Ladies and gentlemen, thank you for standing by and welcome to the 2Q 2021 ACCO Brands Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Christine Hanneman. Thank you. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands second quarter 2021 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. When speaking about our results, we may refer to adjusted results. Adjusted results exclude transaction, integration, amortization and restructuring costs and other non-recurring items and reflect an adjusted tax rate. 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 the earnings release and slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP measures. Beginning with the first quarter of this year, we changed the way we calculate and report adjusted non-GAAP results by excluding non-cash amortization of intangible assets. Please see our press release for further explanation of this change. Forward-looking statements made during the call, including statements concerning the impacts of the COVID-19 pandemic on the company, are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. All forward-looking statements are subject to risks and uncertainties and our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements are made as of today and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session. Now, I will turn the call over to Boris Elisman.

Good morning, everyone. Thank you for joining us. I will spend a few minutes reviewing the second quarter highlights. Neal will follow me with details on the numbers and provide additional comments on our balance sheet, cash flow and second half outlook. Then we will take your questions. We had an excellent quarter with a rebound in demand for many of our commercial products, reflecting the economic recovery. Second quarter sales and profits exceeded our internal expectations as we posted a significant increase in total sales as well as robust organic growth for both the second quarter and year-to-date. Our total second quarter sales were near record levels and comparable to 2019 and each of our segments experienced a steady improving level of demand throughout the quarter. I am very pleased with our performance and remain confident in our strategy of transforming our business to become more consumer-oriented. In general, the U.S., EMEA, Australia, New Zealand and Asia, continue to see strong recoveries as more people return to offices, hiring rebounded and many schools return to in-person learning. EMEA had an excellent quarter, driven by outstanding organic sales growth, returning the business to pre-pandemic levels. We believe we continue to take share as customers move toward the well-known brands and more reliable service that we provide. Strong sales growth was widespread, led by computer accessories, DIY tools, wellness products, shredders, art supplies and a general increase in demand from all categories. In North America, we had a robust recovery of office and commercial categories, which improved sequentially throughout the quarter as offices begin reopening. Our second quarter is usually driven by North America back-to-school orders, and we expect most schools will be open for in-person, 5-day a week education beginning this fall. Our major customers have back-to-school inventory remaining from…

Thank you, Boris and good morning everyone. Our second quarter reported net sales increased 41% due to an increase in sales of commercial products as well as the contribution of PowerA, which added $51 million. Our comparable sales rose 21%, helped by steadily improving market conditions. Second quarter net income was $49 million or $0.50 per share. Adjusted net income was $42 million and adjusted EPS was $0.43, much better than our outlook, based on higher sales. Our gross margin rose to almost 32% compared to 30% in 2020. The increase was largely the result of cost savings and lower inventory reserves. SG&A expenses were $98 million compared with $77 million last year. Results in 2020 benefited from many pandemic-related temporary cost reduction efforts that impacted both SG&A and cost of goods sold. This year’s expenses are at a more normal level for our company. SG&A as a percent of sales was 19% compared to 21%, primarily because of higher net sales. Reported operating income grew $50 million compared with $19 million last year. The operating margin was almost 10% versus 5% in 2020. We recorded $9 million of other income because of the Brazilian Supreme Court tax ruling that will allow future offset for certain indirect taxes previously paid. We anticipate as the lower courts continue to apply the Supreme Court’s ruling, we will record additional income in future periods. Our adjusted tax rate of 28% was in line with our full year estimate of approximately 29%. RA sales rose 19%. However, the increase would have been larger, if not for a shortage of consoles related to the chip shortage, as Boris described. We continue to expect a strong second half from PowerA as console manufacturers fill their back orders and because of the normal seasonally strong demand for…

[Operator Instructions] Our first question comes from the line of Chris McGinnis with Sidoti & Company.

Hi, good morning. Thanks for taking my questions and nice quarter. Would you mind expanding on the growth in the commercial? How much of that is just that they haven’t been spending through the course of the pandemic? And how do you think that should hold up for the rest of the year? Thanks.

Hi, Chris, thanks for the question. Yes, the growth in commercial channels was pretty strong. You have to keep in mind that last year in Q2, they really shut down purchases. So it’s really a compare story. We do see more offices reopening. They are expecting more offices to reopen in the near future. So they are buying both for demand they have today as well as staging inventory for the demand that’s going to come for the remainder of the year. So the growth throughout all segments of our commercial channels, were very strong. Whether it’s independent or contract stationers, we saw very strong growth throughout. And we think more or less that story will continue for the remainder of the year. Obviously, the compares will be different versus the worst quarter of the pandemic, which was Q2 of last year. But still, from a sequential standpoint, we expect sequential growth for the remainder of the year.

And if I could just add one follow-up, if it’s alright, just on the PowerA, nice growth, can you just talk about from EMEA, how much that was up? And are you starting to gain traction there? I know it’s very early on in the integration. Thanks.

PowerA in EMEA had a good quarter, but they are still pretty small numbers. So that business is still driven very much by North American demand. We still have not implemented greater expansion plans for PowerA in EMEA. That’s something that’s going to come over the next several quarters. There is still significant upside in that business in EMEA. So despite that, we grew 19% in the quarter and 15% – I’m sorry – 53% year-to-date with PowerA globally.

Thanks for taking my question. Good luck Q3.

Thank you. Thanks, Chris.

Your next question comes from the line of Bradley Thomas with KeyBanc Capital Markets.

Hi, good morning, Boris. This is Andrew on for Brad. Congratulations on the strong results here. Now that we’re hopefully through the worst of the pandemic and it appears that you are starting to benefit from populations returning to the office and in-person learning at school, have you noticed any changes in the competitive environment for office products, particularly when you compare this environment to the pre-pandemic environment?

Nothing meaningfully so. I mean, we are still in a competitive industry. We are benefiting from very strong brands that we have and strong distribution that we have. But the competitive environment is very similar. And I’m looking at Neal, anything that you could add versus pre pandemic levels? I don’t think that there is anything…

No change in competitiveness, but probably a change in which products are less popular and more popular as a result. So, some of the paper storage products are less popular. People moved to more electronic storage and products that are used more for teamwork are showing strong signs.

Understood. Thank you. If I may add on one quick follow-up, given the industry-wide supply chain constraints, which you noted in your prepared remarks, are there any areas which you are facing product issues with product availability?

We have generic issues with product availability for everything that we bring in from Asia. And that’s not just us that is a global phenomenon with everybody. It’s a function of logistics constraints, both on just the availability of containers as well as sporadic shutdown through the COVID in Asian countries. So this is something that we’re dealing with and I think managing quite well, but the whole world is dealing with that. It had an impact on some of our product availability in Q2, and we do expect sporadic issues throughout the rest of the year. And as Neal mentioned, all of that is already baked into the guidance that we provided.

Understood. Thank you.

Thanks, Andrew.

Your next question comes from the line of Joe Gomes with NOBLE Capital.

Good morning. Nice quarter.

Thanks, Joe.

So quick question on the cash flow, I mean you really knocked the ball out of the park this quarter. First quarter, you’re raising or putting out some nice numbers for the second half of the year, but you really haven’t raised your cash flow guidance. And I’m just wondering is that just you being conservative or what’s behind that?

Yes, that’s a good question. One of the reverse challenges people don’t always focus on when you get a lot of return to growth is we need a lot more accounts receivable on the balance sheet at the end of the year. And so, particularly around South America, a lot of our business there is very Q4-centric in Brazil and drives all into receivables at the end of the year. So although guidance is increased, we have two negative issues. We have more AR and we’re also seeing a lot more dollars having to go into inventory. And as we’ve always mentioned all year, it’s not changed, PowerA is a use of cash for us for the year, as opposed to a normal source. And their big quarter is Q4.

Right, right. Okay. And one quick follow-up if I may, also on PowerA sequentially, revenues declined. I think in the first quarter, PowerA revenues were north of $60 million; in this quarter they were $50 million. Is that just, as you mentioned before, some of the seasonality in the business and the fact that there has been some outages in terms of the consoles? Or is there anything else there? Thank you.

Yes, that’s right, Joe, a little bit of seasonality, but probably a bigger impact is the fact that the console makers have a difficult – are in a difficult situation, meeting demand due to the semiconductor chip shortages. So their shipments were affected and that affected the sales of the accessories. Our expectation is that there is going to be a partial recovery of that in the remainder of the year. There’ll still be some shortages, but it should be better than Q2, which should drive incremental sales of PowerA as well as just normal seasonality of the business, which improves in Q3 and Q4.

Thank you.

Thanks, Joe.

Your next question comes from the line of William Reuter for Bank of America.

Good morning. In your gross margin reconciliation there doesn’t really seem to be any meaningful headwinds in terms of margin pressure from inputs nor transportation. I guess can you talk a little bit about whether this is the use of third-party manufacturers or whether you’ve contracted your ocean freight some length of time in advance or what’s contributing to the lack of pressure?

So we raised prices at the beginning of the year to offset the ocean freight issues, and so those were largely an offset to each other. They were a small drag of about 30 basis points adverse in the overall net. But in Q3, as we kind of highlighted on our call, we expect, because we’ve seen it already go into our balance sheet in Q2, significant increases of commodity costs. So it’s just the way we have about 3 months worth of inventory. And so all the purchases in Q2 have basically gone to inventory, and they will hit the P&L in Q3. And so we will see a lot more margin pressure in Q3, and that’s part of why we also need to raise prices again in the late summer.

Okay. And then I guess just as my follow-up to that, given that you guys were successful in pushing through sufficient price increases here for the second quarter, will these next round of price increases largely make it so fourth quarter we shouldn’t see much margin pressure at that point?

Obviously it would if we see stability through this quarter. If we see more surges in commodity costs then that will do a different story. But we’re always, unfortunately, lagging what happens in the real world. But we currently think commodities hopefully have stabilized roughly where they are. That’s our function in our forecast.

Make sense. Okay, I will pass it to others. Thank you.

Thanks Will. We are ready to the next question.

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

Hi, good morning. Question on the supply chain and what you’re seeing in terms of pricing pressure, not just for Q3, but how expanding on what you said, how that – is that impact – the impact there competing for space on cargo carriers to bring product over? And do you see that as an obstacle in the second half of the year?

Yes, we do. It continues to be an issue. There continues to be container shortage in Asia. It’s difficult to reserve space on ships. So we continue to have elongated lead times as a result of that, and we don’t see a near-term resolution to that. So we expect that to continue through the second half of the year.

I guess my question on a follow-up is, I mean that’s pretty much what you said in your prepared remarks. But my question is mostly about in terms of capacity and space to get products over, are you bidding higher to make sure your products are arriving in time? Or is it just first come, first served that you’re just – and you’re not quite sure if your product, if you’ll have enough inventory in the second half? Is that an issue at all?

Well, we have long-term contracts with our logistics providers where the price is agreed to. But sometimes we do have to bid or get a spot rate, which is significantly higher in order to get products here in time for a retail set or back-to-school seasonality. So yes, we try to be strategic about it, but sometimes we do have to bid a higher price and incur a higher cost in order to get a product here earlier in expedited fashion.

Thank you.

[Operator Instructions] At this time, there are no further questions. Do you have any closing remarks?

I do. Okay. Thanks, Christy. Thank you for your interest in ACCO Brands. To summarize, as the economy has improved, we saw a very good recovery from the impacts of COVID-19, with strong increases in many of our product lines, particularly on the commercial side. PowerA continues to post significant sales contributions. We’re expecting a strong second half. The business has momentum, and we should continue to see strong economic growth, back-to-school replenishment and the traditional seasonality of Kensington and PowerA. We look to generate a significant amount of free cash flow, and we will use it to reduce our debt. We remain confident about our longer term future as we continue to position the company for higher growth and strong returns for our shareholders. We will update you on our progress next quarter. Thank you, and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. You may now disconnect.