. And then on the DollarStore channel, the last 2 quarters, you've mentioned it as having an impact on profitability. Just wondering what is the differential, currently, with DollarStore channel margins vis-à-vis the overall corporate margins. When do you expect the DollarStore channel margins to kind of migrate, hopefully, up towards the corporate overall margin area? How big is the DollarStore channel today as a percent of revenues?

Yes. The DollarStore channel is fairly small for us in the U.S. It's something that is growing. It's something that we believe we need to become more successful. We are not happy with the balance we had between revenues and profitability in 2018 in that channel. So we're going to be more balanced between revenues and profitability and margin in 2019. But it is still an important channel for us because more and more consumers shop in that channel, and we want to go and we have to be where the consumers shop. So it's a small part of our business. We're talking about single digits in terms of millions of sales. But we'd like to grow it more, and we'd like it to be more profitable than it is.

And this concludes our question-and-answer session. I'd like to turn the call back over to Boris Elisman, Chairman, President and CEO, for closing remarks.

Thank you, Heather. In closing, despite several near-term factors outside of our control, including higher inflation and tariffs and ongoing U.S. industry consolidation, we remain confident about our future and continue to position the company for growth and strong returns for our shareholders. Our team is committed to executing through the current challenging environment in the U.S. and is excited about the international opportunity.

Thank you for your continued interest in ACCO Brands, and we'll talk to you in a quarter. Bye-bye.

Operator, thank you for help.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may disconnect. Everyone, have a wonderful day.