Q2 2021 ACCO Brands Corp Earnings Call

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Ladies and gentlemen, and thank you for standing by and welcome to the 2 Q2021 Echo brands are and news conference calls at this time all participants on the list the only note.

Actually the speaker's presentation day with a question and answer session to ask a question during the session human nature per star 1 on your telephone if you've had any further assistance. Please press dot zero Oh not on.

And the conference on what to you speak of today Christie Hannaman. Thank you. Please go ahead.

Good morning. This is Christine Hannaman senior director of Industrial relations welcome to ankle brands second quarter 2021 conference call speaking on the call today are Boris Ellison, Chairman, President and Chief Executive Officer of Echo Brands Corporation, and Neil Scenic Executive Vice President and Chief Financial Officer.

Slice and accompany this call and have been posted to the Investor Relations section of ACCO brands Dot com.

And speaking about our results neighbor for to adjust to resolve the.

[noise] adjusted results exclude transaction integration amortization and restructuring costs and other non-recurring items and reflected and just the tax rate.

Scheduled to have adjusted results and other non-GAAP financial measures and the reconciliation of these measures to the most directly comparable get measures or anything.

And is released and like that accompany this call do.

Due to the inherent difficulty and forecasting and quantifying certain amount, we do not reconcile and forward looking non-GAAP measures.

Beginning with the first quarter of this year, we changed the way, we calculate and report adjusted and non-GAAP results by excluding non-cash amortization of intangible assets.

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

Forward looking statements made during the call, including statements concerning the and snacks for the COVID-19 pandemic on the company are based on the beliefs and assumptions with management based on information available to us at the time and the statements and make.

Oh and forward looking statements are subject to live and uncertainties and our actual results could get for materially.

Please refer to our earnings release, and the SEC filings for an explanation of a certain of these risk factors and assumptions are forward looking statements are made as of today and we assume no obligation to update them going forward.

And are prepared remarks, and you'll hold the Q&A session and now.

Now I will turn on the call over divorce elephant.

Good morning, everyone. Thank you for joining us.

I will spend a few minutes for a year and a second quarter high like.

Near will follow on me with details on the numbers and provide additional comments on a balance sheet cash flow and second half outlook, then we'll take your questions.

We had an excellent quarter with a rebound and demand for many of on commercial products, reflecting the economic recovery.

Second quarter sales and profits exceeded our internal expectations as opposed to significantly increase and total sales as well as robust organic growth for.

Both of the second quarter and year to day.

A total second quarter sales when you got a record levels and comparable to 2019 and.

Each of our segments experienced a steady improving the level of other demand for a while for quarter.

I'm very pleased with our performance and remain confident and a strategy of transforming our business to become more consumer oriented.

And General V U at India, Australia, New Zealand and Asia continue to see strong recoveries as more people and return to offices hiring rebounded and many schools returned to in person and learning.

And my head and excellent quarter, driven by outstanding organic sales growth.

Turning the business for Prepandemic level.

We believe will continue to take care of customers move for the well known brands and more reliable service that we provide.

Strong sales global widespread.

Led by computer accessories, DIY tools wellness products sweaters.

Supplies and a general increase in demand for all categories.

And North America, we had a robust recovery of office and commercial categories, which improved sequentially throughout the quarter as officers began reopening.

A second quarter is usually driven by North America back to school orders and we.

We expect most schools will be open for in person 5 day, a week education beginning this fall.

A major customers a Baptist school inventory remaining from last year saw second quarter.

While very good we're lower than normal expected swollen and.

Plan for this and our second quarter guidance.

We have expectations for a strong total season.

And it should trigger great on the punishment needs and the second half where our ability to locally for each product, maybe and added benefit due to global supply chain problems.

Power a had a very good second quarter performance with sales up 19%.

And would have been even better.

Gaming console product availability was restricted due to supply chain challenges, including clinic and that's a cute shortages.

There are substantial demand for overall gaming products and uncle producers of backwaters.

Expect many more gaming console for a ship and the seasonal and stronger second half.

And believe Polly sales will increase as it is well positioned to take advantage of greater demand and.

And can you expect 25% sales growth for the year from Poway.

Our integration of far away continues on track and we expect to and transition services agreement with a previous owner get August.

We are pleased with this acquisition and all aspects.

Turning to the international segment the region overall had a good quarter black.

Latin America is still operating and and challenging environment, but vaccinations are increasing and that should build well for office and school, we openings to accelerate.

And the quarter the segment had organic sales growth and profit improvement despite sporadic lockdowns and various parts of the region.

We're expecting continued recovery and this segment over the next few quarters.

Moving on last year, Kansas and computer accessories business received the largest order it has ever had which means that difficult comparison and the second and third quarters. This year.

Despite the difficult comps the Kensington business grew and the color as will continue to introduce new and innovative products.

1 of those products, which I spoke about July 1st quarter earnings call cause the studio dot for Apple ipads.

That product has been so popular that and is now auto stock and and we have a lengthy backwater lisk, which we expect to fulfill and the second half.

Despite increased competition are true walnuts products continue to perform well and a quarter with double digit growth of last year.

Expanded product offerings and this category and later this year and next should feel continue and growth of health and wellness products.

Turning to the supply side of the business day.

And issues, we face worldwide.

And your supply chain disruption due to COVID-19 impact and high inflation.

We are carrying more inventory and where possible because of elongated supply chain new time.

Logistics costs have risen significantly compared with last year's rates at.

Have the cost of commodity such as oil plastics steel and paper.

While the way for the increase has subsided, we expect cost the state and these elevated levels at least for the rest of the year.

As a result, we have taken price increases and most countries and announced additional price increases that will occur later this summer and fall.

Favorable foreign exchange itself and to mitigate some other higher costs and EMEA, Canada and parts of our international sentiment.

And summary.

And continue to focus on and executing our strategy of improving sales growth and profitability by shifting our business towards more consumer centric products and faster growing channel.

As occurred this quarter.

Growth will come from acquisitions, such as power, a as well as organic sales from demand recovery and ready for new products and market share gains.

We have adapted quickly to take advantage of the changing post pandemic environment by aggressively pursuing the long term opportunities with bank will grow most rapidly.

We make and larger investments and growth areas, such as video gaming accessories wellness products.

Work learn a play for home products, and computer accessories, and Ah, reducing our investments and some commercial office products.

<unk> will remain relatively these longer term.

Although we're seeing sample standard recovery, even and these product lines and offices.

We now have better visibility for the second half and are expecting a sustained economic recovery and all regions and the third quarter.

We believe that environment will lead to continue the organic sales growth.

With inflation offsetting some other gross brockett games from volume growth.

For the full year, we're expecting record sales and a strong profit performance.

Now, we will turn the call over to kneel for a more detailed review on the settlements are outlook and other financial commentary.

And then I'll join him and answering your questions Neil.

Thank you Boris and good morning, everyone, while second quarter reported net sales increased 41% due to an increase and calls a commercial portal as well as for contribution and Paula a which added $51 million on.

Comparable sales rose, 21% helped by steadily improving market conditions.

Second call for net income was 49 million or 50 cents per shell and <unk>.

<unk> net income was 42 million and adjusted EPS was 43.

Much bread and our outlook based on fire flow.

Gross margin rose to almost 52% compared to 40% in 2020, the increase and blog <unk> fault or cost savings and loans inventory room for.

SG&A extensive will $98 million compared with $77 million for Ya.

The walls and 2020 benefited from many pandemic related temporary cost of production network that impacted both SG&A and coffee and big bold.

Nikki is extensive auto mall normal level for a company.

And Kunai as a percentage falls with 19% compared to 21 per cent, primarily because of high on net sales.

Reported to operating income with 50 million compared with 19 million and last year, the operating margin with almost 10%.

5% and 2020.

We recorded 9 million with other income because of on continuing to clean Corp talk through meat, but will allow future for.

And in Europe since previous and <unk>.

We anticipate on the lower courts continued to applause and keep clean and <unk>, we will record additional income and teach you period.

Are adjusted tax rate of 28% will be in line with a full year.

And 29%.

Alright sales growth, 19% for over the increased boutiques and larger if not for a shortage of consoles related to the chip shortage as far as described.

We continue to expect a strong second call from Paul.

Console manufactures pulled up on <unk> and because of the normal seasonally strong demand for the December holiday.

All marked as possible and 2 equal and swollen over the next 2 years and.

And falls and profit target for Mick.

Each call for we recognize any change in full volume of the Walmart also and expense and our income statement and.

We expect called new charges throughout the 2 year period.

This call for the book for 5 million expense related to be on and off each along with the 4 million of amortization related to the acquisition resulted in.

Operating contribution and Paul.

Paul and contributed please and can you.

Just to ETS.

Now that came to some details on second results.

Net florals and North Miracle increased 27% largely due to the contribution from Paul.

Comparable sales rose, 8% all day results of strength and commercial office products.

All the expected.

And school cough.

And last June 2nd quarter of course confused inventory day hope from last year.

We slip back to school fees and to be significantly halls, and last year for punishment to tell me your third quarter and possibly also on the fourth quarter.

North America operating income and operating margin increased as a result of hall sales.

$5 million flow of restructuring, Paul and 5 million less expense for inventory result.

Now, let's turn to EMEA.

Net sales rose significantly to 157 million and comparable sales rose to $186 million, which are both above 2019 level.

And strong increases with the result of a general economic recovery as well as market share games.

We have nasty and for cooking, a strong business improvement and India.

And you have posted a $10 million operating profit for us as a 2 million and last last year.

Morally due to the hall sales, which offset hall call, particularly for normalized expenses and and logistics.

Moving to the international psyche and.

Net follow and comparable sales increased significantly and take the higher demand and the other countries.

Mexico, and Brazil continue to be and package, okay. Good and 19, Willow real seeing improvement vaccination rates have increased.

Small businesses, and Australia, New Zealand Asia, and chili on much less impacted.

Ultimate result of improved sales this segment posted it and adjusted operating profit of 5 million growth of the loss of 2 million and last year.

Notes for also helped by 2 million of low about debt with those.

$1 million lower income cream and thoughts on 1 million of low and restructuring cole.

Hey, please now for a balance sheet and cash flow.

And the second quarter, we used to pump can it be 14 million and net cash for operating activities and had 18 million for free cash outflows.

Do you play David and some 6 million and Capex was approximately 5 moving.

<unk>, we used to pumps and will be 55 million and and net cash for operating activities and you $64 million for free cash outflows.

And you pay dividends of 12 million and Capex, 2.9 million.

I used to cash is lower this year's and last year by 12 million.

If you exclude a it was 35 million bucks on.

As we have multi for full declined use and free cash flow for this year will be to pump dividend and to reduce debt.

Capex outlook for 2021 is less and.

2 million.

A call for and we had 351 million and remaining on all 600 million revolving credit facility.

We also had 78 million and cash on hand.

Our bank pro forma net leverage ratio improved 2 for 2 times, which is better than we expected due to a stronger on them.

Now, let's turn to our outlook.

And we now have greater visibility for the rest of the year.

Therefore, we are in counting our guidance to provide both a sales quota and Korea outlook.

I'll second half demand is expected to continue to improve compared with last year. This for.

She was more companies for tending to offices at least and a hybrid mode.

Expect a group and fell off for back to school cut off and for me change should continue to be a benefit.

Likewise, the second half you seek any strong for Kensington on this question and power a.

For a call for outlook is for for.

<unk> to be and the range of 550 million to 1200 and $45 million cash.

Total adjusted EPS is expected to be and a range of 30 to 35 cents.

The headquarter outlook includes a favorable foreign exchange and packed a 2% on sales and 1% on adjusted EPS.

We.

Approximately 12 million for pretax and tangible amortization Whoopi excuses and the third quarter based on our definition of adjusted earnings which represents approximately 9 cents on on an adjusted EPS places.

Compared to the second quarter, we expect additional pressure on operating margins and the third quarter, mainly due to cost inflation much of which it income people used and the second quarter on working for some loans and the fourth quarter.

Most of the incremental price increases for inflation.

Inflation will not perfect for results until the fourth quarter.

All of which is baked into our guidance for.

Oh of course, and we'll also incrementally benefit from strong Paul a sales due to typical business seasonality.

For the for your outlook is fulfilled b and the range of 2 billion to 2.07 volume.

For you adjusted EPS is expected to be and the range of $1.45 to 1 dollar and 45.

Translates to adjusted EBITDA and a range of 285, $2.300 million and.

And with our expected used for free cash flow and maybe reduce debt. We expect to achieve all logos go for 3.5 claims Oh Lola.

Ear and similar to growth was before we focused Paul H.

The full year outlook includes a favorable foreign exchange and part of 3 per cent on sale and 5 cents on the adjusted EPS.

We expect while normal productivity programs will deliver approximately 30 million and pull your expense savings.

On the pretext formal foundation exclusion for the full year is estimated to be 47 million, which equates for 34 cents on and adjusted EPS basis.

And we feel comfortable that we can deliver at least 165 million of operating cash flow the full year and with.

And with Capex expect it to be less and 30 million and we will generally to at least 135 million inquiry cash flow.

That means we expect to generate approximately $220 million and cash flow and the second call that.

That tosses performance has been a ranking returns and all seasonally strong and the second half.

Now, let's move on to Q&A, we're both small will be happy to take your questions.

Offer and so.

At this time, ladies and gentlemen, if you would like to ask and all your question.

Please press star and the number 1 on your telephone keypad and counter other questions to ask 1 question and then you may return to the queue to withdraw your question crashed depend on key please standby and probably compiled and Q&A rosters.

And our first question comes from the line of Chris and again, it was Saturday and companies.

Hi, good morning for taking my questions and next quarter and.

Did you say expanding on.

Growing and commercial how much of that is easier to the day haven't been spending.

Pandemics and how do you think that for you should hold on for the rest of the year.

Hi, Chris and thanks for the question, if you got the growth and and commercial channels was pretty strong.

Have to keep in mind that last year and Q2.

They're really shutdown purchases.

So it's really a compare story.

We do see more offices reopening.

Expecting more offices to reopen and the near future, so, thereby and both for on demand they have today as well as staging inventory and for the demand and that's gonna come for the remainder of the rash and the growth.

All segments of our commercial channels will very strong, whether it's independent or on a contract stationers.

A very strong growth throughout.

And we think more or less.

That story will continue.

For the remainder of the year, obviously, the compersion will be different.

Versus the.

Worst corner on the pandemic, which was Q2 and last year by stealing from a sequential standpoint, we expect sequential growth.

For the remainder of the year.

And if I could just go ahead and follow.

Alright, she's on.

Alrighty and growth.

Can you just talk about from a media how much that was often and are you starting to gain traction there I know, it's very early on and me and integration. Thanks.

Powell ready and and the.

And a good quarter.

Still pretty small numbers.

And so on our business is still driven very much bye and North America and demand.

We still have not implemented.

And our expansion plan for power and and yeah that something's going to come home for the next several quarters are still still significant upside.

And that business and EMEA, despite that and grew 19% and the corner and 15% on 753%.

Could be intimate with finally globally.

Thanks for taking my question do 2.3.

Thanks, Chris.

Your next question comes on the line and frankly cameras with Keybanc capital Mark.

Hi, Good morning, Boris and Neil. This is this is Andrew on for Brad Congratulations on a strong results yet.

Now that now that we're hopefully feeling worse and depend on that day.

And then you are starting to benefit from and a population and returning to the office and in person and learning at school and have you noticed any changes and the competitive environment for office products and particularly when you can carry the pandemic.

Pandemic environment.

Not.

Nothing mean for you so I mean, we still on a.

Competitive industry.

We are benefiting from a very strong brands that we have and strong distribution that we have but the the competitive environment is very.

Very similar and I'm looking at the meal and any anything that and for that versus Prepandemic balance.

And so if there was anything specific nature and.

And competitiveness for probably a change and which province.

Net a pillow and more popular.

As the results and some of the type of storage products are less popular people do tomorrow and chronic storage.

And for the for.

For the use more for teamwork.

Sure and strong songs.

And you said thank you.

And 1 quick follow up.

Given the industrywide supply chain and can change it.

Noted and your prepared remarks.

An area in which you are Casey product availability issues day product availability.

We have generic issues with product availability.

For everything that we bring and from from Asia, and that's not just on snap Peas day.

Global phenomenon and with.

And everybody.

Function of and.

Just 6 constraints and.

And just the.

And the only doing that for containers as well.

Sporadic shutdown through the Covid.

And and Asian countries. So this is something that we're dealing with.

And I think managing quite well, but the whole room and dealing with that.

And had an impact on our.

Some of our practice and ability.

And in queue too and we do expect sporadic issues throughout the rest of the year and and and you mentioned all of that and and you're already baked into the guidance and providers.

I understand thank you.

Thank you and the night.

Question comes from the line of Joe comes with novel capital.

Good morning, nice quarter. Thanks.

Thanks, Joe.

So quick question cash flow and where did you.

You really knock the ball out of the park this quarter first quarter you're raising.

Are putting out some some nice numbers for the second half of the year, but you really haven't raise your cash flow guidance and and just wondering is that just you be conservative or what's behind that.

That's a good question 1 of the reverse challenges people.

That always focus on and when you get a lot of return to growth is we need a lot more accounts receivable on the balance sheet at the end of the year and so particularly around South America.

And a lot of our business day is very cute for centric and Brazil, and dry some and all into receivables at the end of the year. So Willow guidance is increased we have to make a big issues. We have more I R moves and seeing a lot more dollars having to go into inventory.

Always mentioned over here and it's not change power.

Is use a cash for us for the year as opposed to a milk normal source and the big quarters cute for.

Right right.

And 1.1 quick follow up if I may also on.

Power.

Sequentially.

Revenues decline and take him out and the first quarter. They power and revenues were north of 60 million and this quarter. They were 50 million is that just you know and as you mentioned before some of the seasonality and the business and the fact that there has been some.

Outages in terms of the consoles are is there anything else there. Thank you.

Yeah, that's right Joe.

And renovators, because analogy about having a bigger and back and the fact that the the console makers have a difficult.

And did for situations meeting demand due to the semiconductor chip shortages and so they're shipment.

Who are affected and and offensive the sales of the accessories.

The expectation is back and is going to be a kosher and recovery of that and the remainder of the year and I'll still be some shortages by it should be better than Q too.

Which you drive for incremental sales and the phone rang as well as just normal seasonality for business, which improved and Q3 and Q for.

Thank you.

Thanks, Joe.

Your next question comes from the line and William and from there for Bank of America.

Good morning.

We built and your your.

Your and your gross margin reconciliation, there doesn't really seem to be any meaningful headwinds in terms of.

Margin pressure for inputs.

Nor transportation I guess can you talk a little bit about whether this is to use a third party manufactures or whether you're contracted your ocean free some.

You know length of time and advance or what's contributing to the lack of pressure.

Can we raise prices and beginning of the year to offset the ocean fight issues and so those were largely and offset to each other they were small Greg.

About 30 basis points adverse.

And the.

Overall and the nicotine.

And Q3 is weak and it's highlighted on on cool, we expect cause we've seen it already go into a balance sheet and she too.

Significant increases of commodity costs, so and it's just the way we.

And we have about 3 months worth of inventory and so on the purchases and queue to basic and going to end and Korea and they look at the piano and Q3 and so we can see a lot more margin tertiary and country and.

That's part of why we also need to raise prices again.

In the late summer.

Okay, and then I guess just as my follow up to that given you guys were successful I'm pushing for sufficient price increases here for the second quarter.

These next round of price increases largely make itself fourthquarter, we shouldn't see much perjured pressure at that point.

Obviously.

It would it be stability for this quarter.

And.

More so dizzy and commodity close and that'll be a different story will always unfortunately, lagging and what happens and the real world, but we currently say commodity hopefully have stabilized roughly where they all for.

Function for cost.

Makes sense, Okay Augusta other thank you.

Thanks for that.

And we are ready for the next question.

Yes. Your next question comes from the line of course.

Of course on with the and VW and financial.

Good morning question on the supply chain and and what you're seeing in terms of pricing pressure and not just for Q3, but how.

Expanding on what you said, how does that impact to be impact there.

Competing for space on.

Cargo carriers to bring product over and do you see that as an obstacle and the second half for these.

Yes, we do as it continues to be an issue that continues to be okay.

Dana shortage.

And on Asia.

It's difficult to reserve space.

On on.

Kind of ships.

For the continued to have.

Perl and gated lead times as a result of that and and we don't see a.

And a term resolution to that for.

We expect that to continue through the second half of the year.

I guess my my question on a follow up and I mean, that's pretty much for she said and your prepared remarks, but my question and mostly about in terms of capacity and space to get products over for you being higher and to make sure your products are.

Arriving and time or is it just first come first serve that you're just and.

You're not quite sure if your product and if you'll have enough inventory and the second half is that an issue at all.

Well, we have long term contracts with our logistics providers or the price is agreed to.

But sometimes we do have to.

Bid on.

We'll get a spot right, which is significantly higher and on that could get products here.

And time for Anne.

For retail SEC or back to school seasonality for yes, we do have.

We try to be strategic about it.

Sometimes we do have to bid a higher price and incur higher cost and up against a product here earlier and expedited fashion.

Thank you.

As a reminder to ask a question you would need to price Darwin on your telephone account and requested to ask my question that day and 1 follow up.

And you may return to the queue.

At this time they are and no further questions do you have any closing remarks.

I do.

Okay. Thanks Christy.

Thank you for your interest and ACCO brands to.

To summarize has been economy has improved for a very good recovery from the impacts of COVID-19, the straw increases and many of our product lines, particularly on the commercial side.

And it continues to go significant sales contributions and.

And we're expecting a strong second half the business has momentum and we should continue we should continue to see strong economic growth that the school replenishment and and traditional seasonality with Kensington and power right.

You have to generate a significant amount of free cash flow and will use it to reduce our debt.

Remain confident about our longer term future as we continue to position and the company for higher growth and strong returns for our shareholders.

We will not be chew on our progress next quarter. Thank you and have a great day.

Ladies and gentlemen, thank you for participating and today's conference you may now disconnect.

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