Q1 2021 ACCO Brands Corp Earnings Call

Okay.

Yes.

Okay.

Net.

[music] interest payments.

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021, ACCO brands earnings Conference call. 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 the session you will need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like the hand the conference over to your Speaker today, Christine Hanneman Senior director of Investor Relations. Thank you. Please go ahead.

Good morning. This is Christine Hanneman senior director of Investor Relations Welcome to ACCO brands first quarter 2021 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.

Slides that accompany this call have been posted to the Investor Relations section of the Echo brands Dot com.

When speaking about our results we may refer to adjusted results.

Adjusted results exclude transaction integration and amortization and restructuring costs and other nonrecurring items and reflecting the adjusted tax rate.

Schedules of adjusted results and other non-GAAP financial measures and the reconciliation of these measures to the most directly comparable GAAP measures in the earnings release and slides that accompany this call.

Each of the inherent difficulty in forecasting and quantifying certain amounts we do not reconcile of forward looking non-GAAP measures bigger.

Beginning with the first quarter, we changed the way, we calculate and reported adjusted non-GAAP results by excluding noncash amortization of intangible assets.

Please see our press release for further explanation of this change for.

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 I made.

All forward looking statements are subject to risks and uncertainties and our actual results could differ materially.

Please refer to our earnings release and SEC filings for an explanation of certain 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 the Q&A session now I will turn the call over to Boris Ellison.

Good morning, everyone. Thank you for joining us.

I will spend the next few minutes highlighting key elements of our first quarter performance.

Neal will follow me with more details on the quarter.

And provide additional comments on our bond and bank debt refinancing.

Then we'll take your questions.

The World I'm very pleased with our first quarter results.

And in particular, the performance of Powerade and the continued strength in EMEA.

The 7% total company to all the growth we performed better than we expected. Despite comparing of COVID-19 effect this quarter against the most of the pre COVID-19 quarter last year.

Even more impressive.

Sales were 4% above our sales in the first quarter of 2019.

First quarter of profits were also better than our expectations.

We have been seeing a recovery in India for the past three quarters of offices have been reopening in many schools never fully closed.

Our team did a great job servicing customers investing in growth initiatives, we are oriented towards the at home products and taking market share.

In the first quarter comparable sales in EMEA were up 7%.

With good organic growth from true Air Purifiers.

Self tools Kensington computer accessories the.

While and cozy ranges of organizational products.

<unk> shredders enduro and art supplies.

We're proud to say the three of our life products one of the Red Dot design Awards.

Several of the Cozy line of home office items, our premium shredders, which of stylish inquired of designed for home use.

And our functional recycle line of office products.

With every product is made with recycled materials.

EMEA of sales could E tailers.

Up over 80%.

And we also saw good sales growth with many independent and tech specialists.

North America also had a good quarter driven by power.

Excluding power.

Sales declined because of the impact of COVID-19, but.

But we began to see improvement in March of <unk>.

<unk> grew with many retail and e-commerce customers.

The good sign that there is more demand now for school supplies as close to 60% of K through 12 schools in the U S.

Of return to fully in person education and the.

The other 30% of using a hybrid approach.

Many schools have also indicated that we'll have an earlier start for the fall semester.

The exchange would bode well for the second half as our customers work through the inventory overhang from 2020.

We have adequate inventory on hand to be able to rapidly replenish the stock as needed.

Turning to the international segment of.

Australia, and New Zealand and Asia have been performing better.

It will take a while for the entire segment to improve given the continuing school and office closures and the slow destination rollout in Latin America.

We hope to see the beginning of a recovery in Latin America later in the second half and into 2022.

We're confident in our strategy, we will continue to focus on improving sales growth and profitability by shifting our business towards the more consumer centric products.

Our growth will come from acquisitions, such as power, a which I will comment on in a few minutes.

And from organic sales generation.

Our products that are focused on consumers technology of home usage.

The strong demand throughout 2020 and in the first quarter.

<unk> Air Purifiers do it yourself tools organization and storage product for home office Youth Kansas.

Kensington computer accessories government art supplies Emmanuel homesteaders, all sold well as people outfitted the home offices entertaining themselves at home and I remain concerned about wellness.

We expect this will remain true in 2021.

And believe solid performance from this product lines will continue.

For example, our true product line has grown from an introduction of 2019 through $25 million business currently.

Late last year, we introduced smart air Purifiers.

And we have some additional product introductions on tap for later this year and in 2022.

The competition has increased over time, we think the wellness category will be one in which we can establish a significant position.

Last year, our Kensington computer accessories business.

<unk> received the largest order we have ever had.

That means the difficult comparison, this year and some quarters. However.

However, excluding net order the core business is expected to grow strongly and we will continue to introduce new innovative products.

As an example in the first quarter accounts.

You can introduce the studio dock for the Apple iPad Pro and iPad Air.

IPad tablets can be magnetically attached to the docking station and either portrait of landscape modes.

And through the dock connect to a host of peripheral and charging options.

The strong Testament of our efforts is of the Kensington studio dock.

One of CES Innovation Award.

As well as the Red Dot design award during the first quarter.

Turning now to power a.

For those of you who may not know Holloway is a leading player in video game accessories, such as controllers power charging stations and headphones.

That we bought in late December 2020.

I am very pleased with power range results and how smoothly the integration is going the.

The seems to be a particularly good fit on the people side with everyone messaging in terms of culture and with everyone focused on supporting the transition and power as the growth.

The gaming market continues to exhibit strong growth trends.

Adjusted reported forecast that between 2021 and 2026, the gaming console industry is expected to grow approximately 18% per year.

The amount of time spent by consumers and gaming is increasing with the global average now over seven hours a week.

Morgan Stanley estimates that mobile gaming users grew 20% in 2020.

Adding approximately four years worth of the new gamers during the pandemic.

Most analysts believe this is a permanent shift.

Moreover.

In the fourth quarter of last year, Sony and Microsoft launched from generation console products.

Which are still popular but they are having difficulty keeping up with the demand for controllers for <unk>.

<unk> is filling that void.

The.

<unk> first quarter performance was exceptionally strong.

With an increase of more than 100% over the pro forma 2020 sales.

While we don't expect that rate of growth to continue.

We expect strong sales for the rest of the year.

In fact, we now think power sales will grow 25% this year.

Rather than the 15% we initially projected.

Another element of our overall strategy is the continued to shift our product sales for growing channels, such as E tail mass merchants and direct to consumer platforms, while maintaining our presence with successful independence and tech specialists.

This shift has resulted in more growth of customers, such as Walmart target and Amazon.

Which are among our top five customers and performed well throughout the pandemic.

Also aligned with the shift from <unk>.

<unk> of our school in technology categories, non represented 59% of our sales and are the fastest growing parts of our portfolio.

Moving on.

Our productivity program is that the normal levels. After the accelerated cost reductions take of last year due to the pandemic.

We have reinstated merit increases and bonus opportunities for.

Our SG&A expenses will normalize this year still a full year productivity savings for the year I expect it to be of a $30 million.

Our free cash flow for this year is expected to the at least $135 million.

We intend to use the cash to pay our dividend and to reduce our debt.

The new will comment further on this later.

In summary.

Our business benefits from the breadth and balance of our geographic and product portfolio.

We're not dependent on any one area of the success and have done a good job, partially offsetting channel customer and product line declines with growth elsewhere.

I'm proud of the way we have adapted quickly to take advantage of the changing environment.

A shift of consumer behavior post pandemic and the changing our product and channel investments as a result.

This includes making larger investments in growth areas, such as video gaming accessories walnuts products work learn of play from home products and computer accessories.

While reducing our investments in some commercial office products that we expect will remain weak longer term such as Wi form Atlanta neighbors, and large whiteboards, although we expect some post pandemic recovery.

We will emerge from the pandemic as a strong growing financially sound company.

That is ready to aggressively pursue the opportunities ahead.

Now I will turn the call call over to Neal for a review of the segments our outlook and up.

Of the financial commentary and then I'll join him in answering the question Neil.

Thank you Bob.

Good morning, everyone of <unk>.

<unk> mentioned, we saw the initial impact of COVID-19 hit our EMEA business minimally.

In late March last year.

Since the last quarter of comparing of COVID-19 impacted quarter against one that wasn't impacted for a month.

Our first quarter sales rose 7%.

As the result of the pyrite acquisition.

Comparable sales declined approximately 13%.

<unk> sales were much stronger than we expected from a gain of $64 million, mostly in the North America segment in the.

This compared with pre acquisition sales last year of approximately $31 million.

We also continued to see strong sales growth and product lines focused on work and play from home.

Because of our Kensington computer accessories, <unk> Air Purifiers.

It yourself and art supplies.

Sales to commercial channels remained weak and drove most of the comparable sales decline.

Compared to 2020 and exchanging.

Sales to commercial and <unk> customers declined, 18% and retail and net sales were down 7% on the.

The other hand e-commerce sales rose, 28%, while sales from the tech, especially the channels rose 6%.

First quarter adjusted net income was $10 million or <unk> 10 per share versus 13 million of <unk> 14 per share last year the.

Year over year decline was mainly the result of lower volume in North America, and international higher incentive accruals and logistics expense and higher interest expense associated with the acquisition.

Taxes benefitting EPS for our cost reduction efforts and best of profit in EMEA.

Our reported profit was also negatively impacted by $14 million of other expense related to the bond and bank debt refinancing and.

<unk> 7 million due to the earn out portion of the power a purchase price.

In addition, we had for millennium and restructuring charges.

$1 million of pension curtailment charges and $4 million increase in amortization charges and $2 million inventory step up for the acquisition related.

You may recall the power.

Now it is payable in two equal installments over the next two years, if certain sales and profit targets are met.

As such every quarter, we missed the effects of the fair value and recognize any change as the expense net income statement.

We expect that this will result in coffee charges throughout the two year earn out period as we forecast strong results for power.

This quarter, we booked a $7 million expense, which along with the higher charges. Previously noted resulted from a small reported operating loss for the total company.

Our gross margin was approximately 28% compared with 21% in 2020.

The adjusted gross margin was down 50 basis points versus last year much less from the margin pressure, we experienced from the fourth quarter.

The main driver was the cost increases that are impacting our logistics expense ocean freight and domestic freight and some inflation in our input and purchase costs.

On the positive side, where cost savings lower obsolete inventory charges foreign exchange and <unk> accretive.

The accretive margins.

SG&A expenses were $94 million compared with 86 million last year, primarily because of $8 million of higher incentive accruals and $5 million of power of expense, which were partially offset by cost reduction efforts you.

You may recall that last year, we eliminated almost all of incentive accruals in the first quarter due to the pandemic.

SG&A as a percentage of sales was approximately 23%.

The flat with last year, because we were able to leverage power against our core business expenses and largely offset the lower sales in the restaurants of our business.

Adjusted operating income was approximately $25 million compared with 26 million last year, primarily due to <unk> contribution largely offsetting the declines in the rest of the business.

The adjusted operating margin was 6% versus 7% last year.

Our adjusted tax rate for the quarter was 29, 1%.

Now, let's turn to see details of our segment results.

Comparable net sales in North America decreased 19% to $136 million.

Some of the decline was between the first quarter of 2020 benefited from almost $6 million of pre buying in advance of our it systems conversion. The live last April as well as the channel inventory build because of COVID-19 concerns.

Lower commercial channel sales continue to impact North America as many offices remain closed for had limited openings.

As Boris mentioned, we are encouraged to see more schools reopening of interest in learning. This is helping to absorb some of our customers inventory overhang from loss of season.

We're likely to see less than our usual amounts of back to school sell in during the second quarter as last year's sell in was strong.

We expect.

Major customers will continue to work through the inventory they purchased last year that did not sell the cause of school closures.

We are well prepared to service them with our branded products in the second half as the.

They might need to replenishment.

For the overall North America business, we anticipate the sales increase in the second quarter.

First quarter adjusted operating income was $11 million up slightly from last year adjusted.

Adjusted operating margin was 6% compared to six 5% last year.

The margin decline primarily was the result of lower sales in our business excluding <unk>.

Also as previously mentioned, we experienced higher costs, particularly related to logistics the impacted the margin even with the partial offset from cost reductions.

Now, let's turn to EMEA.

For the quarter EMEA of comparable net sales increased 7% to $136 million.

Reductions in commercial sales were partially offset by growth in <unk> and the air Purifiers do it yourself tools Kensington computer accessories, our new line of work from home storage and organization products and losses personal shredders together with <unk>.

Suppliers.

Alright contributed $9 million to EMEA sales.

The since the third consecutive quarter that we have seen sequential improvement in EMEA. This quarter showed strong year over year growth, even though the last years first quarter had just two weeks of COVID-19 impact.

EMEA posted an adjusted operating profit of $21 million versus $15 million in 2020, primarily due to higher sales, which offset from gross margin pressure from increased logistics expense and also higher incentive costs.

Adjusted operating margin was approximately 14% versus 12% last year.

We expect EMEA to continue to perform well during the second quarter.

Moving to the international segment comparable sales declined significantly because of lower demand from the impact of COVID-19.

While oil markets declined Australia, and Asia sales trends continued to improve sequentially post down only 5%.

However, Brazil, and Mexico continued to be severely impacted by COVID-19, with sales down more than 50% as many schools and offices in both countries remain closed.

The current expectation as of this situation will continue for the next several months.

International adjusted operating income was $3 million compared with 8 million last year, primarily as a result of the lower sales, which also reduced fixed cost absorption due to lower volume.

Bad debt reserves in Latin America remain high but in total and the increased 700000 versus last year.

Collections improved in Brazil, but were was in Mexico.

Let's move now to our balance sheet and cash flow.

In the first quarter, we had $42 million of cash outflows from operations and the use of free cash flow of $46 million, which includes $4 million of Capex.

As expected 28 million was used by PRA for rebuilding working capital. After the acquisition closed since we did not purchase the receivables or payables in the transaction and the business has also grown organically.

If you exclude power.

Use of cash was lower this year than last year by $14 million.

Capex in the first quarter was $4 million and we paid $6 million in dividends.

Our capex outlook for 2021, with approximately $30 million, including $5 million related to <unk>.

As we noted when we acquired <unk>.

An increase of debt in the near term, we plan to use of cash to fund our dividend and to reduce debt.

Longer term, we plan to use of free cash flow to fund our dividend reduce debt.

The repurchase shares and make acquisitions.

During the quarter, we refinanced our bond and bank debt.

The company issued $575 million of eight year bonds at four in the quarter percent.

The amended our bank agreement to lock in more favorable pricing and extend our maturity to March 2026.

The refinancing will save $5 million in the interest expense for the balance of this year.

It also appropriately fund the <unk> acquisition with the better balance of long and short term debt.

At the end of the quarter, we hedged $219 million outstanding on our 600 million revolving credit facility and had $75 million cash on hand for.

The bank pro forma net leverage ratio was four five times, which is in line with where we expected it to pay off for the purchase of power.

Even with seasonal borrowings in the second quarter, we anticipate our leverage ratio to be approximately the same.

We will use the majority of our free cash flow this year to reduce debt and with continued improvement in EBITDA.

As we saw this quarter and lower debt, we should reduce our year end leverage ratio to approximately three five times, which is where it was prior to the purchasing power.

Given our financial strength and the proactive steps, we've taken to reduce costs, we expect to be able to maintain good liquidity as we manage through the current environment.

Now, let's turn to our outlook.

It continues to be difficult to forecast longer term in this environment because there is still much uncertainty due to COVID-19.

We are hopeful that as mass vaccinations continued to rollout we will see reduced impacts from COVID-19, particularly in the second half of this year and continuing through 2022.

For the second quarter, we anticipate another strong performance by power.

And the rest of our business will have easier comparisons.

We're looking for organic growth in all three segments as we expect the recovery to continue.

Our second quarter outlook for the entire company is for sales to be between $460 million to $490 million with power a contributing between $50 million to $60 million.

Second quarter adjusted earnings per share, excluding amortization are expected to be in the range of 25 to 30.

The outlook includes a favorable foreign exchange impact of 5% on sales and one to two on adjusted EPS.

We.

The pace of approximately $12 million of pretax intangible amortization will be excluded in the second quarter based on our new definition of adjusted earnings.

<unk> represents approximately <unk> <unk> on an adjusted EPS basis.

We have reinstated the compensation and benefit reductions we took in 2020.

We are also planning to invest more in growth initiatives in support of anticipated stronger second half demand.

As such our SG&A spending will increase in 2021 in all quarters compared with 2020.

We expect our productivity programs will deliver a more normal level of approximately 30 plus million in savings.

Savings for the full year.

Sure.

With respect to our cash flow outlook, we feel confident that we can generate at least 165 million of operating cash flow for the full year.

And with Capex expected to be approximately $30 million, we expect to generate at least $135 million of free cash flow.

As I mentioned earlier.

<unk> will not contribute a normal level of free cash flow in 2021 due to the structure of the acquisition agreement.

In late December we acquired eight without normal levels of accounts receivable and payable.

We received an $18 million purchase price adjustment from the seller to account for the absence of working capital delivered at closing.

But we also need to fund.

Through both its seasonal peak in December and it's substantial growth this year.

Thus, we anticipate minimal if any free cash flow impact from power in 2021.

For a working capital will be normalized in 2022, when we expect an incremental $25 million to $30 million in free cash flow contribution.

Now, let's move onto Q&A for first and I'll be happy to take your questions.

Operator.

Yes.

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

To withdraw your question press the pound key.

Please limit your question to one question. If you have any further questions. Please re enter the queue.

Please hold while we compile the Q&A roster.

Your first question is from the line of Chris Mcginnis with Sidoti <unk> Company.

Good morning, Boris more interesting thanks for taking my questions and the congrats on a good quarter.

Can you start with the strength of the power rate.

Unfair of a 100% can you just talk about is that really just driven from the new consoles.

And then maybe can you break down the growth between North America and EMEA.

How is the EMEA.

Integration of growing thanks.

Thanks, Chris Thanks for the question.

<unk> growth is driven by multiple factors.

The overall growth in gaming.

And that's been accelerated by the introduction of new console to the rest of last year from Microsoft and Sony So Thats part of it.

The second part of it is just.

Supply availability of cheap availability of power has done a great job.

Managing their supply chain.

So the half decent product availability and are able to deliver to our customers win.

Some of our competitors and including the first tier suppliers, such as Sony Microsoft Cant can deliver to all of the demand.

And then of the third primary reason the team in <unk> is not of great job servicing customers and taking share and <unk>.

Creasing the lead.

For all of those are multiple reasons, we saw tremendous growth of slightly over 100%.

During the during the quarter.

The integration with <unk> is going well.

We are in the midst of it right now the.

The plan is to transition.

From the.

The services agreement with the seller by the end of the third quarter and they'll be completely on our systems and then with the critics swiftly focused focused on further growth.

Did I answer all of your question Chris.

Yeah I.

I guess, just one more on that.

The growth.

The growth in North American EMEA, where they.

100% or or could you just maybe break down I don't know if you can provide that margin.

I don't have the detail with the power as the business is 80% and North America. So North America is definitely driven the majority of the growth of.

Of the EMEA has done well, it's a relatively small number.

I appreciate it I'll jump back into queue. Thank you.

Thanks, Chris.

Your next question for you from the line of Joe Gomes with the noble capital.

Good morning, Boris from Neil Congratulations on the quarter and again, thanks for taking my question.

The window.

So I kind of wanted to follow up a little bit here on power.

You gave some some guidance.

Creasing the.

The expectation from the 15% growth of 25% growth but.

I mean, if we look at what you just projected Neil said for the fourth quarter of <unk>.

$50 million to $60 million, if you hit the top end.

Of that then you're really already at that 25% growth level.

And your 65% of power of <unk> sales are in the second half of the year.

Are we just taking a more conservative stance here on power of growth or.

Is there something else there that would kind of prevent you from putting out even a greater expectation for power rate revenues for this year. Thank you.

Okay. Thanks, Joe.

There is nothing.

Artificial in that number the.

Certainly we'll strive.

<unk> exceeded obviously, we'll do as much as we can the only thing you have to keep in mind. There's a couple of things. The compares will get much more difficult in the second half because there was significant growth last year due to people staying at home and gaming more so thats one factor to consider and the other factor of consider is supply.

There may be a lot more demand out there, but the just can be fulfilled the because of the long lead times associated with supply so.

<unk>.

I think the math is largely correct.

I think we are.

For them.

Assuming some kind of a supply constraint for the for the second half.

And there is a lot of uncertainty of the what's going to happen in the second half.

If we if we are optimistic that maybe it will get a little bit better.

Thank you.

Thanks, Joe.

Your next question is from the line of Kevin Spanky with Barrington Research.

Yes, good morning.

Kevin.

So obviously you talked about.

Virtual office sales.

In North America continues to be weak, but also.

60% of U S schools is now fully reopened and I think in the past.

The timing kind of reopening of the schools the movie some.

Eventual returns of the office from this wondering if there are any.

Glimmers of recovery of your hope.

In the commercial office sales.

In North America.

There certainly are glimmers of hope in recovery.

We are definitely.

Hearing a lot more companies.

The scheduling day for returns back to the offices, we think a lot of companies will will go back.

For the summer and early fall timeframe.

And then it will be enabled by by schools being fully in person as well.

So we think there is a.

Our recovery ahead of US we think those are definitely the sales upside ahead of us of things continuing to go down kind of revert back of Varian stone.

On the call, but based on everything we're seeing in the marketplace from hearing from our customers. We do think that North America in the U S, especially in Canada had some slightly different initiatives by use of specialty is poised to.

Go back to the offices a lot more.

The currently we do anticipate the entity a hybrid kind of arrangement, but certainly we do expect more offices to be in person than they are today.

Okay. Thanks, Thats helpful and thanks for taking the question.

Thank you thanks, Kevin.

Your next question for you from the line of Hill Holden with Barclays.

Good morning.

Two quick ones.

Neil I was wondering.

Given the growth in power, if you were where you need to be for working capital or if there is further investment in the current quarter were expected.

Yeah.

The quick answer for that one tail is it's the seasonal business and so its strongest sales are in Q4, and therefore is it seasonally grows in the year, we are going to see an increase in.

Working capital we are also doing our.

Best too.

Moving up our inventory levels of some of their products because of the chip issues that we're seeing in the supply chain.

For those reasons, we are quite happy to investing.

The <unk> working capital.

That actually was my second question is you alluded to the.

Sure.

Issue. So maybe some of your competitors are having and I was wondering if theres something to rest of your sourcing.

It's why we win.

Modest about projecting too much growth in the second half of the power because of our own supply questions and obviously expect to improve our forecast will improve.

Great. Thank you very much.

Thanks Dale.

Your next question is from the line of William Reuter with Bank of America.

Good morning.

My questions are I guess.

Kind of two part question on raw material inflation as well as shipping inflation. So.

I guess you have them.

A third of the group debt.

Dollar impact of inflation across input costs for ground shipping.

How much regard to kind of impact from Goodyear versus maybe some of the assumed delay due to some hedging for for purchases contract net switching etcetera. Thanks.

Yes, so I think two different things one we.

Seeing live the.

Shipping impacts we saw that in Q1.

From a purchasing point of view I think that's going to be a much bigger story from the rising cost of that we're seeing for raw materials to.

To the point you mentioned, we do have contracts with built in time delays and we have inventory the builds and the recognition delays and so for both reasons, what we're going to see is an increasing impact of those.

Costs on our business as the year end zone, and that's why it's necessary for us to raise prices in the market to offset.

And I guess as.

As you know basic commodities are up significantly.

Yeah, I guess just on that point I guess do you expect that the second quarter is going to see much of that or really where we see the impacts of those in the third quarter and beyond.

Now, we're going to start to see cost impacts hit the P&L of the second quarter and the much more so in the third quarter and beyond.

Great I will pass the others. Thank you.

And just the follow up on net a little bit.

As Neil mentioned, we have raised prices in April in the U S. Two to offset the increased inflation and we're going to be doing some of that in other countries and also on the island stimulated as we go into the second half of it also would be we're looking at that in the deflation continues to be high will be of raising prices again in the second half to offset the <unk>.

Lack of inflation.

Thank you.

Thanks Bill.

Your next question is from the line of Brad Thomas with Keybanc capital.

Hi.

Good morning, and Boris.

I got on a little bit late so I apologize if you covered some of the assets, but I first wanted to touch on.

Back to school and see if you can get a sort of a bit more color on.

How you were thinking about the split between <unk> and <unk> and how you are thinking about that unfolding in the U S. This year.

Sure. So let me start we're very optimistic about that the score b of a 100% in person in the U S.

There was.

Some of uncertainty earlier in the year about how exactly is going to break but consensus is emerging and we're seeing that today with 60% of the schools are already being for the in person.

<unk> com.

And the August July even win from schools start to go back to school, we feel very good debt.

There'll be 100%.

The person.

With that said given the.

Back to school.

By orders of eight pretty early in the season, just given the length of the supply chain.

And given the situation last year with the pretty core of back to school most retailers were conservative in their upfront purchases and then we'll chase.

Supply when demand materializes. So we had a very good back to school sell in last year. If you remember North American sales were quite strong in Q2 of last year.

So we think that.

From a relative standpoint sales will be sales it will be weaker than they would've been otherwise just because of the more conservative position that the customers are taking plus some inventory overhang debt some of them have firm from last year.

So we think there'll be some shift from Q2 probably to Q3.

There'll be more replenishment in Q3.

Certainly that we saw last year, but probably the answer that we traditionally see.

With all of that we expect the sellout to be up significantly the industry estimates anywhere from 5% to 25% higher.

Then.

Last year.

And also as Neil mentioned, despite some of these shifts we do expect growth in North American sales in Q2 versus prior year.

That's very helpful. Boris Thank you.

And if I could ask a follow up on empower a certainly a very exciting.

New product for beer business.

Can you just give us your.

Latest thoughts on how you're thinking about the.

For the medium term, perhaps two to three year revenue opportunity from power and how you think about the long term opportunity for power range.

Wow.

This year, we said, we expect the roughly 25% growth from power rate.

You look at the forecasts from industry Analyst Day project, the 18% of sales growth over the next few years for the gaming industry. So I don't think its unreasonable for us to expect that we will grow in the medium term.

With the market.

And the.

From a inorganic standpoint, as we mentioned over the last couple of quarters, where all of the thing that that gives us the new land for potential inorganic growth as well. So we think of say exciting and important segment for us.

We're happy to invest in it and hopefully looking to continue to grow at the rates that we've been team.

So in the longer term, we do see geographic expansion.

The big piece that we can add to that on top of the industry growth.

Wonderful. Thank you so much thanks Brad.

Your next question is from the line of <unk> Martinson with Jefferies.

Good morning, just following up on that.

In terms of the new leg to investing.

Where are you comfortable on your leverage or did you have to get down back to the three and a half by year by year end to fund the investments or how are you thinking about that.

To do something major Peru, we would have to get down to that three five times at least vertical or lower but we are comfortable doing small tuck ins.

At the current level as long as they are.

Strategically aligned and financially very accretive from the organizational competence of talking about.

$10 million of less.

But for a major investment of <unk>.

$50 million of more we'd like to get pillar of three five times net debt.

Average ratio.

Okay.

As referenced the fundings from growth initiatives for the second half I was wondering is is there any more color in terms of the sort.

Some of those investments and where and what the.

Going behind other than the.

Power supply concerns.

Yes, most of them will be on new product development.

And demand generation to support our growth.

The price development will be of knee.

Work from home video gaming computer accessories art supplies.

All of the areas of that we're seeing strong demand in and.

The demand generation will be in the near term debt to support those but also support back to school in North America. So that's where the investments are going to go in.

Thank you very much guys I appreciate it.

Thanks Kurt.

Your next question is from the line of Matt <unk> with the B Ws financial.

Hey, good morning, So just wanted to ask about back to school.

Are you seeing any changes in the purchasing habits.

On the regional side.

The schools are going back of the recession and what are your expectations on gross margin as you start to scale up of neat.

Go back to normalcy with back to school.

The purchasing.

Hi, Matt its difficult for us to say because right now the increased demand.

From end users from being primarily serviced by the inventory that the customers already have so we haven't seen a significant the replenishment cycle.

Cycled, yet that's still to come so.

Difficult for me to give you of any additional color on a regional.

Beyond that overall.

South we ask the in sell through.

For pretty much all of our customers in the U S.

And what was the second question I'm sorry.

Margin as far as gross margin yes.

Yes.

It's also a tough.

Question for comment on because certainly with scale, we would expect an expansion in gross margin plus we think.

Some of the.

Are the absolute inventory accruals will be released as well as volume goes up but.

But on the other hand, we are seeing increased inflation of raw materials inflation, and we are seeing continuing to see.

Logistics and freight inflation, so how those things.

<unk> offset each other it's difficult for us to give you additional color on until we see a load of more in the quarter.

Okay. Thank you.

And then kind of.

Your next question is from the line of Carla Casella of Jpmorgan.

Sure.

I'm wondering on the M&A front as you are seeing any more opportunities out there at the come out of the pandemic and the net pure success in power assets, mainly Gary maybe changed the view of what you might be interested in the internet aircraft debt nor attack per share.

The traditional business.

Yes, thanks for the question.

There certainly is no shortage of M&A opportunities.

As we've mentioned over the last.

A few earnings calls Theres lots of things in play there.

Both because the.

The pandemic has squeezed some players.

Strategically, but also because valuations are relatively high so people want to.

Monetize monetize the opportunity.

We.

I have always thought.

That the Tech agency would be interested interesting for us we've looked at that for a while.

Overall, our strategy doesn't change it has to make sense.

Strategically for the company in terms of distribution brands value added et cetera, what else estimate the financial sense from an accretion for our for our shareholders. So our strategy Hasnt changed.

Mentioned in the my previous answer to do something big NAV to de lever as well we have plenty of.

Work on our hand, this year to drive organic growth in the business. We think we have lots of opportunity.

But we are definitely open to other acquisitions.

If both strategic and financial criteria on net and we have the balance sheet today.

Okay.

Great. Thank you.

Thanks, so much.

Again to ask a question. Please press star one on your telephone keypad again Thats Star one please limit your questions to one question.

Your next question is from the line of Joe Gomes with noble capital.

Thanks for taking the follow up.

Most of my questions been answered, but Boris maybe you could give us a little bit more insight on some of the new product introductions that you're thinking about here looking at end of previously you had talked about humidifiers are the potential areas of interest.

Maybe you could expand a little bit more on that thank you.

Sure.

And the wellness area, we're definitely looking to expand of the line.

You mentioned that I previously talked about the entering the humidifier space. That's definitely something we're looking at we're also looking at the more of a commercial grade air Purifiers.

Today out of our products are largely focused on the consumer space on the home space, but.

But we think that there is a.

Sustained need for air purification in the office environment as well.

And small businesses.

Given the pandemic and just the sensitivity.

Two of those Capex, that's one big area of investment.

Worked from home products is another big area of investment with things that the world does not go back of the pre pandemic way of working with things that the country will return that will return largely to a hybrid type of situation with people working in the offices, a few days of week and working from home.

Days of week. So we think there will be sustained need for on a work at home products and that includes investments in.

Additional daffing solutions both for the.

Traditional.

Pcs as well as for Apple ecosystem, including ipads.

Certainly investments.

The investments in power and video gaming and expanding net line.

Neil mentioned of for.

For international expansion for mobile gaming.

And in headsets.

And to support other console.

The introduction.

And then the other big area for.

For work from home is the annual shredding of leasing is a huge opportunity there to introduce value products that actually the work and don't breakup for a few months.

And also a line of.

<unk>.

Storage products and the organization of products for whom we mentioned the Wow and KOL day range that we introduced in EMEA, which is a big hit from the.

We have an opportunity to introduce debt.

On a global basis, so theres really not a shortage of ideas for us too.

Investing in product development that we think of a great roadmap and I look forward to of bringing those to our consumers.

Thank you Boris.

Thanks, Joe.

Okay.

There are no further questions I will turn the call over to force Allison for closing remarks.

Thanks for carrier.

Thank you for your interest in ACCO brands to summarize we're optimistic about continued recovery throughout the rest of 2021. We're also very pleased with the performance of foray and EMEA and expect growth in both to continue.

We remain confident about our future and our ability to continue to position the company for growth and improving returns for our shareholders and the.

Great Day, and we'll talk to you next time thanks.

Yeah.

This concludes the first quarter 2021, ACCO brands earnings call. Thank you for your participation you may now disconnect.

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