Hello everyone, and welcome to the ACCO Brands Third Quarter 2023 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I'll now turn the call over to our host, Chris McGinnis. Please go ahead.

Good morning, and welcome to the ACCO Brands Third Quarter 2023 Conference Call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Tedford, President and Chief Executive Officer of ACCO Brands Corporation. Tom was named CEO on October 1st. Tom will provide an overview of our third quarter results and 2023 priorities. Also speaking today is Deborah O'Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our third quarter results and provide an update to the full year outlook. We will then open the lines 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 noncash goodwill impairment charge, the change in fair value of the contingent consideration related to the Power A 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, and our 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. Now I will turn the call over to Tom Tedford.

Thank you, Chris, and good morning, everyone. Thank you for joining us. Before I discuss our third quarter results, I want to thank Boris for his mentorship throughout the years. We have partnered closely to ensure a smooth leadership transition, and we will continue to work together until he officially retires in early 2024. I would also like to thank our dedicated team at ACCO Brands for their good work in the quarter. We made significant progress against our key priorities while facing a challenging demand environment. Since I became CEO on October 1st, we have been reviewing our strategies to ensure we have the right focus on driving long-term value for our stakeholders as we navigate the current global demand environment. We have a strong team, category-leading brands and a passion in our business to win. Now let's transition to the third quarter commentary. The third quarter was highlighted by the improvement in our gross margin, strong free cash flow generation, and our solid management of expenses which led to growth in operating income and adjusted EPS at the high end of outlook. At the start of 2023, we laid out four key priorities, which were the restoration of our gross margin, profitable management of our top line, continued investments in our brands and new products, and tight management of expenses and inventory. Our top priority entering 2023 was recovering lost margin from the high rate of inflation experienced in 2022. Year-to-date, we have delivered 380 basis points of gross margin improvement, driven by the combination of our cost savings actions and the cumulative effect of price increases. With the improvement in gross margin, we are back to our 2019 gross margin rate. Additionally, we have focused on more profitable revenue streams, while remaining committed to supporting our broad…

Thank you, Tom, and good morning everyone. When we last spoke in August, we highlighted a slow demand environment due to the current macro-economic backdrop. While we were expecting demand trends to improve, that did not happen as the global economies continue to challenge demand as both consumers and businesses curbed discretionary spending in response to the higher cost of living and higher interest rate environment. In addition, as the US dollar strengthened during the period, we've realized only a 2% benefit from FX versus our outlook of 4%. The combination of these factors led to our sales shortfall versus our outlook in the third quarter. Despite this, we made great progress in recovering our lost margin from the extreme inflation that challenged the company's margin profile in 2022. Our margin profile significantly improved in the third quarter, and we managed costs well, which allowed us to deliver adjusted EPS at the high end of our outlook. In the third quarter of 2023, reported sales decreased 8% versus the prior year. Comparable sales, excluding foreign exchange, were down 10% versus the prior year. The sales decline was due to lower volumes across all three of our operating segments, more than offsetting global price increases and volume growth in Latin America. Kensington, our computer accessories category saw significant decline following the industry-wide trends that Tom discussed. Gross profit for the third quarter was $145 million, an increase of 5% despite lower sales as gross margins improved 400 basis points from the cumulative effect of our pricing and cost reduction actions. Adjusted SG&A expense of $99 million was up from $95 million in 2022. Adjusted SG&A as a percent of sales increased to 22.1% as strong cost controls were more than offset by increases in incentive compensation expense and the deleveraging from…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Greg Burns with Sidoti & Company. Greg, please go ahead, your line is open.

Good morning. When you think about managing your expenses in this environment and then balancing that with kind of the new focus on new product development, how do you kind of reconcile those two? Are you willing to sacrifice some margin in the near term to achieve some of your new product growth goals?

Yes, Greg, good morning. This is Tom. Thank you for the question. We've worked very hard to really recover our gross margin rates from the unprecedented inflation that we faced in 2022. The plan is not to give back gross margin rates that we've earned back over this period of time from our cost actions and price increases. As we think about innovation, it's a clear focus of our company. And we think that our innovative products, the new products that we're introducing, need to be accretive to our current margin profile. So it is unlikely that any new innovation would be dilutive to margins on a move-forward basis.

Okay. Thank you. And in terms of the softness in gaming, I guess the expectation was that maybe supply chain issues would get better and those kind of a strong slate of games coming out that might stimulate demand there. It doesn't look like that happened, but can you just give us maybe a little bit more color on what you're seeing in the gaming market?

Yes. It is a bit of a dynamic environment that we're competing in the category. Let me first talk about what our near-term focus has been, which is really the international expansion of the category. We've made great progress, particularly in our International segment, setting the foundation for what I believe is a strong future growth in International. So really pleased with the work that we've done in preparing ourselves to expand the category globally. But the category is under some pressure. And there's a number of reasons we believe the pressure continues to persist. At the beginning of the year, we had anticipated that it would start to see some improving trends. And frankly, those trends have not improved, they've really maintained their earlier performance throughout the back half of the year. And that largely is due to a number of factors. So first party continues to discount as they work through their inventory. Much like all of us, they struggled with chip availability and worked very hard to get chips and build inventory, and now they're working through that excess of inventory as the demand environment has slowed. So we're seeing some first-party discounting that has continued into the third quarter that we did not anticipate. Next, in EMEA, in particular, we suffered through a number of store closures, right? The number of retail outlets that have represented our product lines is down significantly. And certainly, that wasn't anticipated at the beginning of the year and is impacting sales. And then we just continue to see a very cautious spending by the consumer and very cautious replenishment by our retailers. We've seen and experienced with our early orders that the holiday season is weaker than we had anticipated at the beginning of the year, and all of those factors combined have really proven to be headwinds that are too difficult to overcome this year in the gaming accessories market. As I said in my prepared remarks, we do believe that long term, it is a fantastic platform. There's 3 billion plus gamers worldwide. It's a category that's growing. It has more entrants into the category. So long term, we're very bullish on the opportunities, and we'll just have to continue to navigate the challenges that we face in the near term.

Okay. Thank you.

Thank you.

The next question comes from Kevin Steinke with Barrington Research. Please go ahead, you line is open.

Good morning. I just wanted to dig a little bit more into the back-to-school season, which you noted was softer than expected. You mentioned that the lower inventory replenishment by customers. Just what did you see for consumers? Was it just lower volumes purchased, trade down to lower-priced products or, I guess, the combination of all the above?

Yes. First, Kevin, good morning, and thank you for the question. Yes, so back-to-school was a bit weaker than we had anticipated when we spoke last. With that said, I'm very pleased with our performance. We predominantly participate in student note taking and we took share during the season with our collection of brands. And we grew our POS, right? Our through the register sales grew modestly in a season that was down. So our performance was really strong, and you alluded to it, right? The season overall was lower than expected, and that caused retailers to be cautious as they thought about their ending inventory positions in the categories that we compete in, which did not materialize with replenishment orders that we had hoped for, right? The good thing is that most of our retail partners came out of the season very clean, right? They didn't have to do deep discounting, and we are well positioned as we think about 2024 BTS because of our brand performance in this season. So again, overall, pleased with performance. Market was down; however, we grew modestly and took share, but we did not see replenishment orders as we anticipated as retailers just became more cautious through the quarter with their purchases and replenishment.

Okay. Great. That's good color. Thanks for taking the question. I'll turn it over.

Thank you, Kevin.

Our next question comes from Joe Gomes with NOBLE Capital. Please go ahead. Joe, your line is open.

Good morning and thanks for taking my question.

Good morning, Joe.

I wanted to just circle back here with the weakness on the top line. You guys, on the second quarter call that was five weeks into the quarter, when you held that call, a lot of the things that you have mentioned, the retailers and inventory, the economic weakness, strength of the dollar, all of that was already prevalent when you made that forecast in the third quarter being flat to down 3% and it actually came down 7.7%. And understand the foreign exchange, but I'm guessing the kind of question is, what happened that you were not anticipating in mid-August or early August, I guess I should say, that would have resulted in the top line being as weak as it was in the quarter?

Yes. No, good question, Joe. Thanks. I think the third quarter sales performance also went in form how we look at the fourth quarter. And we thought there would be some lessening of the environment and that now there's really greater uncertainty and kind of recession points. The consumer is definitely reducing their discretionary purchases more than we would have anticipated in the fourth quarter. And I think the weaker demand that Tom has talked about in our tech services really hit us harder in the fourth quarter than we would have imagined. The PC trends that we talked about in the third quarter continued into the fourth quarter, and our Kensington business suffered from that, more than we would have anticipated. I think office also was down a little bit lower than what we had expected given the office stabilization that we had thought we'd have more return to office in the fourth quarter than what happened. And then lastly, I would just say the retailers really showed their conservatism in the third quarter that we believe will carry into the fourth and so far has, and that also was an impact as we looked out. We are hearing some messaging too from our retail partners of a softer holiday than we would have anticipated a couple of months ago. And so all of those factors together, I think, has caused us to reevaluate the fourth quarter and come in with our reduced guidance.

Okay. And then kind of a follow-up to that. We're talking about a weaker-than-expected or originally expected environment here. And I know you guys said that one of the things you want to try and do is maintain that gross margin, you don't want to give any of that back. But in a weaker environment, competitive environment oftentimes ticks up. And how quickly do you think your customers will be coming, looking for price reductions to make themselves more competitive and impact your margin level there?

Yes, Joe, an interesting question and certainly one that we talked about internally. First, we try to position our business holistically with our customers, right? We want to drive value for them and value can be defined in a number of different ways. Certainly, price and program are constant negotiations with our customers and rightfully so, that they have a responsibility to do that, and we have a responsibility to make sure that we are competitive in the marketplace, and we believe that our current pricing is competitive. I think we can support that. And I gave an example in our prepared remarks and as a response to the question earlier, with our back-to-school offering, right? We took share, we grew our branded business in a very competitive season in which retailers led with private label. So we know we have an offering that creates value for our customers, and it is desired from our consumers. And so we have to protect that value and that value comes at a cost and at a price. And so we work hard to be competitively priced in the marketplace, and we believe we are. But where we do need to lean in with price, we're prepared to do that, but we have to offset that with more competitive input costs, which we're prepared to do as well. So this is a mix of work that we manage. It's not just simply a negotiation with the customer. And I think we've got a strong history of doing that. And as I mentioned, right, we believe our gross margins are fully recovered, and we want to protect that and maintain that. That's important to our company, it's important to you.

Yes. And I would just add, inflation is still there, Joe. And so we're still seeing the input side, labor's up, things are up. And so as far as to Tom's point, input costs are going up, albeit not like what we had seen by any means, but up. And I don't think the demand environment this year matters on price as much as it does in just the discretionary purchasing.

Okay. Great. Thanks for that insight. Appreciate it. I'll get back in queue.

Thank you, Joe.

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 for your interest in ACCO Brands. While the operating environment remains uncertain, we are focused on executing against our key priorities and keeping margin improvement at the forefront. We have managed well in difficult environments and are confident in our ability to navigate the current economic challenges. With the reimagined approach to product innovation, prioritization of key growth categories supported by leading brands and a highly effective global commercial team, we will be well positioned to deliver organic growth as global economies recover. As previously mentioned, we are analyzing our cost structure, and we'll be implementing actions to lower our costs. With improving revenue trends and a lower cost structure, we believe compelling market performance will follow. So we look forward to talking to you in a couple of months to report on our fourth quarter results.

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