Q3 2021 ACCO Brands Corp Earnings Call
Certain 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.
Our 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 a Q&A session now I will turn the call over to Boris Ellison.
Good morning, everyone. Thank you for joining us I will spend a few minutes discussing the overall environment, we're operating in and how it's impacting our business.
Jill will follow with details on the numbers and provide additional comments on our balance sheet cash flow and outlook.
We'll take your questions.
We had a good quarter.
Based on the addition of power Rea continued strength in EMEA, a solid back to school sellout in North America and improvement in our international segment.
All segments posted organic sales growth, including double digit growth in comparable sales in EMEA.
During the quarter, we continued to see steadily improving demand overall.
Spike higher incidence of COVID-19 during August and September however.
While commercial product sales were up and back to school replenishment orders were solid.
The increase in the Delta variant in the quarter resulted in more muted demand for commercial products and less back to school replenishment than I would have seen otherwise.
In addition, <unk>.
Global supply chain and semiconductor availability issues kept our backwaters high which also delayed some shipments in the quarter.
Despite those challenges, we saw economic recovery and improving end user demand throughout the quarter and believe the steady recovery will continue in the fourth quarter.
Let me now give you some color on our business.
I'll begin with power.
We're pleased with the performance of this business, which had a good sales quarter, but at the low end of our expectations.
Due to chip shortages video gaming console sales have been hampered by product availability issues throughout the year and console sales a major demand driver for the accessories sold by power rate.
We had expected council availability to improve in the third quarter, but it did not to any significant extent.
A few products at retail shelves and whatever shipments were received were sold immediately mostly through online channels.
There continues to be strong demand for video gaming products, and we expect console supply to improve over time.
<unk> console producers are still likely to have back orders in the fourth quarter.
As a result, we're reducing our outlook for power sales growth this year to 20% from 25%.
Business is enough product to sell and a seasonally strong fourth quarter, and we are well positioned to meet demand.
We expect to continue to see a strong organic performance domestically from foray in 2022 and plan to begin incremental expansion internationally in the latter part of next year.
Moving on.
As we noted last quarter the U S back to school sell in was impacted by an inventory overhang from 2020.
That this call sell through was solid this year with school supplies sales growing 27%. According to the preliminary information from external sources.
Our five Star brand New school products took share again with sales growing 39% according to external sources.
We were the leading notebook brands for back to school in North America.
The inventory overhang from last year's soft sellout has been sold through.
Due to increased incidence of the Delta variance, however, customers were somewhat conservative in making replenishment orders, but we still had a reasonable amount of replenishment in the third quarter and are very pleased with our overall back to school performance.
We will enter next year in a good position for back to school sell in.
Expectations for a strong 2022 season as the circumstances should be more normalized and the channel finished this season without excess inventory.
Moving now to our Kensington brand you may recall that last year that business had its largest order ever. So we are up against a very difficult comparison this quarter.
If we exclude that large sale Kensington had double digit sales growth versus last year, and our total comparable sales increased 10% instead of 4%.
Kensington continues to focus on development of new products to fuel its growth and the pipeline for 2022.
Just.
EMEA had another excellent quarter with organic growth of 10% on top of a strong third quarter last year.
We'll continue to take share in every part of our portfolio with especially strong growth in <unk>.
Kensington repeat light and Derwent branded products our team in EMEA is doing an excellent job and I would expect our strong performance there to continue.
Finally, let me talk a bit about our supply chain and the high freight and commodity costs, we have been seeing.
The business is facing supply chain delays and disruptions, whether it's port congestion factory closures truck driver shortages rail chassis shortages shipping containers in the wrong places et cetera.
Logistics and commodity costs have increased rapidly over the past year and is still very high.
While it is hard to predict we don't see the situation improving until perhaps the second half of 2022.
Our employees have been managing this difficult situation very well.
Carrying more inventory were possible because of elongated supply chain lead times.
It also helps that we manufacture approximately 40% of our products and our local markets.
We've taken several price increases across all of our businesses globally to help offset the higher cost and we will announce additional price increases for 2022.
We expect price increases to substantially mitigate the effects of inflation in 2021.
But they won't fully offset them until next year, because our pricing generally lags cost increases.
In summary, we believe that current recovering demand will lead to continued organic sales growth and improved profitability of our business for the full year. We continue to expect record sales and strong profit performance.
<unk> will continue to focus on executing our long term strategy of improving sales growth and profitability by shifting our business towards more consumer centric products and faster growing channels.
Growth will come from acquisitions, such as power.
As well as organic sales from demand recovery innovative new products and market share gains.
We are aggressively pursuing and investing in the long term opportunities. We think will grow most rapidly such as video gaming accessories computer accessories and work learn a play from home products where.
We have recently made some leadership changes to enhance our execution of this strategy, we have promoted Tom captured.
Who ran our North America operations to President and Chief operating Officer, and hired Roxanne Bernstein, who has strong consumer and marketing experience to run.
North America segment.
We remain confident in our strategy and our solid financial position, especially our consistent strong free cash flow generation.
I'm pleased to report that our board shares that confidence and has approved a 15% increase to our quarterly dividend to seven and a half cents per share.
Now I will turn the call over to Neal for a more detailed review of the segments our outlook and other financial commentary and then I'll join him in answering your questions Neil.
Thank you Boris and good morning, everyone. Our third quarter reported net sales increased 19% to $527 million largely due to the contribution of power.
Which added $57 million.
Our comparable sales rose, 4% as we saw increased demand in most markets.
Fourth quarter net income was 20 million or <unk> 21 per share adjusted net income was $32 million and adjusted EPS was <unk> 43 per share.
Our adjusted EPS was adversely impacted by three.
From a much higher adjusted tax rate than originally forecast without the change in tax rate, our adjusted EPS would have 30, 46%.
Our gross margin rose 120 basis points to almost 30% compared with roughly 29% in 2020 the.
The increase was largely the result of higher sales.
It's a product mix and cost reductions.
SG&A expenses were $102 million compared with $84 million last year.
Results in 2020 benefited from many pandemic related temporary cost reduction efforts that impacted both SG&A and cost of goods sold.
This year's expenses at a more normal level for our company and also reflect the addition of <unk>.
SG&A expense as a percent of sales was 19% even with last year.
Higher expenditure was offset by higher sales.
Reported operating income was $39 million compared with 34 million last year and operating margin was slightly over 7% versus close to 8% in 2020 due to the dilution from the power announced and amortization.
The earn out is payable in two equal installments in March of 2022, and 2023, if certain solvency profit targets are met.
Each quarter, we recognize any change in fair value of the earn.
Is the expense in our income statement.
We expect quarterly charges throughout the earn out period.
This quarter, we booked a 5 million expense related to the earn out which along with 4 million of amortization related to the acquisition resulted in only a slight operating profit contribution from power.
Without those charges power a contributed <unk> <unk>.
To adjusted EPS.
We increased our full year tax estimate to reflect changes in our forecast geographic mix of income interest expense limitations and are guilty tax burden.
This resulted in a 31% projection for 2021% increase from the previous level of 29%.
For the third quarter with 34, 8% tax expense reflects the year to date true up as the first two quarters have reflected the 29% projected.
Now, let's turn to some details of our segment results.
Net sales in North America increased 21% to $288 million largely due to the 45 million contribution for power.
Comparable sales rose, 1%, primarily from higher back to school and commercial sales.
The offset by the absence of a large kensington computer accessories order that shipped mainly in the fourth quarter last year.
North America, adjusted operating income and margin increased as a result of higher organic sales.
And better product mix, primarily due to the absence of $22 million of low margin Kensington sales.
Now, let's turn to EMEA.
Net sales rose, 18% to $161 million and comparable sales rose, 10% to $151 million, which are both above 2019 levels.
The strong increases with a result of the general economic recovery as well as market share gains, including the benefit from the acquisition of the <unk> product line.
We have now seen five consecutive quarters of strong business improvement in EMEA.
EMEA posted a lower operating profit and margin due to higher logistics and commodity costs as well as more normalized SG&A expenses versus last year.
EMEA rates prices effective October one so we should see some margin improvement in the fourth quarter, but EMEA will likely need to take additional price increases in 2022 to offset inflation.
Moving to the international segment.
Net sales increased 13% due to price increases.
And favorable foreign exchange.
Comparable sales increased 5%, primarily because of higher prices.
Mexico, and Brazil continue to be impacted more by COVID-19, although we are seeing improvement that's explanation rates have increased.
Mexico, essentially did not have a back to school season.
We're all hopeful that Brazil will fare better with gets back to school season as more children have returned this fall to invest in education.
We expect the back to school season in Brazil to be larger than the prior year.
However, we anticipate that more sales are likely to move into the first quarter of 2022 and less in the fourth quarter of this year, which is the opposite of what historically has occurred.
Our business in Australia was negatively impacted by a return to lockdowns in.
And you saw whales, which has the largest population and it's where most of our sales occur lockdowns impacted the entire third quarter.
Despite that sales in Australia were up mid single digits in the quarter.
The lockdowns on our over on the vaccination rates have improved markedly. So we are expecting Australia to have a relatively good fourth quarter.
The International segment posted an adjusted operating profit of 10 million much better from last year, primarily based on long term cost reductions and higher pricing.
Let's move now to our balance sheet and cash flow.
In the third quarter, we generated $99 million in net cash from operating activities and had approximately $94 million of free cash flow.
We paid dividends of 6 million and Capex was $5 million.
To date, we generated $44 million in net cash from operating activities and generated $30 million of free cash flow.
We have paid dividends of 19 million and Capex was $14 million.
Year to date free cash flow is $20 million higher than last year.
As we have noted before the planned use of free cash flow for this year will be to reduce our debt and fund our dividend.
Capex outlook for 2021 is less than $25 million.
At quarter end, we had $447 million available on our $600 million revolving credit facility.
We repaid $117 million in debt in the quarter.
Our bank pro forma net leverage ratio improved to three eight times, which is in line with what we expected and results in incremental interest savings of over $400000 for the next four months.
Now, let's turn to our outlook.
Our fourth quarter demand is expected to continue to improve compared to last year, especially with more companies expected to return to offices at least in a hybrid mode.
Foreign exchange, which has been that benefit is not expected to add much to our fourth quarter since the U S. Dollar recovered strongly during the third quarter.
As a reminder, the fourth quarter is normally very strong seasonally for power EMEA.
EMEA and back to school in both Australia and Brazil.
We expect continued pressure on operating margins in the fourth quarter, mainly due to logistics and commodity cost inflation.
However, the recent price increases will benefit our results in the fourth quarter and although there will not fully offset the cumulative impact of inflation, we should see margins expand but they will still remain below 2019 levels. We have incorporated this into our guidance.
Wherever it using the top end of our sales outlook to reflect the impact of console availability for power.
And we are modifying our adjusted EPS to reflect the higher full year tax rate.
For the full year, our outlook is for sales to be in the range of $2 billion.
284 billion.
Adjusted EPS is expected to be in the range of $1 30 to $1 40, using a 31% tax rate.
The impact of the higher tax rate on a full year adjusted EPS forecast is poor.
We forecast adjusted EBITDA to still be in the range of $2 85 to 300 million, which at the high end will bring us back to 2019 levels.
With our expected use of free cash flow to reduce debt, we expect to achieve our leverage goal of three five times or lower at year end similar to where it was before we purchase power.
The full year outlook includes a favorable foreign exchange impact of two 5% on sales and 5% on adjusted EPS, We expect our normal productivity programs will deliver approximately $30 million and full year expense savings.
The pretax amortization exclusion for the full year is estimated to be $47 million, which equates to approximately 33 on.
On an adjusted EPS basis.
We feel confident we can deliver at least $135 million in free cash flow.
We expect to generate at least $160 million of operating cash flow for the full year and capex is expected to be less than $25 million.
Now, let's move on to Q&A robust and I will be happy to take your questions operator.
Thank you if you'd like to register a question you can do so by pressing star followed by one on your kind of thank you Pat.
<unk> and limited to one question per registration if you'd like to ask a follow up question. Please me rich step by pressing star followed by one.
Our first question today.
It comes from Todd Thomas from Keybanc Capital markets. Please go ahead that your lines now open.
Okay.
Hi, Good morning, good morning worse and Neil Thanks for all the details.
<unk>.
I will focus my question around gross margin.
And given the world that we're operating in.
With input costs going up and.
Logistics and transportation costs going up I was hoping you could talk a little bit more about the puts and takes on gross margin as we think about 2022.
<unk>.
Maybe a first cut at how we should be thinking about that for next year. Thank you.
Good morning, Brett.
So like every other company will see worldwide escalation in costs for international and domestic freight together with commodity cost escalation and all of that is feeding into our products.
<unk>.
As you probably heard from other companies.
Developing story that is continuing to see increases, particularly now in commodity costs, even though ocean freight as pulp stabilized. So we are playing catch up with pricing.
You see that particularly if you look for example in the third.
Quarter at our EMEA segment, which wasn't able to raise prices until the beginning of October.
And you see fairly significant impact to its gross margin. The other two segments were able to get the price increases we will need to raise prices again in the future to offset and we are fundamentally.
Muted too.
We have no choice, but to pulse on the level of cost increase that we're seeing we don't make enough gross profit two to appeal that and so we will be playing catch up on cost through through.
Through next year, and we do expect to see our margins continue to.
Recover.
So year over year, perhaps improve but they're just getting back to where they were in the long term in 2019.
And Neal just to be just to be clear.
As a follow up on the topic.
You still have some nice tailwind from recovery and productivity initiatives.
<unk>.
Do you believe that each quarter going forward. There is still a good shot at continuing to expand gross margins just at a lesser rate.
And that an MLP environment.
Because if you or is there a potential you start to see gross margin declines again, just trying to understand the magnitude of some of these things.
Yes, if you look at the third quarter in total.
Pricing as you didn't offset cost so cost is actually a drag on margins to see what drove up margins was higher volume and product mix together with our own cost saving initiatives.
From a cost versus price perspective on commodities and freight we're still playing catch up what's driving the improvement in our margins is fundamentally the better mix of product sales and the higher volume of sales and our own cost reduction efforts.
While we do expect improvement to your point, Brad we expect improvement.
Not as much.
Maybe we can.
Originally planned for and just because of the level.
Inflation, we're seeing.
But given the productivity initiatives given expected volume recovery in the pricing we are passing through we do expect to continue to improve our margins next year.
Very helpful I will turn it over to others and get back in the queue.
Thanks, Brad.
Thank you. Our next question today comes from Chris Mcginnis from Sidoti.
Tony. Please go ahead. Your line is now open.
Hey, good morning, Thanks for taking my questions.
Nice quarter, I guess, just maybe touch on powering just in Q4, it sounds like it's going to obviously have some issues related to the console manufacturers do you think you I don't know if I may Mr.
Our forecast for power in Q4, I don't know if you gave one.
But could you just provide where you think that will end up for the year.
Above or below your expectation there.
Yes overall, let me just kind of go through a little bit on that one.
But what happened this year, we entered this year with an expectation of 15% growth for powertrain one five.
We had an incredibly strong first quarter.
And on the back of the first quarter, we raised our expectations for the year.
The 25% growth and maintain that.
Through the second quarter, we expected console product availability it could be better than Q3 based on the information that was shared with the markets that did not really happened. There is they are still in very very tight supply.
<unk> console sales drive accessory sales.
Sung <unk>.
And because of that we are reducing our forecast for power rate to 20% to zero for the year, It's still outstanding growth and as I mentioned.
Anybody told me, we're going to grow 20% as we entered 2021 or whatever.
<unk> signed is that great.
So even though we are reducing it from 'twenty to 'twenty, that's still outstanding growth and we expect.
Strong quarter from fourth quarter from timeline, but there is some.
D.
Our console product availability.
That's really why we took a trim.
25% to 20%.
Totally understand thanks for that color and then I guess just with the strong performance in back to school can you just talk about maybe the competitive landscape.
Could you take share.
In that market, maybe just a little more color on that.
Sell through.
Punishment.
Sure sure Chris Yes.
Our back to school was.
Good is going to return to almost normal.
There is still inventory overhang of center by from a semi perspective it was almost normal.
The overall score supply sales grew by 27% versus last year.
Which is a very strong recovery and then we took share our five star brand in school products grew 39%.
We're one.
One of the fastest growing.
School supply manufacturers during the season.
Took share and definitely on number one.
In school notebooks in North America, So we're very very pleased.
With the season from a selling perspective, and we're also pleased that the channel is.
Exiting this back to school clean.
Not.
The level of additional incremental inventory.
Leftovers. So we're very optimistic that next year sell in is it going to be a really good because the channel is clean.
Great. Thanks, very much for taking my questions and good luck in Q4.
Thank you Chris.
Our next question today comes from Joe Gomes from Noble Capital. Please go ahead, Joe Your line is now open.
Good morning, and congrats on the quarter and thanks for taking my question.
Good morning, Joe.
So just wanted to talk a little bit here and get some more insight for us on the commercial re openings.
How much.
You kind of think we stand on that and how much more positive impact that have if you look at EMEA <unk> had five consecutive.
Positive quarters there.
So how much good there.
They're in same here in North America, where it seems to be a little bit slower.
Turn to normal mobile, let's say.
How much more do you think is still to come and then the commercial reopening side and what can that mean for for the top line at <unk>. Thank you.
Thanks, Joe.
Yes, we think there is still a tailwind.
In the commercial sales.
If you look at North America for example, where we have most.
Third party market research information on these things.
We still have a lot of offices, especially in the enterprise space that are operating remotely.
Especially in those especially the case in Q3.
When the dunker variance spike.
People are now returning back to work at least in a hybrid mode.
During Q4 and some in Q1 of.
Next year in that.
It's going to be a tailwind in North America, we had positive sales comps our commercial sales comps in North America, but there's more to come on given the return back to office in <unk>.
Q3, I'm, sorry in Q4, and Q1 of next year.
We're seeing good commercial sales internationally as people are beginning to.
We work from offices more there as well.
And the same thing is happening in EMEA to your point the comps get more difficult in EMEA, because now sales have been very very strong.
For five quarters in a row, but in EMEA until people are beginning to return to offices.
This quarter more and more so we should see some tailwind.
Commercial sales I can't quantify that for you, but I do believe it's going to be a positive.
I think for our sales growth.
Thanks for that bar, so I'll get back in queue.
Thank you Joe.
Thank you. Our next question today comes from William Reuter from Bank of America. Please go ahead William Your line is now open.
Good morning.
So you mentioned in your prepared remarks that growth is going to continue to come from acquisitions. What does the pipeline look like at this point, where valuations and I guess are you guys ready given leverage being down to take on a larger acquisition.
Good morning, Bill and thanks for the question.
The pipeline is still strong there are still a lot of opportunities are.
Valuations are.
Fairly high.
At this moment.
And our types of markets consistent with what you're seeing across the board.
Our net debt to EBITDA ratio was down to three eight.
End of Q3, so it's improving.
It's still likely to continue to improve before we are ready to do anything big.
Yeah.
We previously said that.
Sure.
Range is two to two five that is still the case.
We will continue to delever.
Both this year and next and.
The more we de lever.
The more of an opportunity for us to do something big but.
Okay.
Our strategy is not.
We think acquisitions are important component of our growth strategy aligned to ensure that we are managing it prudently and build over whether our balance sheet.
Very helpful commentary thanks.
Thanks Bill.
Thank you. Our next question today comes from Hamed <unk> from <unk>.
Dws financials. Please go ahead Thomas your line is now open.
Good morning, So I just wanted to ask if you are carrying more inventory play and do so.
Kind of a drag.
Free cash flow abilities for next year or are you expecting demand to be so strong that need that extra inventory.
Obviously, one of the things that's driving up inventory as both the unpredictability of the supply chain and also just the commodity cost increases that we've been seeing so youll.
Youre correct in pointing out.
As a.
Statement when inventory goes up it's a drag on free cash flow.
<unk>.
With that obviously comes the fact that you've increased your payables.
Same inflation, so you get a partial offset to that but.
Our free cash flow perspective.
Part of what we've been doing this year is also working on receivables and payables and so that is effectively going to allow us to still achieve our free cash flow target for the year together with our EBITDA, which is.
Remaining very strong and so from a tax perspective, although our tax rate went up our cash taxes are actually coming in lower than the original forecast for the year.
As is our capex.
Puts and takes but overall, we're still on track to deliver our 135 free cash flow for the year.
And enough inventory.
Going into 'twenty two.
Yes, we've got.
In my view, a lot of inventory and so if we see supply chains become more reliable that's an opportunity in 2002, but we're going to go into 'twenty, two with a lot of inventory compared to last year.
Okay. Thank you.
Thanks Alan.
Our next question today comes from Kevin Spanky from Barrington Research. Please go ahead. Your line is now open.
Good morning.
Was wondering if you could touch on your plans for the international rollout or further rollout.
Power is.
<unk> products.
As you move into 2022 and are those plans.
<unk> it all by.
The lack of console available availability.
Good morning, Kevin Thanks for the question.
The plans for incremental expansion internationally are really focused on Asia, we don't have a significant press.
Presence or kind of legacy presence with power and in Asia, we have feet on the ground with ACA. So if you look at countries like.
India, Japan.
China, We think there are opportunities there.
That with <unk> in the second half of 'twenty two.
And all of that planning.
Second.
Part of your question, we certainly hope and expect by by that by the second half 'twenty two.
There'll be much better product availability.
Counsel not to.
Impact our incremental rollout.
And we'll get more information to the contrary, we will scale our.
Our launches, but right now.
We think it's a terrific opportunity.
Given that roughly half of the gaming World is in Asia.
And we have very little participation. So we think it's a terrific opportunity for incremental growth for us.
Okay, great. Thank you for taking the question.
Thanks, Kevin.
Okay.
Thank you. Our next question today is a follow up from Brad Thomas from Keybanc Capital markets. Please go ahead, Brad Your line is now open.
Boris Neal was hoping you could talk a little bit more about capex I think you've lowered that to I think you said a little under $25 million. This year I believe the plan had originally been $30 million.
That's still coming in pretty lean for what you guys historically had spent.
What the needs of the business, probably on our normal annual basis for Capex and some of the priorities there.
Yes, but.
No.
One of the nice things about <unk> is we were able to leverage all the core systems that we'd spend a lot of money, putting in and so power a fundamentally.
Up from just the take on costs. This year, which is part of our Capex for this year it doesn't add to our capex.
But and going forward, what does drive capex for US fundamentally is two things, it's basically new product rollouts.
Together with that level of productivity replacement for machinery and it is really driven by ERP transitions that we have to make.
The next couple of ERP projects that we're working on a smaller ones, we had a significantly higher capex associated with transitioning the U S. Canadian business, which we spent in preceding years and so on a go forward basis, we're pretty comfortable that capex will be around $30 million.
Great really helpful.
That's it for me thanks, so much.
Thanks, Brad.
Thank you just as a reminder, if you would like to ask a question you can do so now by pressing star followed by the number one on your telephone keypad.
Yeah.
We currently have no further questions. So I'll hand, the call back to burst Allison for any closing remarks.
Thank you Emma and thank you everyone for your interest in ACCO brands.
We continue to see a steady recovery from the impact of COVID-19, with solid increases in any of our product line and expect that to continue in the fourth quarter, which is our seasonally strongest quarter.
We expect to generate a significant amount of free cash flow and we use it to reduce our debt.
We remain confident about our long term future as we continue to position the company to be more consumer product oriented higher growth and strong return for our shareholders. Thank you and we'll talk to you next time.
This concludes today's call you may now disconnect your lines.
Yes.
Okay.
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