Q4 2020 ACCO Brands Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full year ACCO brands, earning.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero and I would like to turn the call conference call over to your speaker.
For today Christine Hanneman. Please go ahead and.
Good morning. This is Christine Hanneman senior director of Investor Relations welcome to ACCO brands fourth quarter and full year 2020 earnings conference call speaking on the call today are Boris Ellison, Chairman, President and Chief Executive Officer of ACCO Brands Corporation, and Neal Fenwick Executive Vice President and Chief Financial Officer.
And that accompany this call have been posted to the Investor Relations section of ACCO brands Dot Com when speaking about our results. We may refer to adjusted results adjusted results exclude transaction and 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 reconcile our forward looking non-GAAP measures.
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 of the statements are made on.
Our forward looking statements are subject to risks and uncertainties and our actual results could differ materially among.
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 and which we operate uncertainties regarding how geographies distribution channels and consumer behavior will evolve overtime and 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 SEC filings for an explanation of certain of these risk factors and assumptions. Our forward looking statements are made as of today and we assume no obligation to update them going forward.
Following our prepared remarks, we will hold a Q&A session.
Now I will turn the call over to Boris Ella Smith.
Good morning, everyone. Thank you for joining us and we'll.
Spend the next few minutes reviewing our fourth quarter and full year 2020 results.
Including the impact of the pandemic and.
And commenting on the progress, we're making against some of our strategic imperatives.
Neal will follow me.
With more details and provide additional comments on our cost reductions and balance sheet.
And cash outlook.
And then we'll take your questions.
I am pleased with our fourth quarter and full year results.
In light of the pandemic and the current economic conditions.
And the quarter, both sales and profits were within our expectations.
With fourth quarter comparable sales.
Down 16%.
And adjusted EPS of <unk> 32, compared.
Paired with 46 cents in 2019.
A large part of our adjusted EPS performance and the quarter.
As the result of many cost reduction actions, we took throughout the year.
And year, we'll discuss that and more detail and a few minutes.
As anticipated.
For paid the fourth quarter sales declined largely as a result of slow sales in Latin America, and a seasonal swing for commercial channels and North America.
In Brazil, there was very limited debt the school business.
Public schools remain closed.
Likewise, our Mexico business was down significantly at schools and many offices remain closed there as well.
As a result comparable sales in Latin America were down 35% versus 2019.
And north.
America.
A resurgence and COVID-19 cases and November and December.
And <unk> offices, and most schools closed.
This.
Combined with the seasonal sales swing to slower growing commercial channels.
With a primary reason North America comparable sales.
We're down 21%.
Sales of large wide boards bulletin boards.
Large shredders and laminate.
Binding machines and binders.
<unk> to be weak.
But there are also several bright spots.
Our products that are focused on consumers technology for home usage continued to see strong demand.
Several of our product lines did well all year.
Our Kensington computer accessories.
True <unk> air Purifiers, and durable and art supplies, all sold well as people continue to outfit their home offices and entertain themselves at home.
And we remain concerned about wellness.
Late in the quarter, we introduced smart air Purifiers and.
And we have other launches on tap and 2021 to build on our momentum and the wellness area.
And which will think will be a significant category for us overtime.
EMEA continued its good performance with comparable sales and the fourth quarter down just 1%.
Country, and channel fragmentation and Europe benefits us.
In addition, our teams did a great job of service and customer throughout the pandemic and we believe we have taken market share.
Under our life brands.
Which is highly recognizable and Europe.
And we introduced like Wow, and lights, Cozy colorful home office storage and organizational products.
Advantage of work from home needs.
Sales of personal sweaters, and DIY tools remains strong as more people work from home.
Kensington products also posted a solid sales gain and EMEA for the full year with a particularly strong fourth quarter.
Overall, Kensington became our top selling brands and 2020 with strong double digit sales growth, including a significant border we referenced in the fourth quarter.
We were also encouraged by progress on Australia, and Asia as the rate of sales decline and these areas has improved sequentially since the second quarter.
During the quarter, we acquired power array and are very excited to have that business under our umbrella.
For those of you who may not know power as a leading player and video gaming and accessories, such as controllers power charging stations and headphones.
As many of you may be aware the video gaming companies introduced the next generation of platforms and late 2020.
And then other refresh is expected in 2021 or 2022.
Historically this has generated strong demand for gaming and accessories for a lengthy period following the platform introductions.
We anticipate power and will benefit from this for a few years.
In 2021, we're expecting power range of sales growth of approximately 15%.
And EBITDA and the range of $55 million to $60 million.
We are very pleased to report that our 2020 free cash flow continues to be robust.
Coming in at $104 million.
Including the transaction cost of the <unk> acquisition.
Overall, we'll continue to manage the business well and me.
And the historic pandemic and a difficult economic environment with.
And with demand for our products being impacted and many geographies.
The remote education working from home.
High unemployment and closed a disruptive business situations.
Our business benefits from the breadth and balance of our geographic and product portfolio with.
We're not dependent on any one area for success and have it.
And good job, partially mitigating channel customer and product line declines with growth somewhere else.
While we have seen our business improve and the second half of 2020.
There's still a lot of uncertainty around when offices and school of fully reopen which will increase demand for many of our products.
All of our production and warehouse facilities.
And have remained open to the extent necessary to meet customer demand.
Most of our office employees continue to work from home.
We will continue to adapt our strategy to respond to both challenges and opportunities and the current environment.
We are assuming a shifting consumer behavior post pandemic and.
And our changing product and channel portfolio of investments as a result.
This includes making larger investments and growth areas, such as video games and accessories wellness products and work learn a play from home products and computer accessories.
While reducing our investments and some commercial office products and.
Such as wide format laminated and large whiteboards.
Provided on this point because due to all the uncertainty some of the decisions are being delayed until later time for more clarity.
Is provided but thats kind of how we're thinking about it going into it.
As far as that commerce is concerned.
As Neil mentioned for US It was a big winner.
In 2020 with 17%.
Our growth in that channel for the year all the trends there continue.
We think E commerce will continue to be a winner in 2021.
Both overall, but also for back to school that were a big winner for back to school as well and that should continue and we are well positioned to benefit from.
Growth in ecommerce both.
Third party ecommerce players as well as our own direct to consumer sales.
Thank you for your question I'll jump back in queue. Thanks.
Thanks, Chris.
And your next question will come from Bradley Thomas from Keybanc capital markets. Your line is open.
Good morning, this is Andrew on for Brad.
I just wanted to talk about you know we've all heard the news that Staples has proposed to acquire office depot.
I was wondering if you can remind us how big those customers are to you and what level of risk might there be if that deal came to fruition.
Yeah.
Both customers are less than 10% for us.
So beyond that we don't really provide detailed but they're significantly smaller.
And they used to be.
We think.
If something were to happen that the risk is very manageable.
We are assuming.
For the next.
Forecasting period that sales in that particular channel will continue to decline.
So day decline a little bit more as a result of any potential combination. We think we can manage that pretty well.
Understood. Thank you I will jump back in the queue.
Thank you Andrew.
And your next question will come from Joe Gomes from Noble capital. Your line is now open.
Good morning, Boris for Neil Thanks for taking the question.
Good morning, Joe.
I just wanted to.
<unk> had a really nice quarter.
Relative to what's going on here.
Towards the end of the year now here into the low obviously into January.
Seeing the new stories of.
New types of of virus strains, especially in the UK.
Just kind of if you could kind.
Kind of go over the quarter.
Did you see monthly sequential improvement and how is that kind of <unk>.
Laid out so far here in the first quarter or is it kind of stalled.
Due to some more of these.
New variants of the virus coming out thank you.
Thanks, Joe.
EMEA continues to perform really well.
We will continue to perform really well in the second half of the year and that was certainly the case.
In Q4, with our sales were down slightly over 1% versus 2019.
There are several factors that benefit us.
The fact that we sell through 27 different countries and we're not dependent on any one to execute flawlessly is a big benefit very fragmented channel structure.
Is a big benefit.
How the European governments have manage the pandemic and especially the support they provided to employment to keeping people employed.
Is it back.
A big benefit the fact that.
Much of our sales around 40% of our sales in EMEA.
Take place in Germany, and Germany was is one of the countries that best managed.
The.
Pandemic.
And the job that our team has done both in supporting.
Customers through these difficult times, and becoming a day faster go too.
Company.
During these difficult times as well as the emphasis we have on growth.
Initiatives.
And they are fairly broad.
Share to some of our other.
On a regions. So all of those in combination portends really well for us.
And we're six weeks into.
2021, and that momentum that we had.
In the second half of the year on in Q4.
Certainly has continued into the.
Initial couple of weeks of 2021.
Thanks for that for ourselves to get back on queue.
Thank you Joe.
And our next question will come from Kevin Steinke, Inc. From Barrington Research. Your line is open.
Good morning.
Neil.
Your prepared comments you talked about.
I believe reinstating incentive compensation in 2021 and also.
Growth initiatives this year.
On.
And then also the $30 million to $40 million of savings you expect I'm, just trying to get a sense for.
Size of the.
Incentive compensation and growth initiatives how much.
We should expect that to be in terms of.
Increased expense versus 2020.
Yes, I guess the first point is it will be variable depending on outperformance.
Because of all of our incentives all but it is a headwind year over year.
And it's a significant one in the kind of.
On.
Double digits.
Millions so closer to awards.
17 ish million in terms of total headwind assuming that we hit all of outperformance of its.
The.
It's.
An important piece of.
The momentum that we expect to see in the business is getting the.
Worldwide teams focused on growing the business again.
For the full year, obviously that impact.
It will have an impact each quarter for.
The.
On the.
Business, hopefully, we will be recovering to drive them.
Okay, Great. That's very helpful. Thanks for taking my questions.
Thanks, Kevin.
Your next question will come from Hale Holden from Barclays. Your line is open.
Good morning, Thanks for taking my call.
Two questions.
In the slide deck, you called out.
Some commodity cost headwinds our input cost headwinds on I was wondering if you could give us a little bit more color on that.
And then.
In the presentation, Boris you talked a little bit about how reopening in Australia have gone well.
Thanks, Victoria had lifted restrictions on that I was wondering if there are any takeaways.
For now for what.
The broader business could look like on the roster.
Bottom line.
Sure regarding inflation.
I'll, let neel add to that as well, but right now what were seeing driving the most inflation if supply chain costs associated with.
Product coming from Asia.
To the other parts of the world.
Container shortage.
In China as a result of day imbalanced and trade between what's coming in into China, what's going on out of China, and Thats driving huge increases in container.
Container cost and inbound freight.
And we're seeing that for.
Throughout the World and U S and in Europe and in other parts of the world.
We expect those costs to stay elevated in the near term hopefully they'll decline in the.
In the second half of the year, but certainly in the near term, we expect them to stay elevated that's what's driving the.
Fairly significant inflation that we're seeing right now as far as other commodities are concerned.
Ben.
Fairly benign, although certainly oil is up compared to the prior year, So that's going to drive.
Some level of inflation and then people costs as Neil answered to a previous question will certainly be a source of inflation as well Neil do you have anything to add to that yes. There was one other which was we saw a lot of currency fluctuations during the year as a whole and so overall FX for us was an adverse drag and.
Because we source, who have a product in China and U S dollars and sell it in international markets in local currency, it's a source of inflation in those markets.
<unk> I'm, sorry remind me on your second question. Please.
You have talked about.
Reopening on Australia, and some of the benefits you had seen there when the restrictions Delaware I think on Vittorio and I was just wondering is right.
Takeaways for other markets bigger picture.
Yes, Australia.
As many of you and that also is one of the countries that manage the pandemic very well they have.
Very low incidents.
Covid their schools are open their offices are open.
We saw.
Little decline in Australia.
On the second half of the year low.
Decline in Q4 and in fact in December their sales were up.
<unk> two to prior year so share.
Currently we are hopeful that.
That's how the world is going to look like after.
We recover from from Covid that as people go back to the offices will see similar levels of performance and demand but.
Australia numbers were good in the second half of the year.
Great. Thank you very much thanks.
Thanks Dale.
And your next question will come from William Reuter from Bank of America. Your line is open.
Hi.
So my first question is on the cost savings for <unk>.
$80 million or so that you saved last year some of those were temporary and some permanent.
Have you talked about what component of those maybe coming back this year.
Well certainly the incentive park.
That Neil talked about.
Is going to come back.
Some of the.
We also took some some some salary cuts and thats.
Obviously is going to come back.
Then it will also significantly.
<unk> discretionary spend throughout the company with the sales decline.
That's going to be valuable of our sales are coming back then we will invest more.
Obviously, if if things get.
On delayed as far as recovery is concerned that we will tamper down on those expenses as well, we don't really have it broken down by a proportion.
How much is temporary how much is permanent Neil.
Neil mentioned in response to previous question most of our.
Anticipated increases in expenses this.
This year have to deal with restoring the incentive comp.
Compensation and then.
The.
Discretionary expenses will depend on sales.
Okay, and then you mentioned for.
I know that with.
Logistics in terms of supply chain from Asia has been getting a little bit on that.
At the time.
In terms of power given the console launches I would imagine they have some pretty good tailwind here and it's important to get products on the shelves is there any concern that there could be some disruption there that may.
I guess delay sales on eliminate them.
Power has manage that.
The supply chain.
Fairly well given what's what's going on.
The lead times associated with some of their products are up to six months ourselves. So they have to be well ahead of it.
And they are planning for for growth so they're ordering the products upfront.
Could always use more product.
Right now we are really supply constrained versus demand constrained.
But.
Kind of given the plans that I've outlined and given what we anticipate to happen.
Throughout 2021, I think power as it is on a fairly decent decent shape.
A lot of the delays in the port in the West coast, starting to reduce so vessels that Hilton.
Good to hear Alright, I'll pass to others. Thank you. Thanks.
Thanks Bill.
And your next question will come from carrier market share from Jefferies. Your line is open.
Good morning.
Yes.
The power acquisition, and then certainly the demand being there.
What's the outlook for M&A for you guys as.
When you look at your capital structure is in kind of getting back to that.
Two to two five times target.
Our leverage ratio.
Well this year, we're going to be focusing on delevering the business.
Supporting our dividend if there is a small acquisition in what I say small, let's say less than $50 million Thats a tuck in that makes sense, we will take a look at it.
But we're not.
We're not contemplating.
Anything large this year.
We are focused on <unk>.
Integrating <unk>.
And de levering the business and then come 2022, we think we'll be in position potentially to do more.
But right now the focus on integration and delivering.
Okay, and then just given the cap structure of the notes for 2020 for callable what's.
What's your thoughts there.
We monitor what happens on the capital markets will look for the time and.
It's something we're well aware of.
As you know.
Kohl's get cheaper later in the year is low.
Alright, Thank you very much I appreciate it.
Thanks Carl.
And your next question will come from Amit <unk> from Bank of England's financial your line is open.
Good morning, I was just wondering.
How much share.
The Delta between last year sales in 2019 without harm because of equipment sales how much of that do you think comes back this year on R. R.
Are you planning to increase any of the equipment manufacturing to have.
Adequate supply.
Thanks for the question <unk>, it's difficult to say.
Yes.
We.
We have <unk>.
Better visibility on near term that's why we provided guidance for for Q1, only and certainly in Q1, we.
We don't expect a recovery.
Compared to 2019.
<unk>.
We expect the kind of level of sales.
We saw on the trend that we saw in the second half of the year and in Q4 to continue in Q1, we're certainly hopeful that things will begin to recover.
In the second half of the year and as they do and.
People start going back to the offices that we do expect.
A recovery in equipment sales as well right now we don't really anticipate that even if that happens that recovered to the level of 2019, we think thats a little bit too quickly.
But any recovery will be good recovery.
That's an important business for us and if it if it starts growing it will certainly help.
For the outperformance.
Let me just to reiterate that point different countries. The recovery will be at different times, and we certainly expect South America to recover slower.
So we do anticipate a recovering environment low.
Through 2022, as I mentioned for my remarks.
Got it thank you very much thanks Amit.
Anthony I would like to ask a question star one.
One on your telephone keypad. Your next question comes from Jeff <unk> from Jpmorgan. Your line is open.
Hi, Thanks for taking the question.
Just two quick ones on tower did you say, how empowering is doing since you acquired it meaning maybe January and February that's cash.
One in the second part is.
Can you remind us empowering gross margin and EBITDA margin accretive, but we know it's growth accretive.
On the margin front is it accretive or how does it stack up thanks.
Thanks, Jeff we Didnt say by Powerade is doing really well in the six weeks since we acquired them. So we're very pleased with their for.
Performance and growth and as far as.
Margins are concerned I know they are.
EBITDA accretive very significantly EBITDA accretive as far as gross margins Neil I'll, let you comment on on that whether they're positive for us we're very much in line in line with our average on the gross margin level and part of why the EBITDA accretive as speakers.
We left the former owner with order for fixed costs. So once we're off the transition services agreement, we were able to leverage our fixed cost base and that's what makes it really incrementally much stronger EBITDA.
Great. Thank you. Thanks.
Thanks, Jeff.
I have no further questions in queue at this time I'll turn the call back over to the presenters for closing remarks.
Thank you Michelle.
Thank you everybody for your interest in ACCO brands.
Summarize, while we continue to see impacts of COVID-19 on our business in Q4, I am pleased with our overall response and relative results with the addition of power array will continue to transform our business towards being more consumer focused and are well positioned to benefit from economic recovery, which could occur later this year, we look forward to reporting on a per.
<unk> for our next call have a great day.
Thank you everyone for joining us today. This will conclude today's conference call you may now disconnect.
Yeah.
Okay.
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