Ladies and gentlemen hello and welcome to the ACCO Brands Q3, 2022 Earnings Conference Call. My name is [Maxin] and I will be coordinating today's call. [Operator Instructions] I will now hand over to Chris McGinnis, Senior Director of Investor Relations to begin. Chris please go ahead when you are ready.

Good morning, and welcome to ACCO Brands third quarter 2022 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today are Boris Elisman, Chairman and Chief Executive Officer at ACCO Brands Corporation; and Deb O'Connor, 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 non-cash, goodwill impairment charge and change in fair value of the contingent consideration related to the PowerA earn-out and other non-recurring items and reflect in 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 the 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. Forward-looking statements made during the call are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our 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. In mid October, we issued a press release updating our third quarter and full year outlook, highlighting the fact that the third quarter proved to be more challenging, given the economic environment, especially in Europe, and more cautious inventory replenishment by retailers. Last night, we issued our third quarter results, reflecting sales at the midpoint and adjusted EPS at the high end of our guidance with our full year outlook unchanged. Let me start by saying the solid fundamentals of our business are intact. And we believe we have the right strategy and team to weather the economic challenges and deliver sustainable organic revenue growth once the economy improves. The transformative actions we've taken over the past few years to be more consumer centric and geographically diverse, has helped us maintain a global market share in 2022. There were many positives in the quarter. We had a solid back to school style throw in North America. Our five star brands grew sales and market share in the back to school season and outperform the overall market in dollars and units. Sales of our commercial products have benefited from return to office trend, especially in North America, where office occupancy rates continue to improve and have recently reached a post pandemic high. Our Kensington brands and computer accessories category grew double digits globally in the third quarter and the year-to-date. Our international segment grew comparable sales over 30% in almost double adjusted operating income in the third quarter as in person education returned in Brazil and Mexico. These successes were more than offset by a more cautious stance than anticipated from retailers at inventory replenishment and reduced sales of gaming accessories in North America as well as reduced demand from a challenging environment…

Thank you, Boris. And good morning, everyone. Our third quarter 2022 reported sales decreased almost 8% as foreign currency was a 6% headwind in the quarter. Comparable sales were down 2%. The decline was due to lower volumes in our EMEA and North America segments offsetting strong growth in our international segments. Adjusted operating income was $43 million compared with $57 million last year. Adjusted net income was $24 million compared to $32 million in 2021 and adjusted EPS was $0.25 versus $0.33 in 2021. In the third quarter, we took a non-cash goodwill impairment charge of $99 million. We had a significant amount of goodwill on our balance sheet from previous acquisitions, such as need, GDC and [indiscernible]. This charge represents less than 15% of the overall goodwill balance. Given our stock price, the company's market capitalization is low, which triggered a review of our goodwill. The charges reflected in our North America segment, which carries a significant portion of our total goodwill. Inflation was more of a headwind than we had previously anticipated, which is why our gross margin and operating income declined were more significant than our sales decline. Given a lower sales overall, we are experiencing fixed cost deleveraging in our facilities, while inflationary costs are beginning to come down, their landing effects in our P&L will continue to impact their gross profit to the end of the year, but should improve as you progress through 2023. Third quarter adjusted SG&A expenses were $95 million, compared with $101 million in 2021. Primarily as a result of cost savings and lower incentive compensation accruals and the positive benefit of FX partially offset by continued investment in our go to market program. Adjusted SG&A expense as a percent of sales was 19.5% above last year's 19.1% due to…

Thank you. [Operator Instructions] Our first question comes from Joe Gomes from Noble Capital. Please go ahead, Joe. Your line is now open.

Good morning. Thanks for taking the questions.

Good morning, Joe.

So just wanted to get maybe a little deeper dive into the outperformance of the international segment. Is this all just related to the rebound in Mexico and Brazil? Or how are these the other parts of the international segment performing?

It's being led by very strong performance in Brazil and Mexico as both of those countries have rebounded from a couple of years of COVID. Schools are open. Offices are open. And we're seeing very strong business for back to school in Mexico, and in preparation for back to school and just office business in Brazil. If we look at outside of those two countries, Chile has done well. It has grown mid to high single digits in the quarter. And then Australia is recovering. They had a very tough first half of the year with a lot of COVID cases in Australia, but still a small growth in Q3. In Asia is still difficult. It's a small part of our business. But we are seeing some sales decline in Asia just driven by weaknesses due to zero COVID policies in many of those countries and just the week macro in Japan.

And the next segment done very well in passing price to offset the inflation mixing as well.

Okay. Thanks for that. And on inventories. You guys talked a little bit about how you've built it in anticipation. They've come they came down somewhat in the third quarter. How much more do you think you've got to come down there to be where you'd like to be in terms of the inventory levels?

We still have ways to go. We are pleased with the progress that we've made through the year. We build a lot of inventory last year in the second half pregnant by supply chain difficulties, and that we started picking it down earlier this year. We wish we could have done more by doing slower sales, low volumes in Q3 was still a little bit high. So my anticipation as we'll still make significant progress in the fourth quarter and really come end of this year early next year, we'll be in the normal working capital cycle of the supply chain issues of pretty much behind that so there's not a reason to hold more inventory than we need to come end of this year. And once we're normalized we'll be able to go with a normal working capital cycle in 2023.

Yes, that's right, you just Joe don't forget high inflation 10%, 11% is also on those inventory balances if you just think about the level.

Right, right. Okay. And one more if I may. A lot of companies have talked about the difficulty in the hiring and retention environment. Just wondering how you guys are finding your ability to hire people and/or retain people that you're you want to retain?

We haven't had any issues. We saw a little bit of a pickup and attrition last year '21 in the summer, this year has been running pretty flat. And it's still a very competitive market. But we're not having difficulties even with attrition or with hiring people.

Great. I'll get back into queue. Thank you.

Thank you, Joe.

Thank you. Our next question comes from Greg Burns from Sidoti. Please go ahead, your line is now open.

Good morning. With the EBITDA covenant flexibility with the new amendment, going to five times. What do you foresee like where do you foresee leverage kind of peaking here given the current outlook? Do you feel like you're going to rise to that level and work down from there? Or how should we think about leverage going forward?

Yes. So, Greg, as I talked about fourth quarter this year we're going to be in that 38, 39 and the new ratio, that kind of 4.5. So that kind of 50, 60 basis point differential would be as we work out, kind of a lowest point or the highest point, lowest point, differential. And we really got it to get more headroom for next year as we go into this uncertainty, but not worse than kind of a 50 basis point spread. If that's what you're looking to. Yes.

So we don't we don't expect to get to five we don't expect to now – [indiscernible] flexibility and headroom given the uncertainty and the environment. Typically, our leverage peaks in Q2 as we build inventory for back to school. So as Deb said, we expect to be at least 50, 60 points below that 5x.

And, Greg, the one nice thing too is the banks were really supportive on that seasonality and so going forward, we'll have that higher ratio in the first and second quarters for that seasonality that Boris spoke to.

Okay, great. And then in the North America, with the retail side of business. Where do inventories, channel inventories currently standing? Can you just talk about inventories, channel inventories currently standing. Can you just talk about how that impacts, you gave a little color on how it's going to impact the first half of next year. But you see a stronger selling in the early part of the year next year to replenish those inventories? How does that historically play out?

Yes, the inventories right now are pretty low in the channel. It doesn't mean that they will be able to go lower. It all depends on how sell through is and retailers will get a certain number of weeks on hand, depending on what the sell through is. But we expect retailers to be conservative with inventory, all the way through the first half of next year. So this year, as Deb mentioned in the prepared remarks, they bought inventory early because of the supply chain issues to prepare for back to school. We think that's not going to happen next year. We think that given both the economic challenges, and easing of supply chain, they will be more chasing inventory. They will bring in what's only what's necessary, and then try to chase sales with additional purchases in Q3. So we think that and that's what happened in 2021. So we think it's what's likely is retailers will be conservative with inventory in the first half. And then as they sell through in Q3 they will bring more inventory in.

Okay. And then on the commercial side of North America, how far below pre-pandemic levels, is that business still? And do you think you'd get back to pre-pandemic levels there?

Yes, we're about. So if you look at during the pandemic, we lost, let's call it 15% or so on the commercial side. We made up about two thirds of that. So we're down about 5%. And yes, we are clawing our way back and people are going back to offices, and that's driving POS. So they think that we will be able to make it up in 2023.

Okay, and then just lastly, on powerA. Do you think that businesses fully kind of reset from the pandemic bubble? Or is there additional kind of normalization that needs to happen in North America? And what's the status on your strategy to kind of expand that business globally? The other footprint pulling in place to do that? Or is there more investments that need to be made?

Sure. So globally, it's going very well. The business has been growing globally in 2022. And that's both in EMEA and internationally. And we will continue to invest and expand that footprint in the sales growth. But we feel very, very comfortable in our day to do that. In North America, it's still normalizing and my expectation is that we'll continue to do that through Q4 just driven by partially by steel supply chain issues. There is still semiconductor chip shortages that affect people's ability to buy both Xbox series X as well as the PlayStation PS-5s and then also the lack of chips so some of the wires accessories. So that's impacting availability as well normalization of demand people were staying home and playing games. Now they're traveling and going out and playing less games. And I think that's going to be still the case in Q4. But we do expect that to recover and rebound in 2023 and we expect growth in the powerA business in 2023.

Great. Just to kind of drilling on that growth outlook, is that mostly going to be coming from the rest of the world or North America? Do you think North America can grow to or is that mostly going to be coming from Europe and Asia?

We do expect North America to grow. But growth rates will be much higher in Europe and internationally than it would be North America, but we do expect growth in North America.

Okay, all right. Thank you.

Thanks, Greg.

Thank you. Our next question comes from Kevin Steinke from Barrington Research. Please go ahead. Your line is now open.

Good morning.

Good morning.

Good morning Boris. Just wanted to start off by asking about gross margin, and you noted that you expect some improvement in 2023 in light of the price increases, you're implementing on January 1, and maybe some cost reductions. But I would assume we should think of gross margin progression. I don't know, fairly gradual and still maybe meaningfully below that 33% target, just trying to get a sense of how much you think can be accomplished. And I know inflation is kind of still the wild curve. But any thoughts on gross margin progression?

Yes. I'm now just started out in a lead board add on, but I think you're exactly right. It's going to be a gradual improvement and expansion and growth margin. And we are still fighting, and we still haven't gotten to the price, the cost differential, as we sit here in the third quarter. So we've got 10%, 11%, inflation, 8%, 9% price. So we're still lagging, and we've got to do the catch up on that. And that's going to take that January price increase to do it. So you're right, it's going to be gradual, it's going to be throughout the year. And I think the 33% is, is a little bit away.

Yes. I agree that we're going to be making progress. I'm expecting progress in Q4 and certainly throughout 2023. But I don't think we're going to get fully to that 33% number until after 2023. We're still going to be catching up in 2023.

Right. Okay. Yes. Makes sense. You mentioned in your prepared comments modifying some contracts to allow for more price increases, maybe sounded like that was fairly isolated to a few customers that are in this. Trying to get a sense as to how broad of an initiative that is and how meaningful that can be in terms of your ability to catch up to inflation maybe a little more quickly.

That's a specific to EMEA. We really couldn't do price increases more than twice a year. And normal environment that's okay. But when you have inflation 14% a year, that's not frequent enough. So our teams are working with customers to modify the contracts to allow us to do more frequent price increases so we can keep up with inflation. And, by the way, it works both ways. It's both increases and decreases. I'm sure nobody will complain about more frequent price decreases, but nevertheless, the interaction allows us to develop.

Okay, great. Well, thank you for taking the questions.

Thanks Kevin.

Thank you. [Operator Instructions] Our next question comes from Hamid Khorsand from BWS Financial.please go ahead. Your line is now open.

Hi, good morning. So the first question was, is the lower stocking levels resulting in shorter order intervals from retailers?

Meaning more frequent and smaller orders Hamed is that what you mean?

Yes.

0 Yes, it is resulting that. That is correct.

Are you able to be efficient in that kind of operating structure?

Well we do have minimum order quantity. So we charge above a certain amount. The outbound freight is included in the price and it's free below certain amount. They have to pay for outbound freight. So there is a built in financial incentive to keep orders at a certain level and what happens in reality is we can go to wholesalers for really small orders because we won't, it's not economical for them to get it from us. So even though there is shifting to more frequent lower dollar orders, there is economic incentive built in not to make it inefficient for us.

Okay, and how's the product mix changed greatly four years to what retailers won’t to stock, and how does that relate to the inventory you have in your warehouses?

It really hasn't changed and their retail is typically stock A and B items and seeing the items they offer on an as needed basis. And that continued to [indiscernible] if I look at over the last, 5, 10 years, certainly the mix has changed [indiscernible] computer accessories and learning products is away from [indiscernible] and organization. But if I look at within this year, kind of individual skews, it's still and these skews being soft and seeing these skews being brought in just in time. What's really driving this break on replenishment is just the economic outlook and retailers becoming very, very conservative with how much inventory they want to stock given that they are forecasting a economic recession.

Okay, great. Thank you.

Thanks Hamed.

Thank you. This concludes our Q&A session for today. So I'll hand the call back to Boris Elisman for closing remarks.

Thanks, Maxine, and thank you everybody for your interest in ACCO brands. Previously, we have managed well in difficult environments and are confidence in our ability to navigate current economic challenges. We're also confident we have the right strategy and believe we're well-positioned to continue to deliver organic sales growth, compelling market performance and improved financial results as the global economy is recovering. We'll look forward to talking to you in a couple of months to report on our fourth quarter results. Thank you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.