Q3 2019 Earnings Call
Hi, and welcome to the third quarter 2019, ACCO brands earnings Conference call.
This time all participants are in in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session. You want me to press Star one on your telephone.
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I would now like to hand, the conference over to your Speaker Christine Hanneman. Please go ahead ma'am.
Good morning. This is Christine Hanneman senior director of Investor Relations.
Welcome to ACCO Brands' third quarter 2019 conference call.
Looking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation, and Nielsen It Executive Vice President and Chief Financial Officer.
Slides that accompany this call had been posted to the Investor Relations section of the ACCO brands Dot com.
Speaking about quarterly results, we may refer to adjusted results.
Adjusted results exclude transaction integration and restructuring costs 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 reconciled are forward looking adjusted earnings per share free cash flow net leverage ratio for adjusted tax rate guidance.
Well, we're looking statements made during the call are based on certain risks and uncertainties and our actual results could differ materially.
Please refer to our earnings release, and FCC 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 acuity session now I will turn the call over divorce Alison.
Good morning, everyone and thank you for joining us.
I will spend the next few minutes reviewing the highlights of the quarter and commenting on the progress, we're making against our strategic imperatives.
You will follow me with more color in details on the quarter and then we'll take your questions.
Reported good third quarter sales and adjusted EPS, achieving our objectives for the quarter and building a strong performance of the first half.
Third quarter sales or even with last year and organic sales were up half a percent.
Due to an outstanding back to school performance in North America.
North America sales were up over 3% on top of a 9% growth in the second corner.
As we noted last quarter, we had very strong back to school selling.
The actual consumer sales, which took place in the third quarter and all the ultimate measure of the success of the back to school season. We're also very strong.
Oh sales grew mid single digits for the season, a strong improvement over last years, 2% growth.
Based on preliminary industry information overall back to school sales were roughly flat.
We believe with Duke share.
Our market share growth was led by the five star brand, which was the second largest national back to school brand in the U.S. and has the highest growth rate of the top 10 brands during the season.
Another highlight on the quarter it was our working capital management in cash generation.
We entered the quarter was high inventories due to strategic prebuys associated with raw material shortages.
Dissipated increases in U.S. tariffs on Chinese imports and strong third quarter forecasts from North America sales teams.
Because of good North America sales in Nexsan Global working capital management.
Reduced working capital of 141 million sequentially, and 20 million versus the same quarter last year.
We set that's what are your record with 183 million of free cash flow generation.
We feel confident you know ability to reach out targets free cash flow range for the year and to grow a free cash flow over the long term.
Overall, I'm very pleased without performance year to date.
Results continued to show that our strategies are working.
No I would like to give you an update I know progress against the six strategic imperatives that we've been working on over the past few years to drive profitable growth and increase shareholder value.
We discussed the strategic objectives last quarter and they include diversifying oh geographies and channels.
Focusing on the end consumer.
Living products with end user driven innovation.
Reducing unnecessary costs.
Executing with excellence.
And disciplined capital allocation.
During the quarter, we purchased ferrone.
Leading provider of notebooks in school and office products in Brazil.
Peroni expands our presence in the attractive Brazilian market and it faster growing school categories. We now have to leading school product brands in Brazil.
Acquisition also further diversifies our customer base.
Integration is going well and we expect for only two at 35 million to sales and be marginally accretive to EPS. This year.
Peroni is our fourth meaningful acquisition in four years.
We are successfully reorienting, our portfolio of brands channels and geographies.
Grow faster and with better margins.
Slide six and seven in our deck.
Give you details on ferrone and the other three acquisitions.
We will continue to look for additional acquisitions that will provide growth and geographic or category expansion at a reasonable price.
Last time, we spoke about end user driven product innovation and I mentioned several product ranges that we introduced in 2019.
These Protestant food Air Purifiers, an automatic laminator, a docking station for the Microsoft surface Pro and high end Shredders and the first nine months, we have generated almost 7 million in sales for these new products and we're just beginning to ramp up.
Moving onto our productivity initiative.
Continued to generate substantial savings from our programs.
Each year with target approximately 30 million the productivity improvements.
Third quarter, we're on track to deliver close to 40 million savings most of which had been reinvested in the business.
Finally, an update on capital allocation.
You will go through the specifics, but in the quarter, we significantly reduced out debt and continued with share repurchases.
Yesterday, our board of directors approved and 8% increase in a quarterly dividend six and a half centsper share.
The increase is people effective in the fourth fourth quarter.
With that.
I will turn the call over to Neal for a review of the segments guidance and other financial commentary.
Then I'll join him in answering your questions Neil.
Thank you Boris good morning, everyone.
Before I moved to the quarterly results I would like to start with a perspective on the North America back to school season, which covers both the second answered quotas.
Taking his entire season, we did well.
As far as already mentioned second quarter sales rose, 9% and third quarter sales rose, 3% with or estranged following the sales pet.
In total the second quarter and the third quarter S. A two cents over prior year.
The third quarter is down two cents.
The second quota up four cents, reflecting the relative share back to school ship in each quarter respectively.
This is a continuation of the trend seen last year with the second quarter now the stronger quarter for back to school.
Moving now to our third quarter.
Comparable sales increased slightly based on solid growth in North America.
Adjusted net income of 31 million 32 cents per share was down from 36 million for 34 cents last year.
Decline was from lower gross margins in EMEA and international.
Our gross margin was 30.8% down almost two percentage point as we had an unfavorable product mix in most areas cost inflation in our international businesses from adverse foreign exchange and experienced low cost absorption as we reduced inventory.
Yes, you know expenses as a percent of sales increased to 19.1% from 18.3%.
The increase was related to higher management incentive expenses based on better performance. This year. This is lost you wouldn't be releasing a cruise.
In addition.
For the nation technology spending increased from a building out Sep in North America.
Reported operating income decreased to 49 million from 58 million operating margin declined to 9.6 from 11.3 last year.
On a reported and adjusted basis operating income decreased due to the low gross profit and highest you know expenses from the fact is I just mentioned.
Our adjusted tax rate was 27.4% in the quota as we change sit in Texas assumptions to reflect the change you know geographic earnings.
Stronger in the U.S. and weaker in EMEA and international.
For the full year, we now expect or adjusted tax rate to be in a range, 29% to 30%.
Now, let's turn to some details about segment results.
Net sales in North America rose, 3% pricing offsetting input inflation tariffs and low volume.
Back to school sell through was strong and sales growth continued with the Kensington brand on the strength of new products.
We saw strong growth with many customers in the E tail and mass merchant channels, but also had declines with some customers.
On balance it wasn't X and back to school season.
America operating margin decreased slightly to 12.4% from 12.8% driven by lower cost absorption as we reduced inventory at a slightly unfavorable product mix.
Before we now expect North America sales to be slightly Oh. This is last year.
In EMEA sales decreased 7%.
He translation reduce sales approximately 7 million well, 5% worse than anticipated.
Comparable sales decreased 2%, primarily because of a softening economic environment.
EMEA adjusted operating income of 14 million declined 17% due to lower volume and high input cost.
Largely due to weakness of the euro and UK pound, which increases the cost of U.S. dollar source products that we purchase in Asia.
Gross profit gross profit margin also negatively impacted by an adverse sales mix and lower cost absorption also due to reducing inventory levels as well as lower sales.
On a comparable basis, we expect EMEA sales to be flat for the full you.
Moving to the international segment comparable sales decreased almost 4%.
Peroni acquisition added approximately 6 million in August and September .
Well Straightly nature continued to be difficult markets and Mexico, when a comparable basis is now flat year to date as our third quarter back to school performance there was disappointing.
We'll continue to grow and is well positioned going into sort of gets back to school season International operating income declined on both the reported an adjusted basis from inflationary cost increases and low volume and exiting a commodity business in Asia Roni did not impact operating income for the segment in the so called.
Going forward, we anticipate continuing good performance in Brazil, as the fourth quarter is typically the strongest quarter and that should also be seasonally truthful ferrone.
We anticipate challenges in Australia, and Asia will continue.
Overall, we expect international sales to be flat on a comparable basis for the full years.
Let's move now to our balance sheet and cash flow.
As we know to doing a law school, we were pleased that all high inventory levels protected on they North America back to school margins what off early purchases shifted the seasonality of cash flows.
In the third quarter, we generated a record quarterly free cash flow of 183 million as we collected receivables on sales of inventory that had already been paid for earlier in the year.
We have almost close the gap with last year's nine months free cash flow and we believe we are back to normal seasonal pattern.
During the quarter, we repurchased 2.1 million shares right now 16 million and paid 6 million in dividends.
Year to date, we have repurchased 7.5 million shares for 58 million and paid 18 million in dividends.
Most significantly we repaid 174 million seasonal borrowings.
At quarter end, a pro forma bank net leverage ratio was 2.9 times.
As mentioned earlier.
Closed on the Frone acquisition in the third quarter.
This cost 42 million in cash plus 8 million of acquired debt and we expect to have a need for 7 million in additional seasonal working capital for this business.
Now, let's turn to our outlook.
We are updating our outlook for 2019 include the Frone acquisition as well as the impact to the low tax rate an adverse foreign exchange, which has become a stronger headwind as we saw in the third quarter.
We estimate that sales would be flat to up 1%, including a 3% adverse foreign currency effect.
Outlooks S for the year is in a range of 115 to 120, which includes four cents negative impact of foreign exchange.
Since year to date and another sent expected in the fourth quarter.
This is once and worse than we anticipated when we gave our original outlook in February .
The U.S. consumer channels still appear to be doing well for us.
The U.S. commercial customers and the rest of the will of becoming more cautious in.
In addition in last year's fourth quarter, we released additional incentive compensation accruals of almost $7 million.
Given our full cost performance. This year, we do not anticipate releasing incentive compensation in the fourth quarter.
The outlook for free cash flow remains unchanged at 165 to 175 million.
We anticipate yearend things leverage will be down from last year.
We have included certain modeling assumptions no slide deck on page 13.
Now, let's move on to keep an eye with forest and I will be happy to take your questions.
Okay.
Thank you as a reminder to ask the question you want me to press Star one on your telephone to withdraw your question. Please press the pound please standby will be compile acuity roster.
Our first question comes from Phil Chappell Suntrust Your line.
Thanks, Good morning.
Good morning value a.
Hey boards can talk a little bit more about the back to school season, just anything you can give us on kind of sell through percentages versus versus sell in growth that we see and just was it more company specific in terms of market share gains are just driven by a good overall kinda back to school season.
Yeah. Thanks, Bill for the question back to school was very strong in fact, it's from a cellphone standpoint.
It's a the strongest that I remember at my time here are the sell through was up.
Approximately 5% for the season.
Overall industry back to school was roughly flat.
So clearly we did better than average and then when I look at the.
Details by by customer it looks pretty broad most of our customers.
Group and the sell through with US. It was led by the five Star brand. We had you know much better placement.
Then last year and a much stronger end user demand.
For our key products.
We had a couple of accounts that decline based on just there you know.
Time in place in the industry and their focus on private label, but the majority.
And especially the growing customers, including major.
Mass market or mass merchandiser, ER and and Etailers have grown so the season was very very strong and then just a tie it into the sales as Neal mentioned.
Oh, the sell in a lot of a sell in for that sell through happened in Q2, we had 9% growth in Q2, and then we've got some replenishment in Q3 with 3% growth, but normal season that was very very strong with up plus 5%.
Got it and so with doesn't mind, there's the inventory levels are in good shape, you don't see a de stock kinda as we go in fourth quarter or first quarter next year.
No and that's it that's a very a important point, what we've seen actually over the last couple of years. He is an emphasis by our customers to exit the season clean.
So they're trying to sell through more.
And they buy a because they hold some inventory going into the season, yes, we we feel that exiting the season were very very good inventory shape.
Got it and then switching to quick to Peroni, just help me understand it seems similar to the products you have with me I thought there was there was some option to kind of expand that ER internationally. So is this more of a different product line or is it more of just it was it was easier or fab.
For two to buy the the leading player versus kind of move to intentionally into the market.
No. It's a similar product line really the driver for.
The purchase is the brand for Rone. He is a very strong hundred your own brand in Brazil.
Very strong consumer allegiance a their number two player in the markets next to US a we're number one player in the market with to LIBOR. So this allows us to have number one number two strongest back to school or brands and Brazil, I'm going to continue to push Abbas two separate brands with.
Ah Ah separate separate lines and stuff, but assortments and we try to create some synergies in the backend.
Got it and then last one for me I know you talked about incentive comp in the fourth quarter not being released I just didn't fully understand is that because you're not hitting your targets where is it because there was a.
A a bigger than normal a release last year.
It was last year last year, we would not hitting our targets that we've really significant incentive comp in the fourth quarter and this year.
We are anticipating not doing the same things like making hitting on tokens.
Okay. So we can say release, you mean lots you there was a reversal this year, there's not that the very weird thing perfect. Okay. Thanks, so much.
Thanks Bill.
Thank you and our next question comes from William Bruder with Bank of America. Your line is healthy.
Good morning.
With regard to the I'm sorry, my morning, the mix of products, which I guess was a little bit dilutive to margins I guess can you talk about that was it some of the new products that are not up to scale at this point in terms of units.
No. The mix was driven primarily by our heavy a participation in private label this back to school season.
And last season, so as we've talked before we are fairly tactical without private label strategy.
We bid on products.
We are weekend or make dollar gross profits.
And if we if itself you know loss leader, we don't bid on it so given.
All of the inflationary pressures this year in late last year and the tariffs are we participated in more opening price point private label business is back to school, which drove revenue, but also a diluted a diluted our margins. So that's really the mix issue that we're talking about.
That makes sense do you think that there is a phone it sounds like if you hadn't participated. This then your branded products sales would've been down a little bit legacy were down a little bit do you think that there is a.
Strategy from a lot of your customers to shift there a mix of products that they offer more towards private label on I guess do you expect that to continue.
No the branded product sales were actually up this season, so if I look at how girls.
In North America is roughly 60 40, 60% that growth was driven by the branded products and maybe 40% by incremental private label. So we've done well with branded products and I mentioned, a five star which was the fastest growing.
Brand during the back to school season of the top then brands you know as far as a private label strategy from our customers.
You know as we've talked before it's it's very customer specific you know given the.
Change in ownership with a couple about customers from public to private.
And private equity backed a there isn't a little bit about the increase push.
For private labels from from those us specific customers I, you know how strategy remains unchanged to private label today.
Is around 7% of our global business and then depending on the air they'll be.
Plus or minus a couple of points as I mentioned that will bid on profitable business and we will not participate in unprofitable business.
Our tons a that makes sense and then just lastly, I think when you had talked about list for tariffs previously you mentioned I think 20 million dollar impact.
I guess, how do you expect to contend with this next year I guess, what do you expect the net impact of those list for tariffs is gonna be that's all for me. Thanks.
Yeah, I think when you're talking about 28 million Bill, yes, its 2018 and 2019 combined and that also included inflation. If you look at tariffs.
The number is small that's roughly half of that.
And we anticipate roughly similar impacts that we saw in 2018 and 19 of the anticipate seeing and then 2020.
Oh, unless unless things change and you know as as you know things can change on a daily basis when it comes to tariffs.
Right now we plan to have a price increases on January 1st to offset the tariffs that we know off sort of coming on December 15th.
Obviously, a U.S. is then negotiations with China. So some of that May change and if it does change will react to it if the tariffs go down we will reduce our price pricing of low price increases and at the time has continued to go up we will have to pass those increases through.
Okay. So I guess, what that would mean is that the 2020 impact would be about 14 million, but more or less you expect to offset that with price of tariffs are in place. So you want to fund the same spot on a margin basis 2020 is about half of that's about six to 7 million in terrorists off Okay. All right. That's all for me. Thank you.
Okay. Thanks Bill.
Thank you and our next question comes from the line of Joe Gomes with Noble capital. Your line is open.
Good morning.
Wanting Joe.
Just wondered if you could give us a little bit more color.
On the E tail segmented you know what kind of growth are you seeing there you know what percent of overall revenues is E tail.
I'll now making up for the firm.
Uh huh.
We track we track E tail sales.
For a U.S., specifically, because that's really where we get the sell through information.
And right now or in Q2.
Sorry Q3.
Retail was roughly 15, 16%.
Of Oh, the quarter or the growth was very strong the girls. He is a teen percent girls etail.
You know continues to take share a during the season, both for back to school and back to college, we have very broad participation or in E tail. So literally pretty much every skew that we make.
Gets sold or through Etail, there's nothing that today at least they're not willing to carry so it's it's a very successful channel for us, it's a margin accretive for us and a with lovey tell him and continue to focus on it.
Great and it's a lot less developed internationally.
Okay.
And taking switching gears for second here.
Just kind of water.
We visit Australia.
You deal with it in the.
Pelican acquisition.
You know that market.
Has been under pressure here for you know.
At least the two years set up that I've been following the company here.
Are we getting close to a point, where we might have to start considering whether there's going to be write downs on this.
Business.
I'll, let me answer [laughter] dumb question [laughter] less I'll, let him answer that question.
I'm.
Note that we anticipate at the moment chip.
Oh, just too just to give you additional color on a fairly New Zealand Joe.
It has been a tough market you're absolutely right for the last couple of years, both because of.
A weakness in Australian economy, as well as industry specific issue, where you have a consolidation be consolidations happening on the part of a couple of commercial customers.
Those customers are reducing their footprint as well as just competitively and not doing well in their big customers and when they don't do well obviously it affects our sales.
I'm not the biggest impact we have felt in Australia. He is on the legacy Alco side not on the Pelikan Artline side.
So legacy Alco has historically participated.
More in a trade products not end user products and more in commodity categories as opposed to well known branded value added categories and that is the part that has suffered the most during.
The last couple of years, both private label that we historically made for our customers that they're choosing to sourced directly as well as with some of the commodity categories, which are just a declining.
The pelikan Artline.
Park, which we've acquired.
It's done relatively well compared to the legacy Echopark.
Okay, that's very informative thank you.
And then just one last one for me.
We looked at what the nine month free cash flow number as you know little over 50 million to.
Looking for full year, and the 165 to 275 million.
That suggest you know call with 110 billion.
Can be generated in the fourth quarter you know what are your guys you know early thoughts as to.
If that happens as to how you would allocate that money.
In the in the quarter.
So first of the joke, that's very consistent with the free cash flow generation that we had last year and normally see in the fourth quarter. So well today, a free cash flow is only 6 million lower than the prior year.
And that's really all driven by paying high taxes earlier, this year, which we anticipated.
So we're very confident on hitting all free cash flow target for the year, it's something that we put a lot of time and effort behind to make sure we.
Achieve it.
And it seems it's driven by the seasonality of of business.
In terms of how we would deploy that cash obviously, we would continue with what we traditionally do in terms of deployment of cash so year to date, we've spent a significant about on stock repurchases and on dividends. We books, he announced an increasing dividend we have an ongoing stopped reporting.
As program, but one of the big things that we would tend to do in the fourth quarter is pay down debt because we didn't seasonally added again in Q1 in Q2, and so it's part of a cycle than it really been she is our ability to make future acquisitions.
Okay, great. Thanks, guys appreciate the time.
Thank you Joe.
Thank you and our next question comes from the line of Chris Mcginnis with Sidoti and company. Your line is open.
Good morning, Thanks for taking my questions.
Good morning, Chris.
I just want to.
Nothing for keep Army North American back to school, but was there anything specific around five star was a new product introductions or market share gains that are in the shot in the sense a shelf space that that helped drive some of that you know that strong cells.
You know, we launch new products with five star every year, there's no new colors, new materials, a new innovations that we introduced its literally thousands.
Thousands of skews for the back to school season.
That's great placement with major retailers a this year Oh, so last year, we introduced a new demand generation campaign, so focusing on the teens, which are the primary buyers of the five star brand and that campaign continued this year and obviously it resonated.
With the consumer so it's it's all of those things combined that drove that very very successful back to school season.
Okay. Thank you and then just quickly. He said he took talked probably true sense I know, it's still pretty early on in it. So just kind of what you've seen since you launched from for school.
Yeah true sense is our air Purifier brand a we introduced it in February and the U.S. and then in Q2 started to roll out across the rest of the world.
We are incredibly pleased with the ramp up almost every week, we're hitting new records in sell through a in the less.
And we have you know very optimistic it's going to become a multimillion dollar brand for us. So so far a incredibly excited about the launch and the opportunity and we're going to be expanding that product line in the future.
Great. Thanks for taking my questions and good luck in Q4.
Thank you thank you Chris.
Thank you and our next question comes on the line [noise].
Kevin.
The Nike with Barrington Research your line is though.
Good morning.
So [laughter] Hello.
So you you mentioned that you're encouraged about initial a read on the back to school season in Brazil, maybe if you could expand on a little bit more on what you're seeing there and then maybe in contrast to you you mentioned are back to school in Mexico was a little disappoint.
Hang in there maybe a little more color on Ah the factors a behind their performance.
Sure No Brazil continues to do extremely well for us.
We had roughly 10% growth.
In Q3, as we're just beginning to ramp up for back to school and on all the signals that were seeing a that back to school will be strong for us in Brazil. So last year, we had a very strong back to school, we anticipating a that to continue this year.
Honestly, we have to see what the sales actually going to be but going into the season, we think we're very well set up.
Let's now as far as Mexico is concerned the the back to school was disappointing and it's really an economic condition in Mexico, Mexico. So its contraction in Q2, we don't have the numbers on Q3 by then Q2, so contraction from from prior year. So the economy is not doing well what we've heard from all the retailers is.
At the back to school overall.
In Mexico was very soft.
And then we've done we've done commensurately with with how everybody else has done so I'd say, it's definitely a more disappointing season in Mexico that we used to back to school does not represent a huge part of our SaaS business in Mexico, you know it's it's.
Mostly drives our new acquisition in the better Leto acquisition.
And the wasn't little bit softer than we had last year.
Okay got it and and I believe you said you expect international segment sales to be flat for the year I believe that that's down from what you know you're expecting a the prior call and just in terms of growth, but is Mexico, a key factor there or any other.
Factors that maybe change the outlook just a bit for Ah international.
Yeah, Mexico's down a little bit versus prior expectations and and Asia is down.
Versus our prior expectations, both strength in Brazil is consistent with what we're expecting and that Australia. A stressed performance is also consistent with our expectations. That's really Mexico in Asia that decline our view of two of the fourth quarter is lower than we had before.
Okay, Thanks and.
You mentioned, a Europe , a softening economic environment. There is what you're seeing the impact you can find a certain.
You know countries or a is you might expect like the UK or is it are you seeing something more more broad base there in terms of economic impact.
It's a little bit brought up in the UK, our biggest country in Europe is Germany, and a German economy has softened up both in Q2 in Q3 in Germany, Obviously is a big trading partner with the rest of Europe . So it does affect several European countries. I mean, we've seen some weakness so also in eastern Europe .
As well as countries that are in and around the Germany, UK, obviously with the Brexit uncertainty.
It was weak as well so so the the economic softness in Europe that we're seeing is broader than just one country.
Okay. Thank you and then lastly from me I'm, just the maybe talk a little bit more about.
The dividend increase in you know thought process behind that and.
Your your view of the dividend policy going forward.
Yes, as you know, Kevin we implemented our dividend the beginning of last year.
And Ah over when we when we issued a the initial dividend was said that the strategy is to took road overtime prudently, we want to reward how long term shareholders.
We are they return.
And when we looked at our.
Future projections of cash flow, we felt it was time to increase the dividend we didn't repurchasing a lot of share. So if you look from a total cash outlay the cap cash outlay per year that we're projecting even with increased dividend.
For the company is about the same as we paid a dividend in all of 2018, so it's not a increase portion of our.
Cash flow, but a on a per share basis, it's a nice 8.3% increasing dividend for our long term shareholder.
Okay, great. Thank you very much.
Thank you.
Thank you and our next question comes from Hill with Barclays. Your line is open.
Hi, good morning.
A couple of quick. Thank you had a couple of quick ones [laughter] following up on the European comments. He just made you awesome and then the tuxedo some commentary around U.S. corporate clients.
Pulling back around uncertainty I understand you're not giving guidance, but in general.
Or are you thinking a little bit more conservative way, although on a go forward given what you're saying from.
Sure and more specifically a year was corporate clients.
Commercial.
I think that's fair that we are a little bit more cautious when we.
Looking forward.
Neil mentioned in our prepared remarks, the U.S. consumer continues to the wells and we have not seen any weakness from the U.S. consumer, but certainly outside of the U.S. and if you looked at a commercial or industrial customers. They are becoming more cautious so yeah, I'd say I wear out.
On a tone is a little bit more cautious when we look out to two the future.
And then on the price increase that's your take him.
In January I mean have you.
I guess socialized hadn't had initial discussions on and and or do you expect kind of push back around it.
We have communicated the.
Price increases the intention of a price increase to all of our customers were working through the details now.
You know, there's there's push back every time, we do any kind of a price increase so its normal business commercial negotiations that we do without customers.
Nothing unusual this time around.
And then my my last question was the commentary around leverage being down year over year basis at the end to the.
29 team.
Adjusted for the recent acquisition in Brazil, not 50 million Unfinanced mirrors that.
Including Huh.
So on a reported all pro forma basis, it should be lower than for you.
Perfect the acquisition that makes sense.
Right near enough on that with the revolver right.
We did.
Great. Thank you so much I appreciate it.
Thank you Hale.
Thank you and our next question comes from the line of crew Martin Johnson with Jefferies. Your line is open.
Good morning in terms of the price increase on January 1st is that or is there are typically a pull forward a of sales on perhaps a little bit of a depressant for the first quarter that we should be looking out.
You know it depends crew historically I would have said, yes, but nowadays given what we smith patterns that we've seen over the last couple of years.
It depends we we have not seen that for example last year when there was a.
Very significant price increase in January we have not seen any pull forward in December so I can't really comment on that you know what we'll see when it happens.
Okay, and realizing that the tariff backdrop can change on a day to day basis, you know where do we stand now on the alternate countries of supply you know, what's our exposure to China, and you know where where have we moved and manufacturing too.
Yeah, we've been very aggressive in trying to move our supply chain.
From China, where it makes financial sense and it makes sense for most products, where we don't have tooling or just heavy capital investment in China. So a lot about paper skews, we had been very aggressively moving.
Two other southeast Asian countries are low low cost countries.
Some of our even some of our tools products, we are moving too.
Countries like Taiwan, So I expect that our footprint manufacturing footprint in China will be significantly lower on next year.
And it is this year and then it was Ah pass you know so we certainly not waiting.
For the tariff pallet policies, you clarified before we move us supply chain.
And you know regardless. These these these moves on.
Semi permanent I do want to have a safe permanent but even if the tariffs are repealed.
We don't envision moving the manufacturing back to China, because you know cost in Vietnam, and Taiwan, or also becoming very very competitive with China, even the inflationary increases that we've seen in China historically.
Okay and in terms of the inflation you talked about 14 million over the 18 19 period, what's the outlook for raw material that I would assume that's built into that January 1st price increase.
Yeah outside of tariffs the expectations for material inflation is a fairly muted next year, we don't see a they kind of inflation that we saw in 18, which was very very high and it sounds like bled over into 19 as well.
Especially into the first half of of 19, so outside of tariffs the inflation expectations I feel the muted and we are being fairly surgical within our price increases in the U.S., but to only increase prices on those products are exhibiting a increase cost the.
Outside of the U.S. or the inflationary pressure is coming from the strength of the U.S. dollar Oh, So we're definitely going to be adjusting our local currency pricing in both EMEA as well as a in international countries to account for the fact that the U.S. dollar.
Yes, a lot stronger today than it was 12 months ago.
Okay. Thank you very much guys appreciate it.
Thank you.
Thank you and our next question comes from the line of some odd core Sean Your line is open.
Hey, good morning, So first off I just wanted to.
Good understanding of the pushback, you're seeing in Europe is that across the borders or a specific area <unk> Europe , that's creating the has lowered numbers for you.
So there's there's a couple of things going on in Europe on that.
The primary reason, there's the economic weakness that I talked about.
And that's pretty much across the all of the me its its centers a you know around germane to U.K., but as I mentioned, it's it's pretty much affects all of the EMEA the.
The other thing which is he me a is just compares versus prior year last Q3, a Europe grew over 3% I was a very strong quarter, a year ago and that was driven by a GDP are and the launch of the shredders a that we had a in EMEA.
Yeah, I never two factors there one is just.
Increase shredding.
And focus on privacy coordinated with the Jeep GP GDPR launch as well that's just the channel fill up because a lot of our customers were carrying shredders for the first time. So drugs have you know very significant increase in trends last year. This year the sell through is going well and the sales are going well.
But from a year to year comparison perspective, the sales of freighters are down and that's another contributor to.
The 2.3% decline in EMEA this quarter.
Okay and then in the U.S. you were talking about your commercial customers.
Being a little bit cautious are those the same customers you were targeting as far as getting them as a direct.
Customer.
No I'm talking about the big contract Stationers, and the commercial arms or office products superstores. The independence, the small independence that we're.
Trying to buy from US direct continued to do well.
And then what these commercial customers do you have a insight into if there's too much channel inventory out there.
I don't believe there is more it there's a lot of inventory, but they're just buying last because they are preparing for the future. So you know when you look at.
Competitive channel dynamics everybody's trying to compete with the most efficient resellers in the most efficient resellers carries very little inventory, so we see that hour.
Historic legacy customers and trying to compete.
We these modern efficient resellers try to carry just in time inventory and when they think the demands going to be down in the future they reduced their purchasing.
Okay, Great. That's it for me thank you.
Thank you Evan.
Thank you I'm not showing any further questions at this time I'll now turn the call back over to force Allison for any further remarks.
Thank you Sydney.
In closing.
We're very pleased that the business it from well in the first nine months of the year driven by North America strong back to school results remain confident about our future and continuing to position the company for growth and strong returns for our shareholders.
Forward to speaking with you again after report after we report our full year results. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.