Q1 2022 ACCO Brands Corp Earnings Call
As shown in restructuring costs and other nonrecurring items, including the change in fair value of the contingent consideration related to the power <unk> earn out and reflect an adjusted tax rate.
Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP measures 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 are.
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 divorce Ellison.
Good morning, everyone. Thank you for joining us.
Before I begin my comments for the quarter I would like to formally welcome Deb O'connor, our new CFO .
Jeff joined ACCO brands on April 4th and were very pleased to have her on board.
<unk> will follow me with a financial review of the quarter.
And then we will both take your questions.
Moving now to our first quarter.
Following a record sales year in 2021.
We have started 2022 with an excellent first quarter, posting strong sales and higher EPS.
This performance is a result of the strategic transformation of our company towards sustainable comparable sales growth.
I am, particularly pleased with this quarter's performance as we continued to execute well in an environment of high inflation and supply chain constraints.
The 11% comparable sales growth for our total business was higher than our expectations.
And included both price and volume growth.
All segments posted meaningful comparable sales increases.
Led by our international segment.
Earnings per share were 11.
Which was also above our expectations.
Our international segment posted 23% comparable sales growth.
The growth was driven by Brazil and Mexico.
Schools have now reopened after being mostly closed for the past two years.
Our back to school sales have shown recover in Brazil, particularly volatile libre granted notebooks and in Mexico.
But do not yet reflect a pre COVID-19 level of demand.
We anticipate seeing even stronger levels of back to school demand.
The upcoming season in those markets.
The international segment doubled its adjusted operating income grew a strong sales and the release of prior year reserves.
Overall, the segment had an excellent quarter.
Moving to North America.
This segment had a 10% increase in comparable sales.
We saw strong increases in most product categories and.
In particular for student no taken driven by our leading brand by Star.
As well as Kensington computer accessories, and most business products.
We had some back to school sales pull forward into the first quarter as our customers are seeking surety of having inventory on hand for this important season.
Overall, we expect a strong back to school season in North America as more children attending schools in person with channel inventory overhang is gone we expect to see continued good growth in <unk> Our school products.
And we are well positioned to manage supply chain to serve our customers.
We have domestic production of key back to school products, which is a clear advantage for replenishment given supply chain issues related to products imported from Asia.
In addition in the U S and Canada, we're seeing the benefit of price increases we have taken over the past year to help offset inflationary cost increases that continue.
However, we have not yet recovered the cumulative impact of all the cost increases.
And we will raise prices as needed throughout 2022.
Our margin.
Our EMEA business, which has been growing strongly for several quarters.
Posted a 7% increase in comparable sales.
I am very pleased with growth in EMEA, especially in some countries had business lockdown for much of the first quarter due to a spike in COVID-19 .
EMEA operating margin declined as our pricing has not yet caught up with inflationary cost increases.
We took a sizable price increase on April one and have announced another increase there'll be effective on July one.
So we expect to see a recovery in margins as the year progresses.
Creating innovative new products that address unmet consumer needs is one of our key pillars and achieving comparable sales growth goals.
In the first quarter, we won two German design award for our lights, Ergo, Cozy range of storage and organizational products and.
And for our life decisions paper trimmers and cutters.
We also won the prestigious Red Dot award for our <unk> range, our life IQ RFE Shredder range.
Three of our Kensington computer accessories products.
And power received 10, Mark on platinum and Gold awards for the fusion protein to wireless controller and the spectra Infinity enhanced wireless controller for Xbox series X MFS.
11% total company comparable sales growth is especially impressive as.
As we delivered despite a decline in <unk> sales.
<unk> is positioned for long term growth.
Even in the face of a very difficult first quarter comparison, because of posting over a 100% sales growth last year.
While pilot with first quarter sales didn't match last year, the business continued to perform well and showed over 60% growth versus the first quarter of 2020, despite ongoing dearth of gaming consoles in the market.
The chip shortage continues to impact the availability of gaming consoles, which is hurting overall industry sales.
We're hopeful that the shortages will begin to ease in the second half.
But they are likely to still impact gaming console and accessories availability.
As a result, we expect power way to track toward 5% to 10% sales growth this year.
With a softer first half and a stronger second half.
In summary.
We have started the year with good momentum.
We're executing very well as we manage the ongoing supply chain issues and inflation.
We expect to have strong back to school season in North America, and Latin America, and expect to post another year of record sales strong profit and free cash flow growth.
I will now hand, it over to Deb and we'll come back to answer your questions.
<unk>.
Thank you, Brian and good morning, everyone.
Our first quarter 2022 reported net sales increased 8% to $442 million largely due to the return to in person education in Latin America and strength in North America.
We saw broad based growth as most of our product lines posted increases led by no taking products computer accessories and business products.
Our comparable sales rose, 11% as we benefited from 6% higher pricing and improved volume of 5%.
Adverse foreign exchange of almost 4% was it worth headwinds than we had expected.
Adjusted operating income was $23 million compared with $25 million last year.
Adjusted net income was $10 million and adjusted EPS was <unk> 11.
Versus 10% in 2021.
The benefit of our sales price increases has not fully offset inflation, because we are chasing continually rising path.
This was particularly true in EMEA.
We have taken price increases in all of our markets and we'll continue to react to the marketplace with necessary adjustments throughout the year.
First quarter, adjusted SG&A expenses were $97 million compared with $93 million in 2021, primarily as a result of increased marketing expenses to support growth came from inflation.
SG&A expense as a percent of sales was 22% below last year's 23% due to higher sales.
This quarter, we booked a $3 million expense for the power a earn out.
We also booked a $2 million charge to operating expenses related to our Russian business.
We stopped shipping to Russia in late February and expect our $6 million in annual sales there to decline significantly.
Now, let's turn to some details of our segment results for the year.
Comparable net sales in North America increased 10% to $209 million.
The increase was due to higher pricing and higher volume as increases in business and school products as well as computer accessories more than offset the decline in gaming accessories that Boris mentioned.
Our sales reflect increased demand, even with higher pricing and we are seeing share growth in several of our brands.
Gross margin in North America increased as a result of improved sales prices and volume.
In addition, North America also benefited from lower logistics costs, compared with especially high cost last year.
North America, adjusted operating income and adjusted operating margin increased because of higher sales and gross margin.
Now, let's turn to EMEA.
Net sales were essentially flat at $156 million due to unfavorable foreign exchange of 8%.
Comparable sales rose, 7% to $169 million due to price increases and higher volume from computer accessories and business products.
EMEA posted lower operating income and margin as our previous price increases were not large enough to offset inflation.
We've announced additional price increases effective in April and July which should improve margins throughout 2022.
Moving to the international segment net sales increased 19% and comparable sales rose, 23%, primarily due to improved volume, especially in note taking products from Brazil back to school season as schools are now open for in person education.
The segment has also raised prices to offset inflation and unfavorable foreign exchange.
The International segment posted higher adjusted operating income and adjusted operating margin as a result of higher sales lower bad debt reserve due to improved collections and the benefit of long term cost reductions.
The improvements were driven by a rebound in Mexico and Brazil.
Let's now move to our balance sheet and cash flow in the first quarter, we had $104 million of cash outflow from operations.
Use of free cash flow of $108 million.
This was due to increase in your inventory earlier than we did in the prior year period to mitigate supply chain issues.
And the timing of vendor payments.
We also had higher incentive compensation payments this year.
Due to seasonality, we generally use cash in the first half of the year.
As expected this resulted in our quarter end bank net leverage ratio increasing to three seven times.
Nevertheless, because we generate a significant amount of cash flow in the second half, we expect that ratio to be less than three times by year end.
We also paid dividends of $7 million.
At quarter end, we had used $208 million of our $600 million revolving credit facility.
We have a high level of inventory due to a combination of our normal seasonal buildup for back to school and to mitigate supply chain disruptions and installation.
Turning to our outlook as we noted on our last earnings call. We expect demand to continue to improve in 2022 as more offices and schools are in physical use at least in a hybrid mode.
We are continuing to increase prices to catch up and offset cumulative inflationary cost increases.
We remain committed to returning our longer term gross margin to 33% level, but this is an ongoing challenge due to higher costs and the magnitude of inflation.
We now expect the gross margin improvement for 2022 of approximately 50 basis points versus 2021, which is at the lower end of our previous outlook.
Given the strength of the first quarter and expectations for the remainder of the year.
Our guidance reflects an increase in our full year comparable sales outlook of one 5% and comparable adjusted EPS of <unk>.
We now expect foreign exchange to be more of a headwind than we anticipated earlier this year with a two 5% negative impact on sales and are fortunate negative impact on adjusted EPS.
Given these two factors for the full year, our outlook for reported sales growth remains in the range of 1% to 6% full.
Full year adjusted EPS is expected to be in the range of $1 48 to $1 58.
The adjusted effective tax rate is expected to be approximately 29%.
Intangibles amortization for the full year is estimated to be $43 million, which equates to approximately 31 of adjusted EPS.
We continue to expect our free cash flow to be approximately $165 million.
Cash from operations of approximately $190 million less capex of $25 million.
We expect to return to our historically more balanced capital allocation that includes dividends debt reductions opportunistic repurchases of our shares and potential acquisitions.
We have $125 million remaining on our stock repurchase authorization.
Now, let's move onto Q&A, where Boris and I will be happy to take your questions.
Operator.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind you compress start too and we're preparing to ask your question. Please ensure your device is on mute locally.
Our first question today comes from Joe Games Nobu capsule, Joe. Please go ahead.
Yes.
Yes.
Good morning, and congratulations on the quarter.
Good morning, Joe Thank you.
So I just wanted to.
Impressed with the.
The increase in the business product sales some of that obviously is coming from the office re openings.
How much more of that do you see is in play here in terms of the office reopening.
Or do you think.
The business product sales.
From from here for the rest of the year do you still think that will be a positive for the company.
Yes, Joe the short answer is yes, we do.
Offices are continuing.
To reopen.
If you remember actually earlier in the quarter we had.
Hi prevalence.
Omicron.
Pretty much across the world. So so many.
Businesses were still delaying their return to office, but things started to open up.
Later in Q1 and are continuing and we think this will be a positive tailwind for us.
Pretty much across the world. So we saw good growth.
Business products.
In Q1, and it was broad it wasn't one particular category, but pretty much across the board and.
And we expect this to remain a positive for the remainder of the year.
Okay great.
Maybe.
On power.
Can dive a little bit more into that.
The fourth quarter call you had mentioned that you expected sales in there too.
Go back to the historic 10% to 13% range now.
Here Youre talking in the 5% to 10% which is.
On the low end, a pretty big cotton and then maybe just a little bit more detail and color on what you're seeing on the power side and in terms of should we the console availability.
Yes.
The main difference in our view for power array has to do with chip availability. We now have more information that we will continue to be.
Issues, especially with wireless chips pretty much with the remainder of the year.
So we expect that to impact.
The overall availability of.
Accessories.
The broader PC and gaming accessories and that will include.
Power accessories. So as a result of that we've taken down our forecast from as you mentioned 10 to 13, 2% to 5% to 10%.
We expect.
A lower first half repower array just due to difficult comps.
Continued console availability issues and an improvement in the second half.
This year over what.
Was a pretty difficult second half of 2021, but overall, yes, we took the forecast down.
Okay, and if I could sneak in one more.
You talked about Russia.
Shipping and that you thought that that is going to be difficult to make up I think you said $6 million of revenues and that.
Market.
But.
The other markets surrounding where the Ukraine, and where all the we're having the issues at this point are you seeing a reduction in those also R. R.
Are you still seeing somewhat business as usual and the surrounding countries.
We're seeing business as usual, we have not seen the impact of the war.
Crane spill.
Across the borders.
And its impact on our business obviously there.
Other social and humanitarian issues, but as far as the impact on our business, we haven't seen it.
Okay, great. Thank you Boris I'll get back in queue.
Thank you Joe.
The next question comes from Chris Mcginnis from Sidoti <unk> Company, Chris. Please go ahead.
Good morning, Thanks for taking my questions and nice quarter.
Then if we could just start off with just the price versus volume.
Maybe you mentioned it was 5% volume growth on a consolidated basis.
Can you confirm that and then I guess the second part of that would be just given the expectation of additional price increases going forward given the concerns around price sensitivity either.
On those products or from customers. Thanks.
Yeah. So yes, you are right price was about 5% to 6% the volume was strong to within about a 5% when you get to that 11 in total.
So we had nice price and volume in our adjusted growth rate of 11% and.
And fourth I'll, let you answer the second part of that yes, Chris.
We have not seen.
Significant.
Degradation in price elasticity of demand as a result of price increases I think.
Our consumers and our customers still have been broadly accepting of the increases because they see it.
Everywhere around them and they know that this is something that is necessary.
For businesses to take.
And the fact that volume has grown with a 6% price.
The increase as a as a reflection of that.
We are taking appropriate increases the objective is to recover our margin, we're not trying to make extra money on our price increases and again businesses and consumers seem to understand that so we're optimistic that that will continue for the future as well.
I appreciate that and then.
In your prepared comments, you talked about some market share gains, but you also talked about sourcing can you just talk about the competitive landscape as it puts you in a better position for back to school, especially in North America.
With the supply chain challenges that are out there. Thanks.
Yes, we think we're in a great position.
For back to school and more broadly the supply throughout the year because of our mix of what we're manufacturer and a local facilities and what we.
Get through outsourced providers, primarily in Asia as a company, we're about 40% manufacture our own 60%.
Source.
From Asia and that serves us well when.
Well positioned for back to school and we don't anticipate despite.
Uh huh.
Supply chain issues coming out of China that everybody reads in the papers, we are well positioned for our back to school supply.
And then we're also well positioned to support.
Our retailers closer to the season because of our domestic manufacturing. So we do think that as a competitive advantage and we're hearing that from our customers are giving us more business.
So again thats.
Partly why we feel confident in our outlook for the remainder of the year.
I appreciate it and then jump back in queue. Good luck in Q2.
Thank you Chris.
The next question comes from Kevin Steinke Barrington Research Kevin. Please go ahead.
Good morning.
So.
You increased your outlook.
Outlook for comparable sales growth.
$3 five to eight 5% from 2% to 7%.
Despite.
Lowering.
The growth outlook for power already a little bit so what are the areas driving.
The improvement in overall.
Comparable sales growth.
And is that more price or volume related.
The improvement falls into three buckets, Kevin one is just the outperformance in Q1, we did better than we anticipated so thats baked into the number.
Second we believe we are going to have a stronger back to school season, both in North America and in Latin America. So that's part of our optimism.
And then the third big part that we talked about with Joe is.
We think that return too.
Hybrid mode or returned to working on the offense as a positive is a positive trend.
Trend for us so I haven't seen that in Q1, we think that will continue as well so those three factors together.
<unk>.
Gave us reason to raise our comparable sales growth.
That you see in the outlook from two to seven to three and a half.
Two eight and a half.
And we think we're going to have both price and volume I can't give you exactly what that mix is going to be.
But clearly prices going to be a part of it because we're raising prices, but we think volume is going to be up as well.
Okay.
Okay. That's helpful. Good to hear.
And you mentioned that some back to school sales in North America.
Pulled forward into the first quarter.
How should we think about that.
As we look to model out sales for the second quarter.
Just wondering how significant of a pull forward.
It was.
It was a it was a few million dollars. The way I suggest you think about the seasonality of our business on a quarterly basis is similar to what it was last year in terms of percent I think we have a fairly.
Seasonal buy regularly pace business every year, there are different puts and takes but overall it fall is still a very similar pattern.
And I think this year's pattern will be very similar to last year's pattern in terms of certain percentage of the year falling into Q1 third percentage of the year to Q2 et cetera, et cetera, et cetera, I think.
It takes that you still see similar.
Sure.
Both for sales and for four EPS adjusted EPS.
Alright, great. Thanks for taking the questions.
Thanks, Kevin.
The next question comes from Hale Holden at Barclays. Please go ahead.
Hi, Good morning, I had two questions on the inventory increase that you had at the end of the quarter.
I was wondering if that was just driven by forward buys. So that you can make sure you have claims in stock for back to school.
Or what the conversation a lot of it was.
How confident are you trying to show on clearing that out as the year went through.
Yeah. So there's a couple of things in there that I'm sure. You can appreciate first of all inflation is in there right. So that's kind of a big ticket number that's driving inventory up but I would say, yes, we brought in earlier, but we also have things still on the water. So our in transit are up as well as those lead times have really expanded and continue.
Stay expanded.
So a couple of different parts.
Any concern about selling through that or getting it down by year end and some of the reasons and one of the reasons main reason why we bought the inventory forward early as our customers want the back to school inventory a little bit earlier too so.
We're trying to serve their needs.
Great.
And then I was wondering as you sort of think forward in terms of your inflationary pressures that youre seeing.
If you wanted to highlight one or two that you were particularly watching where there was transporter finished goods or how we should be thinking about where your pressures on the Cogs line Sir.
Inflation has been pretty broad.
It's affecting most commodities.
Affecting transportation, so there isn't one or two.
It's pretty much everything I mean, everything thats oil related obviously is elevated.
But also a paper inflation is up so it's not limited to a single commodity.
Higher than we anticipated.
And Thats why we have to do additional price increases.
Offset to offset inflation.
Great. Thank you Boris.
Thanks Al.
Another reminder, press star followed by one on your telephone keypad to ask a question.
The next question comes from Hamad <unk> Bwl's financial comments. Please go ahead.
Hi, good morning.
First question was just given the pull forward that you were talking about in the back to school season.
Are you seeing.
Retailers are your customers just really.
Preparing for price increases from Euro and they're just buying ahead of time.
No I don't think so because we we agree on pricing for back to school well in advance and we don't change that pricing so.
They don't risk anything.
Bye bye waiting the reason that they're bringing the inventory forward is because of the supply chain issues that they are experiencing they wanted the surety of supply for the season.
The season sets on a certain date, they can't Miss it and they want to make sure they have the product in inventory.
And then Kevin.
Lockdowns in China, and the supply chain issues.
Is that putting you at advantageous spot as far as being able to get.
The high volume low margin business, you've been on and off about over the years any interest of it for this year.
Yes, as I mentioned beforehand.
Where we're not seeing the.
China supply chain issues affect our back to school I mean, obviously, we're watching it carefully but most of our.
Products for back to school or shift from Vietnam, or southern China or manufactured domestically in the U S and Canada. So the area Thats most affected right now which is the Shanghai region.
We're not really.
Effective for back to school now your question was does allow us to be more competitive on opening price points and all of those are independent decisions.
And as I mentioned, they made pretty much in advance for back to school given just the length of the supply chain. So so at this point.
The early back to school is affected by anything but we are still open.
To win additional business for back to school and also for Q4 because of our ability to produce.
Domestically.
To meet some of the demands of our customers.
Alright, thank you.
Thanks, Amit.
We have no further questions. So I'll hand back to Boris Allison for any final remarks.
Thank you Bethany and thank you everyone for your interest in ACCO brands.
We had an excellent first quarter and have strong momentum for the second quarter a.
Our business has pivoted to faster growth and we expect financial performance improvements to continue in 2022.
Main confidence about law about our longer term future as we continue to position the company to do more consumer product oriented for higher growth and stronger returns for our shareholders.
We look forward to talking with you in a couple of months.
As we report our second quarter. Thank you.
This concludes the first quarter 2022, RK bonds earnings call. Thank you for joining you may now disconnect your lines.
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