Q3 2020 ACCO Brands Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the third quarter Twentytwenty ACCO Brands Corporation earnings Conference call.
At this time all participants are in listen only mode. After the speakers visitation there will be a question and answer session to ask a question during that portion of the call you wouldn't need to press star one on your telephone please be advised that today's conference maybe recorded.
[music] required any Burger assistance, Please press star and Yeah, I will now hand, the conference over to your Speaker today, Christine Hanneman, you Baby game.
Good morning. This is Christine Hanneman senior director of Investor Relations welcome to ACCO Brands' third quarter 2020 conference call.
Speaking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation, and Neal Sanuk Executive Vice President and Chief Financial Officer.
Slides that accompany this call have been posted to the Investor Relations section with ACCO brands Dot com.
When speaking about our 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 our forward looking adjusted earnings per share free.
Cash flow net leverage ratio or adjusted tax rate guidance.
Forward looking statements made during the call including statements concerning the impacts of the COVID-19 pandemic on the company are based on the beliefs and assumptions of management based on information available to us at the time the statements were made.
Forward looking statements are subject to risks and uncertainties and our actual results could differ materially.
Among the factors that could cause our results to differ materially from our forward looking statements are the scope and duration of the COVID-19 pandemic government actions and third party responses to it and the consequences for the global economy as well as the regional and local economies in which we operate uncertainties regarding how would you.
Yeah, the fees distribution channels and consumer behavior will evolve overtime in response to the pandemic and its impact on our business operations results of operations financial condition and liquidity.
Please refer to our earnings release, and FCC filings for an explanation of certain of these risk factors and assumptions.
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 the QNX session.
Now I will turn the call over to Boris Elisman.
Good morning, everyone. Thank you for joining us.
Ill spend a few minutes reviewing the third quarter results.
Including the impact of COVID-19 that all business and implications for the fourth quarter.
Neil will follow me with more color and details on the third quarter and provide additional comments on our cost reductions balance sheet and cash outlook then we'll take your questions.
I'm very pleased with our third quarter results.
Net sales declined at a lesser rate than we expected.
Down 12% versus prior year to $144 million.
That's a substantial improvement over the second quarter when sales declined 29%.
Our adjusted EPS was 19 cents.
At the high end of our guidance as we benefited from relatively better sales and broad cost reduction actions, we have taken worldwide.
While the economic environment improved in the third quarter compared with the second quarter, we still in the middle of the worst recession of our lifetimes with demand for our products being impacted in many geographies by remote education working from home high unemployment and low business competence.
This makes our third quarter results that much more impressive they.
They demonstrate the strength breadth and balance of our global business and product portfolio.
We are not dependent on any one area for success.
And have done a good job, partially mitigating channel customer or product line declines with growth somewhere else.
The parts of our product portfolio that are focused on consumers technology or home usage had strong demand you.
We saw good sales growth in Kensington computer accessories, especially lapped our docking stations.
Since air Purifiers, DIY tools and Durban our supplies.
Areas that are focused on in office or in school use have lower demand sales of large whiteboards bulletin boards large shredders in laminate ers binding machines and binders were soft.
Online and technology channels did really well.
Our traditional brick and mortar stores and resellers were impacted by weaker back to school demand reduced store traffic and lower business demand.
We also did an excellent job managing expenses, reducing them by $20 million in the quarter and 63 million since the beginning of the year.
Again, I'm very pleased with our results.
Overall, EMEA had a strong quarter in North America, Asia, and Australia, New Zealand did relatively well.
During the third quarter more businesses reopened some students return to physical school and many governments continued to provide economic support to consumers and companies.
As more people return to schools in offices, our sales recovery increased.
In Europe, we have the strongest sales recovery with comparable sales down only 2% in the quarter.
Despite his current challenges Europe managed the economic impact of the pandemic better than our other geographies.
Most European countries have reopened schools restarted in person on September 1st throughout the area and many employees went to their offices at least for a few days a week.
But it is not just the improved environment that is the reason for our strong performance in EMEA.
Our teams did a great job servicing and calling on customers throughout the fantastic. We stayed opened is supported them with many of our competitors couldn't overcome.
As a result, we gain more business and took market share in the third quarter.
We saw good growth in manual shredders.
Why tools lamination and signage products or categories that are seeing increased demand due to the pandemic.
We also introduced new products, such as partitions to meet demand for social distancing at the office I'm very pleased with our results in EMEA.
North America had a less robust, but still good quarter, especially when considering the environment third.
Third quarter sales were negatively impacted by remote back to school starts in the Us India.
Industry estimates.
70% of K through 12 students in the us were not participating in person learning in the third quarter.
That number in Canada was approximately 30%.
This situation reduced demand for school products in the quarter.
As more students go back to in person education in the fourth quarter. We believe the demand for school products will extend beyond its traditional summer season, well into the fall and even winter.
While overall back to school sales were down we believe we have maintained for taking share in the note taking category led by our five star brands.
Kensington had an outstanding quarter in North America growing over 100% year on year from the strength of a large deal and a strong demand for work from home products.
Our third quarter was down significantly in Latin America, because schools are still closed in Brazil, and operating remotely in Mexico.
We would expect difficulties in Latin America to continue in the fourth quarter and through the early part of next year.
All of our production and warehouse facilities have remained opened in the quarter to the extent necessary to meet customer demand.
Most of our office employees work from home during the first quarter and continue to do so now.
While we have seen our business improve there's still a lot of uncertainty around when offices and schools will fully reopened and when the virus will be contained enough for more normal economic activities to take place.
We'll continue to adapt our strategy to respond to both challenges and opportunities in the current environment as we expect economic recovery to take quite some time.
We are assuming a shift in consumer behavior post recovery and we are changing product and channel portfolio investments as a result, we.
We're increasing support of two cents, our wellness products brand by launching specialty air filters, the target flu allergies pet owners and smoke you will see other true sense wellness products launching later this year and next year to build upon our strong momentum.
Our Kensington line is also adding new work from home items and has a solid pipeline of custom orders.
We will be expanding our line of personal shredders to appeal to increases work from home needs.
And we're investing in our direct ecommerce capabilities to satisfy growing consumer demand for direct fulfillment.
On the other side, we are reducing our investments in some of the commercial office products, such as wide format laminate Ers and large whiteboards as we expect demand for such products to remain weak.
We are confident we will withstand the current challenges. We also believe we need to take advantage of the opportunities. The current environment creates to accelerate our transition to a more brands and consumer centric company.
We are pleased with our progress thus far and we'll continue to work to accelerate the pace of this transformation.
We are a large diversified global companies with a strong balance sheet and will deliver consistent strong free cash flow.
Given our financial strength.
And the proactive steps, we have taken to reduce costs, we expect to be able to maintain good liquidity as we manage through the current environment.
Our management team has overcome difficult economic and industry conditions before and we have made great strides over the years to create a more resilient and more profitable company I expect that to continue.
Now I will turn the call over to Neal for review of the segments, our outlook and other financial commentary and then our joint him and answering your questions Neil.
Thank you bars and good morning, everyone.
Im going to discuss the impacts of David 19 throughout my comments, there was impact city, the operational financial and other effects on ACA brands its customers and users of its products school and business closures work from home promote in hybrid learning government orders manufacturing industry.
PC supply chain disruption.
Resulting from COVID-19.
And the actions of ACA brand customers and end users have taken in response to the pandemic, including actions, we have taken to manage our inventory and credit risk under the circumstances.
Our third quarter reported net sales decreased 12% due to lower demand from the impacting pegged at 19.
As Bob noted, we saw strong sales growth in product lines that focus on work and school from home such as our Kensington computer accessories, and trees and air Purifiers that North America back to school sell out was sluggish and its commercial sales remained.
Third quarter net income was $19 million or 20 cents per share.
Adjusted net income was $18 million and adjusted EPS was 19 cents.
Adjusted EPS was at the high end of our outlook based on better relative sales and our cost reduction efforts.
Our gross margin was almost 29% compared with 31% in 2019 the.
The decrease was largely the result of declines in North America, and international from unfavorable product mix and lower fixed cost absorption, primarily because of lower demand.
SGN expenses were $84 million compared with 96 million last year.
As DNA as a percentage of sales was 19% flat with last year, primarily because of cost reduction efforts offset sales de leveraging.
As we indicated in our first and second quarter earnings releases, we have taken many cost reduction actions in response to take with 19 and participated in government assistance programs, where we qualified so as to keep employees rather than implementing layoffs or fellows.
In February and March we took early temporary actions to protect the health and safety of our employees and to aggressively reduce costs to protect our business in the near term.
In the second quarter, we announced a restructuring charge you take more permanent and structural changes to our business, including headcount reductions, which we initiated in North America in Mexico in the third quarter.
The $7 million restructuring charge that we took in the second quarter is expected to produce an annualized run rate savings of $11 million.
In the third quarter, we achieved $20 million in total for both normal productivity and additional cost reductions, including one quarter of benefits from the second quarter restructuring actions.
Moving on adjusted operating income was $35 million compared to $52 million last year due to lower sales lower fixed cost absorption and additional provisions for bad debt expenses.
The adjusted operating margin was 8% versus 10%.
Our adjusted tax rate was 30% the higher adjusted tax rate this quarter versus last year's third quarter reflect differences in the level and geographic location of the earnings.
Now, let's turn to the details of our segment results.
Net sales in North America decreased 12% sell after back to school products was hurt by then by many in a fully remote for hybrid spaces.
As noted earlier the timing of purchases shifted to later in the third quarter and we expect back to school sales to continue throughout the fourth quarter as E. Tailers in some retailers have retained that back to school assets in anticipation of students purchases continuing.
Sales at Kensington computer accessories in North America, where more than doubled the prior year third quarter because of the shipment of a large contract order.
The strong sales of computer accessories helped to offset the weaker back to school sales as expected commercial sales remained weak as many offices in North America were closed or had limited opening.
North America adjusted operating income was $23 million versus 36 million last year, and adjusted operating margin was 10% compared to 13%.
The decline was result of lower sales on favorable mix and unfavorable cost absorption.
These factors were partially offset by cost reduction.
Now, let's turn to EMEA, which had a strong quarter.
Net sales increased 3% to $136 million as a result of favorable foreign exchange comparable sales were down approximately 2% due to the impacts of COVID-19.
These reduced impacts were largely offset by growth in light personal shredders three cents air Purifiers, DIY tools and Kensington computer accessories.
EMEA experienced a much stronger level of demand in the third quarter compared to the second quarter as commercial businesses and consumers were under significantly fewer private 19 restrictions.
And many offices and schools reopen throughout Europe.
We have now seen several months of improvement with good recovery in our sales of commercial products.
EMEA posted an adjusted operating profit of $17 million versus 14 million last year as a result of cost savings.
Adjusted operating margin was 12% versus 10% last year.
Moving to the international segment net sales declined significantly similar to the second quarter because of low demand for the impact of COVID-19.
Mexico in Brazil continue to be significantly impacted by cold with 19, as many schools and offices in both countries remained closed.
The current expectation is that this will continue throughout rest of 2020 and into the first half of 2021.
Australia sales decreased due to the lockdown of the state of Victoria due to COVID-19. The Lockdown has now been rescinded and we expect to see improved demand in the fourth quarter.
Asia sales were down to a lesser extent than in the second quarter.
International adjusted operating income was $4 million compared with $11 million last year as a result of the lower sales.
Profits were also hurt by adverse customer and product mix.
Our bad debt reserves, and lower fixed cost absorption, partially offset by cost reductions and price increases.
Let's move now to our balance sheet and cash flow.
In the third quarter, we generated approximately 89 million in net cash from operating activities and had $86 million of free cash flow, we paid dividends of $6 million and Capex was $3 million.
As we noted in our first quarter release, we do not plan to repurchase shares through the remainder of the year.
Longer term, we plan to use our free cash flow to fund our dividend reduce debt repurchase shares and make acquisitions.
Our capex outlook for 2020 is less than $20 million and we have spent $12 million year to date.
During the quarter, we repaid $124 million in debt at quarter end, we had used $134 million of our 600 million revolving credit facility, primarily to seasonal borrowings and had $86 million in cash on hand.
Our net leverage ratio is 3.45 times, which is well under our debt covenant.
Now, let's turn to our outlook.
It continues to be difficult to forecast in this environment, because theres much uncertainty related to the economy as well as the implications of new COVID-19 flare ups.
Our fourth quarter demand is expected to continue to be down compared with last year, especially in the commercial office product area in North America.
Latin America continues to struggle and we expect Brazil's back to school season to be smaller and to ship later with normal December sales slipping into January.
Australia is likely to improve now that the Victoria Lockdown has been lifted that we still anticipate international to be our most challenged segment.
The recent increases in COVID-19 cases in Europe is making it the hardest segment to forecast. Nevertheless, we currently anticipate that year over year. It will still be the least adversely impacted segment.
We don't see a catalyst for additional economic improvement in the fourth quarter like.
Likewise fourth quarter seasonality in our North American business is skewed towards commercial products, which remained weak.
EMEA typically has seasonally strong fourth quarter commercial sales, which we anticipate will help offset some of the softness in North America and Latin America.
We're cognizant of the rapidly developing situation occur with 90 in EMEA and count cannot guarantee that it could not also negatively impact our results.
Our fourth quarter outlook is a sales decline in the range of 15% to 20%.
Fourth quarter adjusted EPS are expected to be in the range of 26 to 32 cents. The outlook includes an adverse foreign exchange impact of 2% on sales and two cents on adjusted EPS.
We expect our cost reduction actions combined with our normal productivity programs will deliver approximately $15 million in additional fourth quarter expense savings compared with last year.
With respect to achieving our cash flow outlook, we feel confident that we can generate at least $120 million of operating cash flow for the full year and with Capex expected to be below $20 million, we expect to generate above 100 million in free cash flow.
We continue to experience an increased level of late payments from customers in certain international and export markets and have increased our bad debt reserves almost $3 million in the third quarter and $6 million year to date.
Our south American and Mexican customers, along with the wholesaler insolvency in EMEA other main concerns.
We're actively managing our receivables and we'll continue to restrict our own sales to mitigate our risk as necessary.
In the third quarter, we took a 6 million provision for slow moving inventory, which is similar to last year's third quarter on a year to date basis. It is almost 5 million higher than 2019 levels.
Now, let's move on to Q Tonight, We're first and I will be happy to take your questions.
Operator.
As a reminder to ask a question. Please press Star then one to move reasonably Q press the pound key we ask that you. Please limit yourself to one question.
Our first question comes from Chris Mcginnis Sidoti and company. Your line is open.
Good morning, Thank you for taking my questions and nice quarter.
Let me start on board.
Worse, you mentioned some market share gains can.
You just talked about the competitive landscape in this environment and your ability to go out and continue to gain share.
And the strength of that position you have in the marketplace. Thanks.
Sure Chris.
We saw market share gains in several areas.
In Europe, we will gain market share.
Pretty much throughout.
As we mentioned.
Our business declined about 2% organically and certainly.
The industry has done worse than that and we have.
Specific information.
In some countries and categories like shredders, where we've gained substantial market share.
During the quarter.
If we look at our compute.
Computer accessories business Kensington.
Which grew high double digits globally and over 100% North America, and then certainly the gain market share there as the industry has not grown.
Such a large amount and based on our preliminary information we don't have the final information yet, but based on our preliminary information. We also gained.
Gain market share no take in four and five star products in North America, So it's been pretty broad.
Great.
And just one quick follow up north.
No I think you mentioned you highlighted some of where your word button payable.
Anything in North America that you are seeing just when you think about kind of the difficult Brian.
Sure as well.
No with the exit generally North America, Australia Asia EMEA with the one exception of the wholesaler insolvency Amir.
As return to normal payable sluggish.
Great I'll jump back into thanks for taking my questions. Thanks.
Thanks, Chris.
Our next question comes from Jay Joe Gomes Amenable capital Your line is open.
Good morning, and thanks for taking the question.
Good morning, Joe.
I just wanted.
I wanted to jump to the the guidance real quick.
So for the fourth quarter, you're talking about revenues down in the 15% to 20% range year over year, which is the.
The same you had for the third quarter guidance.
But you also mentioned a back to school has been pushed out.
Thank into the fourth quarter here.
So just wondering if we're seeing going to see some back to school sales in the fourth quarter two we normally don't.
Why no improvement in the guidance that just be conservative ours or something else there.
That has you concerned.
Thanks for the question, John I think we're being fairly balanced in our guidance.
We do expect that to school.
Sales and sell out to be stronger in the fourth quarter, but it's a relatively small part of the quarter.
The commercial business in North America for example plays a much bigger way.
And we expect that to be down because people are still working remotely.
In addition, we had a large deal with Kansas in the third quarter, which which added a lot to the sales in the quarter.
And we don't anticipate that will repeat in the fourth quarter.
So we think net net be my.
Minus 15 to minus 20%.
Revenue guidance is fairly balances all of those things as well as.
Our anticipation of EMEA doing fairly well and some back to school weaknesses in international.
Okay, and one quick follow up thanks for that for us.
I think in last.
The second quarter, you had mentioned that you would see.
Sequential monthly improvement at the top line did that continue.
Got into the third quarter in all the regions or was that more.
Region specific in the third quarter about monthly cycle sequential improvement. Thanks.
Neil.
Yes.
So as a generalization, yes, it did although.
Some months were a little stronger than others, just because of went back to school shipments occurred in North America.
EMEA improved every single month in a row and again in international just the mix in different countries is little different month to month, but if you look under the hood It was.
More similar to the to the second quarter, but steady improvement. So generally in the two core markets. We did see an improvement in international it was more choppy, particularly because of the RIN position of the Lockdown in Australia.
That occurred mid quarter.
Okay. Thank you I'll get back in queue.
Thanks, Jeff.
Our next question comes from Brad Thomas of Keybanc Capital markets. Your line is open.
Hi, Good morning, Boris and Neal Thanks for taking my question.
I was hoping you could just share some insights about what you hear as you talk to your customers in.
In may our Takita offices and employees about what it's like when they go back to work on what are you seeing in terms of Reorders in restocking at the office are we starting to see offices place orders and and restocking inventory how is it playing out as people have gone.
Back to work.
Really we feel there.
Thanks, Brad.
We're not seeing much movement, there, it's pretty much status quo, we still see.
The majority of.
Im pleased in North America White collar employees in North America still working from home.
And they were expectations of people coming back for example in early September.
But we after labor day, but we haven't seen that things.
Seemingly being pushed out.
And push down so in our guidance, we would assume that the environment stays as it is.
It's.
Similar trends internationally, Canada is very similar to.
To be less.
And.
It and other countries it really depends on the circumstances certainly.
In Europe more people are going back to the offices at least a few days a week than that we're seeing here in.
In the last Australia also has a lot of people working from home sales.
Again, our assumptions are things are how they are today.
Gotcha and embrace just to come back to the question of guidance obviously.
Obviously, each quarter see it through the year, you have sort of a different channel mix and geography mix, that's going on that can influence how the enterprise performs.
When you think about the different segments or are there any segments or channels, where you're expecting a slowdown to occur in the fourth quarter or is the slowdown in aggregate really just assumption of how the mix plays up plays out for the fourth quarter.
Yes, it's really a function of the mix as Neal mentioned in his prepared remarks.
The most.
On travel channel for US is the commercial office channel in North America.
And we generally see that being a larger part of our sales mix growth in the first quarter and the fourth quarter.
And just because of how the numbers come together, that's really the issue.
Influence that takes the number down from 12% that we saw in the third quarter down to 15% to 20 and Brad. There is also the south hemisphere back to school, which occurs across basically all our calendar year end and in Brazil in particular.
Is the decision to delay school starts until after their own election in Brazil, We definitely will see back to school push back significantly later and that means it will push out of our Q4 into Q1.
Yes, and if I could if I could squeeze one more in here.
As we think out 2021.
This seal has.
You had some pretty easy comparisons and hopefully the world starts to get back to normal.
How should we think about the flow through to the bottom line for you all as as you.
Hopefully start to grow sales began and and the degree to which some of the costs you've taken out you stay out.
And again, just what kind of contribution margin you may be able to get from each point of sales growth you can generate next year.
Let me answer the first part of that now let Neil comment on the contribution margin flow through.
If if if you are correct.
That's a big if if your correction things start improving in 2021.
That we still expect.
Q1 to be a tough comp given that last year. This year, we didnt have covidien.
We certainly expect regardless of the improvement next year to have a co that impact. So I think Q1 will be.
Challenged by.
But then as things improve we certainly do expect.
Some growth sales growth in the rest of the year.
And I'll, let Neil comment on the.
Flow through.
Margins local country tumors equivalent sales yes.
Clearly Brad there are various things going on within the business.
Obviously, we're topline dependent and more our topline improves we will leverage the cost base that we have.
We have also had a year where you know.
Some of our costs, so temporarily reduced as opposed to permanently reduced and so as we come out of this year. There are a lot of puts and takes I would anticipate having a lot less bad debt and obsolete inventory reserves to take that $11 million. After nine months a year to date is good example, though by contrast, I would anticipate hopefully we.
We will.
And management incentive next year, which we can earn this year, so many ups and downs, but generally as burris said for.
Our sales continue to improve particularly in Q2, three and four we would anticipate obviously leveraging through additional profits.
Very helpful. Thank you guys so much.
Thanks, Brad.
Our next question comes from Kevin Spanky.
Appearing to research your line is open.
Hey, good morning.
Just one.
Wondering how you're thinking about is you will to 2021.
You know incremental actions.
To reduce the cost base relative to.
What you've already done.
Yes, thanks, Kevin.
I anticipate we will be reducing our costs further in 2021.
Very pleased with the reductions we've done so far but still in some of our geographies, we have opportunities to realign our cost structure to be expected side of the business.
Neil mentioned the difficulties, we expect in Latin America, So thats an opportunity for us.
And also faced with the continued to.
Streamline how we how we manage things in North America as well in particular, so I do expect that does.
Further opportunities to reduce cost in 2021.
Okay. That's.
Thats all I have for now thanks, Thanks Karen.
Our next question comes from William Reuter of Bank of America. Your line is open.
Hi in.
In terms of the gross margin pressure.
You talked about mix was this just the large.
Joe that you had with Kensington.
Yes.
Does that mean that the outlook will be more favorable than what we saw on a year over year basis in the fourth quarter.
The combination of things so.
Yes within Kensington that was part of the drag on mix. The two two reasons really one can reasons various highest margin kind commercial products sold less and additionally, they sold a lot more of contract purchases, which as you would imagine it's going to be lower than average margin.
So that was one of the drivers, but also other things impacted gross margin will just hi, obsolete inventory charges and lower absorption in the plants as we need to kind of.
Get our volumes and our cost structure aligned appropriately in those areas and so.
There were more factors than just.
What was in the sales mix, which I think is important to understand but we do see higher gross margins typically in the fourth quarter and we do anticipate that the gross margins in the fourth quarter will be higher than what we saw in the third quarter.
Yes that makes sense and then just one follow up for me with regard to the delayed sales sell through back to school products.
It sounds like you believe that that 70% number of kids learning virtually has improved since then I guess when you talk to your retail customers how they dealt with the excess of supply do they seem to be able to sell through it. All this season I guess do you think it might have impacts on 2020 with back to school in North America.
Hi, it's a good question Bill.
The answer is it mix it depends on the particular reseller, obviously etailers will continue to carry the full.
Our assortment and continue to sell.
As demand as demand goes for for back to school products.
And with brick and mortar stores.
Some have taken there.
Back to school Assortments and put it in line. So they will be able to fulfill most of the demand throughout the.
Fall and even winters.
And others have put in storage.
Well, we said it again next year in those particular cases, we do expect that they will that will affect.
Somewhat affected demand next year for for back to school products.
Great Alright, Thanks, I will pass to others.
Thanks.
Our next question comes from Hale Holden of Barclays. Your line is open.
Thanks for taking my call for us to I guess for you.
The first one is you mentioned in your script talking about changes in go to market.
When you get out of the pandemic period and I was wondering if you could talk a little more further about what you're thinking.
Potentially that could do to change the margin structure of the company.
Yes, sure I mean, we are continuing to invest in.
The channels that are preferred by consumers.
And really that means working closer with online reach.
Resellers.
Both.
Obviously, Amazon, but also a lot of the local and regional resellers online resellers will have to we have throughout the world.
And then also means developing our own.
Internal DTC.
Direct to consumer capabilities to be able to fulfill directly for consumers.
So those are the primary the primary areas.
We are going to continue to work.
Work with the independent dealers at the Big channel for Us in.
In many countries.
They are selling to.
Smaller local businesses and they're an important channel continue to do well.
But.
Some of the.
Corporate and commercial resellers, who we expect to still be challenged.
Means we have to be cautious how much we invest in in those particular channels.
Because we do believe that regardless.
Their sales will still be down in the next few quarters.
Got it and then my second question is with you.
You guys mentioned that you are gaining share with five star and Kensington.
With industry capacity now are pretty high and volumes fairly low.
Would would you expect to see capacity away from you potentially fill find more private label players or increased competition from private label players or just the lower sales volume precludes that.
I think it's a it's a hard question to answer and it really depends on the state of the reseller in the channel.
We find that in this environment brands really matter and we think that one of the reasons was done well with five star we've done well with life in some of our other strong brands is that in times of distress and uncertainty both consumers and resellers prefer well known trial.
And true brands that they're comfortable with that they know they'll both sell and they know will be there tomorrow to support their needs. So thats, a big plus for us.
Given given our portfolio of strong brands.
On the other hand, we do have some.
Retailers that are just managing for cash flow in margin that have no objectives of growing sales for the stores that just trying to service their debt.
And those retailers.
I think we will be.
We'll be putting more private label just to manage for the short term because they don't have any longer term aspirations to participate in the market. So it really depends on our general partner.
Is that we're talking about overall, where we are there.
I'm very pleased with how we performed.
We think our brands are taking share and we think that.
Given the strength of our brands that we will continue to be the case as we go forward.
Great. Thank you so much thank.
Thank you.
Our next question comes from Bill Chapell of tourist security Your line is open.
Thanks, Good morning.
Good morning Bill.
Page four just to just generally if I told you a year ago that 70% of the schools in the U.S. would going back going to be virtual for the third quarter would you expect that sales to only be down 12%.
No.
So help me understand I mean, I think we did nominally now.
[laughter].
Is that is that fairly indicative of the category as well as the just the preparation or is it just you feel like you were you were well prepared for.
Better than better than that.
I think we're well prepared for it I think we have a.
Very broad and diverse product line, we're not depending on any.
The one category on any one geography.
Certainly back to school is an important season for us.
But it's not the only thing that we sell in some of the back to school weakness was offset by.
Strong performance in Kensington.
Globally, and particularly in North America, and very strong performance in EMEA. So.
You're absolutely right I mean.
With such large numbers of students working from home.
One would have expected a much bigger effect on the demand side because of the diverse portfolio and diverse geography of the products and channels that we sell to.
Were able to offset some of those weaknesses with other scattergories in other countries.
Got it and then looking at the separate so the business are you I think you alluded to it on a on a prior question, but as.
As you look at.
It's kind of office space.
In the us and in Europe to some extent shrinking overtime.
We will go virtually virtual forever.
Or or different kind of work methods are you really looking at your or that part of the business for the next few years in terms of how to go to market there.
Over the next few quarters, but it would seem like some of that business.
Will dramatically change structurally change.
No absolutely Bill I think that's an excellent question and we are we are looking at that we think that will will be.
Permanent structural changes.
In how end users by products and which products they buy.
And we're looking at addressing that both organically.
By investing in certain categories in certain channels, I already discussed and and investing less in certain others.
And we're also continuing to look at acquisitions, we've talked about this with investors for several years now we believe that acquisitions are an important part of.
One of our strategy to reshape our business to be more.
Consumer centric.
The more end user driven and as we think about the future. That's that's also part of our strategic next.
Got it and last one for me you may have talked about this but.
What's kind of the percentage of D would say back to school in Europe was good it seems at least in the in the last year. They were all largely back to school and and I think in September I mean, I know, it's a later start there we're getting back to school. So maybe how is that running around for US is is much.
Worse, but how how does that compare with versus expectations.
Europe was.
They all went to school that everybody went back to school yet ever first satellites.
Let's see in new assets, 70% work remotely in Europe, if I look at.
Certainly.
Okay through eight it was 100%.
Maybe some of the lease Saizen kind of high schools were in a hybrid mode and certainly colleges universities and were in a hybrid model, but if you look at the primary metal and most high schools. They.
They went to school 100%.
Right now given the increase.
Slight improvement and in certain countries are you looking at that but certainly as far as Q3 was concern for us.
There was no impact for any back to school delays in Europe.
Great. Thanks, so much thanks.
Thanks.
Our next question comes from Hamir course, and BW U.S. financial your line is open.
Hi, good morning.
Boris you've been talking about the change in the product scope.
Last year versus call. It <unk> do you think you have the right cost structure in place for the consumer oriented products and if you were to go back to more offer centric products, what would the cost implications be and could you make that switch quickly.
Hi, I do think that we have the.
Right cost structure in place for either kind I, certainly do expect that out as our mix shifts more to consumer our.
Our gross margins will go up and our marketing spend will go up as well, but that's a lot easier position to be and to increase spend as our gross margins rise.
For them to be in a position to costly reduce costs. So I'm glad that we are doing all this work now.
To have an opportunity to incrementally.
AD spend towards demand generation as we get into.
Into the consumer space.
Did I answer your question comment or did you have a second point that I can answer the second part as far as being able to how quickly can you revert back to the commercial equipment.
Tom you know.
We could we are.
I don't believe were making anything any changes that are.
Very very permanent.
Although we do believe we do believe that be.
Behavior is changing and we do believe that the demand for the sorts of products.
Is not going to come back for.
At least a while it's very difficult to predict what's going to happen a long time from now but in the short to medium term. We believe that there will be a residual effect from coated in terms of many more people work in a hybrid or remote control environment. So overall that Nat gas.
Man for some of these in office products will be down.
Okay. That's helpful. Thank you. Thanks.
Thanks on it.
There are no further questions I'd like to turn the call back over to Borst, Alan Smith for any closing remarks.
Thank you everybody for your interest in ACCO brands to.
To summarize the ramifications we are seeing from COVID-19.
Disruptive to our business, but we are confident in our ability to withstand this crisis as a result of proactive approach we are taking.
Looking longer term, we also remain confident about our future and our ability to continue to position the company for growth and improving returns for our shareholders. We'll talk to you next time. Thank you.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.
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