Hello everyone, and welcome to the ACCO Brands Second Quarter 2023 Earnings Conference Call. My name is Emily and I will be coordinating your call today. [Operator Instructions]. I will now turn the call over to our host, Chris McGinnis, Senior Director of Investor Relations at ACCO Brands Corporation. Please go ahead.

Good morning, and welcome to the ACCO Brands' second quarter 2023 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today are Boris Elisman, Chairman and Chief Executive Officer of ACCO Brands Corporation, who'll provide an overview of our second quarter results and an update on our 2023 priorities; Tom Tedford, President and Chief Operating Officer, who'll discuss the back-to-school season, new product innovation, and provide an update on cost savings initiatives and our daily 2022 ESG report; follow on Deb O'Connor, Executive Vice President and Chief Financial Officer, who'll provide greater detail on our second quarter results and the outlook for the third quarter and full-year. We'll then open up the line for questions. 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, a non-cash goodwill impairment charge, the change in fair value of the contingent consideration related to the PowerA earn-out 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 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 actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain 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'll turn the call over to Boris Elisman.

Thank you, Chris, and good morning, everyone. Thank you for joining us. Before we discuss the quarter, I'd like to begin with the announcement we made last night regarding Tom Tedford becoming ACCO Brands next Chief Executive Officer on October 1st. He will also be joining the Board of Directors at that time. I could not be more pleased to announce Tom as my successor. Having had the pleasure of working with Tom over the past 13 years, I utmost confidence in his ability to lead this company. To ensure a seamless transition, I will continue to serve ACCO Brands and all its stakeholders as executive chairman of the board with my planned retirement in the first half of 2024. This announced transition follows an quarterly multi-year succession plan that the board and I put in place. And it's exciting to finally share the news with all of you. Tom is exceptionally well qualified and prepared to lead ACCO Brands as it enter a new phase and strategic transformation centered on driving sustainable organic revenue growth. Tom has demonstrated success in every position held during his career at ACCO Brands, most recently, serving as President and Chief Operating Officer as we played an integral part in executing on our transformational strategies and growth initiatives. I'm confident that under Tom's leadership, ACCO Brands will continue to drive growth fueled by a strong, diverse brand. Congratulations, Tom. Now let me discuss our second quarter results. We are pleased with our results for the second quarter with sales above the midpoint of our outlook and adjusted EPS significantly above our outlook. These results reflect the strength of our brands and solid execution by our team, as well as the actions we have taken to transform our business, expanding our product categories, what our…

Thank you, Boris, and good morning, everyone. I am honored and excited to lead this outstanding organization and our talented and dedicated team of professionals. Following a great leader like Boris is a privilege and I thank Boris and our Board of Directors for their support in preparing me for this role. I would like to thank Boris for his mentorship and on behalf of all of our employees, recognize his outstanding leadership of ACCO Brands as our CEO. Boris has been a transformational leader, keeping our people brand and customers at the forefront while expanding ACCO Brands geographically and product offering. As CEO, I'm excited about the opportunity to work with our leadership team, the Board of Directors, and all of the talented employees around the world at ACCO Brands as we enhance share owner value by delivering against our key initiatives. I believe that our commitment to superior service to our valued customers, our innovative product offerings supported by iconic category leading brands, and our loyal consumers, provide great opportunity for sustainable organic growth. We also have significant opportunities to simplify our operations and our cost structure as we progress along our multi-year asset rationalization project. These efforts will be at the forefront of our leadership team's focus to drive value for our investors. Boris, congratulations on your upcoming retirement and we look forward to your continued support as executive chairman. Now let me transition to a few comments about the 2023 back to school season. In North America, back to school had a good start, as the timing of back-to-school shipments was earlier than anticipated. Our expectation is these sales are a stiff from Q3 and not incremental to our North America back to school season. While we believe our channel partners will rely more on replenishment…

Thank you, Tom, and good morning, everyone. I just want to take a moment on behalf of the executive leadership team to thank forth and to congratulate Tom on being our next CEO. When we last spoke in May, we highlighted the slow demand environment due to the current macroeconomic backdrop. Despite this environment continuing in the second quarter, we were able to deliver our expected level of sales. We also continue to make progress in recovering our loss margin from the extreme inflation that challenged the company's margin profile over the last few years. Our margin profile significantly improved in the second quarter, which allowed us to deliver adjusted EPS above our outlook. In the second quarter of 2023, reported sales decreased 5% versus the prior year. Comparable sales excluding foreign exchange, were also down 5% versus a strong prior year when comparable sales grew 5%. The sales decline was due to lower volumes across all three of our operating segments, more than offsetting global price increases. Growth profit for the second quarter was $164 million and increase of 10% despite lower sales as gross margin improved 450 basis points from the cumulative effect of our pricing and cost reduction act. Adjusted SG&A expense of $98 million was up from $92 million in 2022. Adjusted SG&A as a percent of sales increased 230 basis points to 19.9%. As strong cost controls were more than offset by increases in incentive compensation expense and de-leveraging from the lower level of sales. Adjusted operating income was $66 million, up 14% compared with the $58 million last year. Adjusted EPS was $0.38 versus $0.37 in 2022, as our growth and adjusted operating income was largely offset by increases in interest and non-operating pension expenses. Now let's turn to our segment results. North America…

[Operator Instructions] Our first question today comes from the line of Greg Burns with Sidoti.

I just wanted to get maybe a little bit more color on the state of channel inventories where they stand, why do you think, sounds like you're a little bit more cautious in terms of the outlook there, but I just wanted to get a sense of channel inventories, your view for maybe the potential for follow through orders. Is there potential upside in your guidance if maybe sell through is a little bit stronger than expected?

Okay, Greg. Hi, this is Tom. Let me take a opportunity to respond to that. So, channel inventories are down modestly versus prior year across most of our product categories. As it relates to back to school specifically, we're really early in the season, Greg, so it's hard for us to give great clarity as to how the season will finish. As I said in my comments, we're uniquely positioned to support demand if the customers demand forecast are greater than they’re currently forecasting. Our customers are aware of that and we're always in a great position to chase late season demand. Right now, it's just too early for BTS to comment on whether that demand will ultimately materialize or not. So we wait patiently and we're prepared in response, prepared to respond if demand's better than forecasted.

And how far from the prior peak technology sales?

Technology sales are down in the order of 20% or so from the prior peak. We expected things to recover throughout the year. We haven't seen that yet in the first half, so we've reduced our expectations for the full year. Now, we believe that the sales for technology accessories will be down overall for the year, even though we do expect some sequential improvement due to refresh cycles and upgrade cycles. But as I mentioned, they're just down too much to recover the full decline in the first year.

Specifically for Kensington --

Specifically for Kensington, yes.

So when you view the outlook for that business, when you look at kind of the new product launches you're bringing to market, typical refresh cycles. Do you feel like that business has kind of troughed or reach a low and you can build from here or is there a potential more downside if the macro worsens?

No, absolutely. We think the worst is behind us. We think that things will improve throughout the year. What's been happening on the IT side specifically is there's been a lot of forward buying in the last couple of years. So people have bought a lot of PCs and accessories. So now, we're all digesting what we bought. Now that's going to get annualized really should analyze in the second half of this year and certainly in 2024. So we do expect an improvement in the remainder of the year.

And you mentioned a slower global rollout for PowerA, what's driving that? Can you just maybe give us an update on your plans there?

Those are really, what I call kind of transitional issues. When we notified our distribution partners of our intention to start selling direct, they basically stopped selling. So we have a little bit of a gap between them stopping their activities and our global teams, own teams picking them up. So we're not as far along as we expected to be, but we're certainly making up ground. I expect us to catch up real soon. So that's why we mentioned the international expansion a little bit slower than we previously anticipated.

And has that -- did that dynamic, I know you said PowerA revenues were up, but has that impacted the top-line for PowerA that maybe you get an added --

It impacted the international top-line. So growth would've been, even higher. Growth in Q2 was driven by North America for PowerA, but certainly as the international kicks in the second half of the year, we expect them to be a greater contributor to growth.

Our next question comes from Joe Gomes with Noble Capital Markets.

This is Joshua Zoepfel filling it from Joe Gomes. So I just had a quick question on the SKU reduction. I just want to kind of get a progress on that, how much have you guys reduced your SKUs and how much more are you guys willing to go on those?

Yes, so we speak about this fairly frequently in our public statements. It's an ongoing process for us. We've accelerated that over the last year as we've started to face the realities of the uncertain economic environment and changes in consumer preferences as the impacts of the prolonged work from home environment really are here to stay. I would say we are going to continue the work that we're doing. We feel like we're in a really good spot in terms of our SKU reduction process. We're not in a position to talk about the specific numbers, but we feel like we're making progress against our internal objectives. With the primary focus being in two segments, North America and EMEA.

And so forgive me if I missed this, but I saw that SG&A expenses just increased both really sequentially and year-over-year. Is that really all like incentive compensation or was there more, or was it pushing that?

No, that's right. It's pretty much the incentive compensation. Last year, we were relieving some of the incentive comp in the back half and second quarter. So you'll continue to see that into the back half.

And last thing from me, I guess that, so I saw that, you said that, you guys are obviously a little bit into the back-to-school years, but what has been the impressions of the season so far now? Obviously, it's still early, but is there anything that you guys have noticed so far in the season?

Yes, I think the first thing that I would say is we've executed very well early, right? The first step in back to school, a successful back to school is ensuring our channel partners have inventory at the right time to our supply chain teams and our sales teams have done a great job of preparing, our retail partners to have a successful back to school season. I will tell you that we have seen a bit of a mixed shift on shelf, so we're seeing a little more offerings across the lower price point spectrums. We'll see how that translates throughout the season. As I mentioned in my prepared remarks and to the first question. We're really early, so it's dangerous to draw conclusions at this point in the season, but we watch it closely every single week.

The next question comes from Kevin Steinke with Barrington Research.

Just wondering if you could discuss the comparable sales percentage change outlook by Q3 geographic regions as you think about it for the full year?

Sure, Kevin. So, for the full year, from a comparable sales standpoint, for total company, we expect sales to be down 2.5% to 4.5% at a comparable level. And then in international we expect growth, low-double-digit growth in international and for both North America and EMEA, we expect mid-single-digit decline.

Could you talk about the factors that enables you to increase your free cash flow outlook a bit for full year 2023 as well as be able to favorably revise your year-end leverage ratio target?

Yes. We have seen, as you saw in the second quarter, what we reported strong working capital management, which has allowed us to significantly improve over the prior year. I talked about it last time where we ended '21 with high inventory that got paid for in '22, and then in '22 we ended up with lower inventory that we're not needing to pay for in '23. So we've seen some significant improvement in cash flows that should not go away. We've also got about $17 million of incentive comp that didn't pay out this year that paid out last year, and all of those factors carry through to the full year. The improvement, I would say in the cash flow is really from our continued expectation of that working capital management. We've done a nice job on receivables and on payables, and so we're anticipating at least $110 million of free cash flow at this point. And our leverage ratio reflects that as well as, you know, slightly higher EBITDA as we look to that.

And also gross margin is trending better than your original expectations? I believe you had talked about getting to 2021 levels and 2023, which of it would've been 30.5% roughly, and now you're talking about 31% to 32% for the full-year 2023. So can you talk about maybe what's trended more favorably there than the original expectations on the gross margin front?

It's all of the cumulative impact from the pricing efforts that we've done over the last two years and all of the cost reduction and restructuring efforts that would've put in place. We're still seeing some inflation in goods, both in the quarter in Q2 and a year-to-date. And we expect some inflation to continue for the remainder of the year. But the impact of the offsetting impact of all of the cost reduction efforts is driving better gross margins. We now expect them to be in the 31 to 32 range for the year. So, very nice job in just executing and recovering. It's really all recovering what we've lost over the last two years.

And then lastly, you feel like you're fully caught up on inflation, and have you seen any moderation there and what's the outlook for price increases?

We think we have caught up with in inflation in 2023. We don't expect certainly not in U.S. and Europe, additional price increases in 2023. We may do some tweaking in our other regions that's just driven by currency exchange rates, but not in our major geographies. Inflation is down, but it's there and today it's really being driven by labor inflation, and that's permeating into pretty much every aspect of the P&L. And we expect labor inflation to continue into next year. So I do anticipate price increases next year, because we do have to offset that inflation, but nothing in 2023.

The next question comes from Hamed Khorsand with BWS Financial.

So first off, just about your comments about volume decline. Where does that go? Has the consumer moved away from buying your products or has completely moved away from the categories?

There's a couple of things to that, Hamed. A big part of volume declines is driven by our computer accessories business. We mentioned that's down substantially. There was no price increases in computer accessories. So all of the decline in revenues decline in volume, and that's just shifting. We grew the computer accessory business 38% from 2019 through 2022. So some of that was a shift in purchases from '23 into '22 into '21. And that's going away all of that will come back, we feel very, very confident about that. And the other part of the volume shift is lower usage due to less people working in offices. A significant percentage of our portfolio is still driven by office products usage, it's especially so in our EMEA segment. And given that we are at, call it roughly 50% office capacity in one time, there is less usage of our types of products. And that's something that we need to adjust to. And this is what Tom mentioned in his prepared remarks in terms of optimization, footprint optimization, asset utilization optimization initiatives that we have to make sure that we are adjusting both our footprint to that reality as well as our product innovation program to really focus on more hybrid work and shifting more to consumer and hybrid as opposed to in office types of environments.

Okay. And then as far as the implied Q4 guidance goes, it's suggesting you're going to be up sequentially from Q3 quite a bit. It's never been up that much. I think you're implying something around $60 million in sales. It's usually been 20 million or 30 million. What's the clarity that you have and your expectation that Q4 could be as solid as you're suggesting your full year guidance?

Well, obviously we give it as some thought that's our best estimate of what it would be, but it is six months away or five months away. So there's always uncertainty in some of that guidance. I would say the compares that you alluded to is more of Q3, being a little bit lower than typical, rather than Q4, being higher than typical. We are more cautious on Q3. And it is even indicated by our Q3 revenue guidance, comparable guidance of minus 4 to minus 7 that Deb alluded to. So from a sequential standpoint, we don't look at Q4 as being that abnormal and then versus prior year, the comparison, because there's also a strong improvement versus prior year. That's more of a last year issue where we had very big inventory channel inventory reduction last year on the revenue side. And we had very high inflation costs in our COGS last year, which are all behind us. So, that's the reason for the Q4 outlook. And Deb, I don't know if you have any additional.

No, actually I can say that last part was exactly right.

Our next question comes from Hale Holden with Barclays.

I had two questions. The first one is on the software economic outlook or macro-outlook that you have in the second half. I understand the Kensington piece, but was curious in North America specifically, if you could sort of talk about if there were greater weakness on the business side or the retail side or away from Kensington, if there were other products or categories that were driving it, or if it was more equal weighted?

It's more on the both, consumer business side, less so on technology accessories. Some of it is the things that all of you read about in terms of fed increasing rates and things being a little bit slower. And some of it is the commentary we're hearing it from our channel partners, both on the retail and business side, that given this uncertainty, they plan to be a little bit more conservative in their inventory carrying and purchasing policies. So with all of that feedback, we thought it was prudent to be more conservative in our sales guidance.

And then historically you guys have done a pretty good job versus some of the private label offerings, but in this kind of environment it wouldn't be abnormal if you private label take more share. I just wanted to confirm that that wasn't the case here in the outlook.

No, I mean, you're absolutely right. Historically, our brands have done really well in a difficult environment. Last year Q3 was already, we were already talking recession, talking up recession and channel was reducing inventory and yet Five Star gained, a couple of points of share during the back-to-school season. So we have performed well, but as Tom said, retailers are featuring more private label and giving them more of a presence on the shelf. So we'll have to just see how that all plays out. We do expect our brands to do well, but there probably will be some trade down to a lower price point products either from us or from private label.

At this time, we have no further questions, so I'll turn the call back to the management team for any closing remarks.

Thank you, Emily. And thank you everybody for your interest in ACCO Brands. We're encouraged about our first half results and about the remainder of 2023 as we stay focused on executing against our priorities, keeping margin improvement at the forefront. We've managed well in difficult environments and our confident in our ability to navigate the current economic challenges. We have the right strategy and we believe we're well positioned to continue to deliver organic sales growth, compelling market performance, and improve financial results as global economies recover. We look forward to talking to you in a couple of months to report on our third quarter. Thank you.

Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.