Q2 2022 ACCO Brands Corp Earnings Call
But they were not enough given the magnitude of commodity and especially energy cost increases.
We pass through additional price increases on July one.
And expect that the cumulative effect of all price increases combined with moderating inflationary pressures in the remainder of the year will lead to gross margin expansion in the second half.
Likewise.
Foreign currency impact.
Are proving to be a greater headwind than originally anticipated given the strength of the U S dollar.
This was particularly true in EMEA.
Currency translation reduced sales by 13% or $20 million in the second quarter.
We expect unfavorable currency impact to continue for the remainder of the year.
Now I'd like to make some comments regarding video gaming accessories.
<unk> has been a great addition to our company over the long term, we believe it will substantially increase our organic growth rate.
This year as for the rest of the gaming industry.
Always demand is resetting from the high levels of demand during the pandemic and supply continues to be challenged by the lack of semiconductor chips.
We expect these temporary demand and supply chain issues to largely remain in place for the remainder of 2022.
With gradual improvement throughout the rest of the year.
As a result, we now.
Now expect <unk> sales to be down approximately 10% to 15% for the full year.
Our long term expectation is for this product line to return to pre pandemic growth things of the industry, which historically were low double digit growth rates.
In summary.
We continue to be confident in our strategy to transform our company to be more consumer centric and to leverage the strength of our brands to accelerate organic growth.
The breadth of our product categories, and our geographically diverse footprint helped to mitigate a difficult operating environment.
I'm pleased with the execution of our team in such challenging circumstances.
Controlling what we can control and while we will be prudent spending we will continue to appropriately invest in our brands and marketing programs.
To innovate without new products.
And be the best partner to our customers.
I will now hand, it over to Deb and we'll come back to answer your questions.
Deb.
Thank you Bart and good morning, everyone.
Our second quarter 2022 reported sales increased almost 1% comp.
Comparable sales were up 5% and 8% higher pricing was partially offset by a 3% volume decrease.
Sales reflect a return to in person education in Latin America.
And strong back to school sell in in North America.
We saw increased volume and note taking products computer accessories and business products.
Adjusted operating income was $58 million compared with $67 million last year.
Adjusted net income was $36 million compared to $42 million in 2021, and adjusted EPS was <unk> 37.
Versus <unk> 43 in 2021.
Now I'd like to provide more context about the inflationary environment pressuring margins.
We began to see the impact of inflation in the third quarter of 2021 with the pace of inflation accelerating over the last six months.
Our margin rate has been impacted by the cumulative price cost gap despite numerous price increases.
We expect stronger margins in the second half of the year, reflecting the full effect of our price increases, including our most recent July one price increase and moderating inflationary cost pressures.
Second quarter, adjusted SG&A expenses were $92 million compared with $97 million in 2021, primarily as a result of cost savings and lower incentive compensation accruals as well as the positive benefit of FX.
Partially offset by continued investment in our go to market programs.
SG&A expense as a percentage of sales was 18% below last year's 19% due to higher sales and overall lower expenses.
As we have spoken in the past there is a two year contingent earn out related to the powering acquisitions that is based on achieving established sales and profit targets.
Based on 2021 results $27 million was earned last year, and we paid that out in the second quarter.
Based on the latest tolerate forecast we have reduced the earn out liability reflected on the balance sheet by $9 million, leaving approximately $3 million on the balance sheet.
Now, let's turn to some details of our segment results for the year.
Comparable net sales in North America increased 4% to $308 million.
The increase was due to higher pricing and volume on the majority of products.
We offset by volume declines in gaming accessories.
Excluding gaming accessories.
North America performed well and grew volume as demand increased in school and business products and computer accessories.
Back to school selling was strong in the quarter and year to date.
Retailers did pull forward some orders to ensure they were set for the important back to school season, given the supply chain concerns.
We are monitoring the expected replenishment activity as retailers are closely managing their inventory.
North.
<unk> adjusted operating income margin decreased due to higher prices of commodity materials, including paper and increased inbound and outbound freight costs.
However margins for the six months were flat compared to the prior year.
In addition, our back to school selling did not fully reflect the impact of our increased pricing given the early placement of orders for the season.
Now, let's turn to EMEA.
Net sales were down 12% to $138 million, reflecting unfavorable currency impacts.
Comparable sales were relatively flat at $158 million, mainly due to price increases which were offset by volume declines.
Volume in this segment was negatively impacted by high inflation in the region and an associated reduction in demand.
In addition, we face difficult comparisons against the strong prior year when sales grew 78%.
EMEA posted lower operating income and margin as our previous price increases were not large enough to offset the accelerated inflation generally, but also more specifically related to cost increases and locally sourced raw materials and energy costs.
Our pricing has lagged many of our customer contracts require a notification period prior to the increase is taking effect.
As mentioned earlier, we expect our July price increases to meaningfully mitigate the overall impact of these inflationary cost increases.
Moving to the international segment net sales increased 16% and comparable sales rose, 20% equally split between higher pricing and improved volumes.
This growth was driven by improved demand in Latin America, especially undertaking products as schools and business are now open for in person education and work.
The International segment posted higher adjusted operating income and adjusted operating margin as a result of the higher sales stronger product mix and strong cost controls. These improvements were driven by the rebound in Mexico and Brazil.
Let's now move to the balance sheet and cash flow.
Year to date, we had a $96 million use of free cash flow, which was a higher use than in the prior year.
Seasonally grow our inventory in the first half. However, we also started 2022 with a higher level of inventory in order to mitigate supply chain issues.
Inventory has remained high as we continue to have more in transit and safety stock inventory than anticipated due to the ongoing supply chain disruptions.
Given these factors there was a greater proportion of paid inventory.
As we bring inventory down we should shift into a more normal payment pattern.
Since supply chain issues have not improved as quickly as everyone expected. We will continue to hold some incremental safety stock and in transit inventory at the end of the year.
Due to business seasonality, we used cash in the first half of the year. We ended the quarter with a net leverage ratio of 397 times compared to $4 two times a year ago.
As we generate cash flow in the second half, we expect that ratio to be approximately three times at year end versus three three times at the end of 2021.
Capex year to date was $7 million, we also paid dividends of $14 million year to date, while also repurchasing two 7 million shares of stock for $19 million.
At quarter end, we issued $240 million of our $600 million revolving credit facility.
Turning to our outlook.
We are updating our guidance to reflect a more conservative view for the remainder of the year, including a moderating demand environment, continuing cost inflation and more adverse foreign exchange.
We remain committed to returning our longer term adjusted gross margin to 33% level, but this is an ongoing challenge due to higher costs and the magnitude and persistence of inflation.
While we now expect adjusted gross margin improvement in the second half given the first half performance full year adjusted gross margins are expected to be flat to slightly down in 2022.
We anticipate adjusted SG&A to be under 19% for the year.
We also expect foreign currency impact to be more of a headwind than we had anticipated earlier this year with a 445% negative impact on sales and a <unk> <unk> negative impact on adjusted EPS.
For the full year, our outlook for reported sales growth is in the range of being down 5% to up one 5% with comparable sales growth of 4% to 6%.
Full year adjusted EPS is expected to be in the range of $1 39 to $1 44.
The adjusted effective tax rate is expected to be approximately 29%.
Intangible amortization for the year is estimated to be $42 million, which equates to approximately 31 of adjusted EPS.
We expect our free cash flow to be within a range of $135 million to $150 million after capex of $20 million.
Looking at cash uses for the remainder of 2022, we expect to prioritize dividends and debt reduction.
Now, let's move on to Q&A, where Boris and I will be happy to take your questions operator.
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The first question today comes from Joe Gomes from local capital. Please go ahead.
Good morning, Boris in depth.
Good morning, Joe.
So just first wanted to start off.
The volume declines there.
Which is a reversal from the first quarter when you saw volume increases.
You have the price increases in April and you just said one here.
In July .
Is there any concern that maybe the price elasticity is.
Jamie steam here.
Prices have been increased that they're maybe there's starting to be.
People being a little more cautious in buying products due to the increased pricing.
Okay.
Yes, Joe was somewhat concerned about that we're very watchful.
Of that fact.
Q2 was really the first quarter.
The full effects of the war in Ukraine being felt on energy prices in Europe , specifically so.
I think the macro situation in Europe is difficult as a result inflation is very high there.
Yes.
Consumer sentiment is very negative as a result.
So we think.
Rather than just.
Pricing and price elasticity.
More of a mass.
Macroeconomic issue.
In EMEA that's affecting demand.
As Deb mentioned in her prepared remarks.
<unk> is very high and we need to take price in order to.
Maintaining the assembler of positive margins.
And I think that that needs to overcome.
The elasticity concerns just because of the level of inflation that we're seeing there which is significantly higher than in any other parts of the world primarily due to energy costs.
Okay. Thank you for that.
Two on the gross.
Margin.
If I'm looking at it.
On a sequential basis, obviously improved Q1 to Q2, but if I look at the decline.
Year over year in the second quarter, it was down 290 basis points.
In the first quarter was only down 100 basis points year over year, even though you have been putting in those price increases.
Just maybe you could give us a little more color as to how you think yes.
Gross margins should be improving here and there.
In the second half of the year.
Okay, Joe So the margin cadence as we kind of think about the year.
We did talk about the back half expansion, but sequentially third quarters much more similar to the.
The current quarter volumes or commit typically equivalent and as you know fourth quarter is historically, a stronger quarter for us seasonally.
So as we think about the back half.
Pricing uplift theyre going to take a little while to take hold so again kind of pushing that to later in the year to mitigate the inflation and there were also anticipating as I said in my comments are more moderation in inflation, which kind of goes as the year progresses.
No.
It's going to take it's going to take some time to get there and that's why I think as you think about third and fourth quarter, you'll see that kind of ever increasing margin.
Yes, Joe and then the other thing is last year in the second half of last year is when we started to feel incremental inflation.
From a compare standpoint, that's when the margins started to go down last year.
That said there'll be sequentially improving this year.
Okay.
And then one last one if I May force last quarter you raised your.
Comp sales growth projections and some of the things you talked about then was the Q1 performance was baked in your belief in a stronger back to school season.
Turn to the hybrid mode.
Here, we sit here today.
All three of those things you said on the call. Obviously Q1 is baked in.
You talked about a stronger back to school season.
Continuing return to in office.
So just.
Probably a little more color or detail on that.
It's pretty significant.
Change in the sales growth guidance today from from the first quarter.
A little more color there if you could I'd appreciate it thank you.
Sure. So if you look at a quarter ago, we guided to.
Comparable sales growth of three five to eight 5%.
And then we took it down this quarter to 46 all of the things that you mentioned in terms of.
Our expectations for a good back to school.
The return to office, and obviously Q1 being baked into the numbers Thats still the case those are still our expectation the difference between the quarters is gaming accessories.
As we mentioned in prepared remarks, we took that down to minus.
10% to 15% growth for this year, just given where the market is and what the expectations for demand are.
In gaming accessories for the remainder of the year. So that is really the primary reason for narrowing of data of the globe and then the secondary is we're a little bit more.
Yes.
Concerned about the macro situation just given what the fed has done over the last quarter.
What the channel partners have reported in terms of their inventory and what they are seeing with the consumer and then being a little bit more conservative on replenishment cautiously.
Cautious and watching the inventory in a cautious and bringing in more inventory so that would be the secondaries in the primary would be the gaming accessories, but still going back to.
4% to 6% comparable sales growth.
Any year, we would take that and smile about it. So is it still a very good growth and we are happy with that level of comparable sales growth.
Thanks for that for as much appreciate it I'll get back in queue.
Yes.
Thank you Joe.
The next question comes from Amit Kumar from Gws financial how much of your line is open.
Hey, good morning, I just wanted to ask you were taking.
Pricing adjustments in April .
And you were giving guidance.
End of April early May.
What's your assumption as to what you thought was going to happen now that you're reversing in lowering sales guidance.
Be more specific.
Our assumptions about what.
Your assumptions for the sales numbers for the full year when you issued guidance.
What do you happen to plan.
Because it sounds like you've already taking price adjustments in April .
Yes, I just mentioned in my answer to Joe's question. The major difference is gain in accessories, we're still expecting a.
Low single digit growth in gaming accessories for the year and now we're guiding to minus 10 to minus 15%.
And what happened during the quarter is really a fundamental change in the assumptions of demand for gaming accessories in 2022.
Our expectation was that the demand will recover.
In Q2, and especially in the second half.
Now given what the industry is reporting what other companies in the gaming space have reported an expectations of base that and what we're seeing from industry analysts.
Expectation is that the gaming market will be down for the year.
And hence.
That's the major change between plus 5% growth to minus 10% to 15% growth in gaming accessories.
The rest of it is fairly minor and as I mentioned this in the secondary effect is just more concerned about the macro conditions given additional quarter.
But all of the things that we previously assumed in terms of strong back to school.
Strong first quarter.
Some tailwind from return to office those are still.
Yes, I would just say we've tightened up the range on our sales guidance to be to be clear, we had a much larger range and you've kind of tightened that down now that we're midway through the year.
So I just want people lose sight of that either.
<unk> is.
As expected and we continue to do the pricing as we had talked at the first quarter pricing assumptions haven't changed.
Okay, and then could you provide some.
And so as to what Youre seeing from retailers with.
Follow on orders and what the conversation is for.
The next 12 months given the retail environment.
Yes.
12 months is too far to look at that if we look at what's happening right now is.
Channel management is just being conservative with replenishment given.
What we heard out of Walmart and target.
And the last.
Couple of months.
They are being cautious about how much inventory there.
Kelly.
<unk> for their everyday sets.
And that's partially reflective.
And our forecast as I mentioned that was a kind of a secondary factor.
Okay.
The level of free cash flow change or.
Outlook as to what you.
You would do on the M&A front.
I don't think Thats related to I think right now.
We're happy with our organic portfolio with things we're capable of.
Low to mid single digit organic sales growth with our portfolio as it is.
They know we're entering more difficult economic times, our priority is on delevering and paying down debt.
So whether we deliver $160 million in free cash flow of $145 million of free cash the priority doesn't change so that that yeah, I agree I totally agree boards listened.
Environment with interest rates rising in the macro uncertainty.
We're going to prioritize debt paydown.
Yeah.
Great. Thank you.
Thanks, Amit.
Okay.
The next question is from Greg Burns from Sidoti <unk> Co. Please go ahead.
Good morning, with the revision.
On power.
Semiconductor shortages have been an issue.
Demand in this space was it more than that.
It.
Still that or is more of a.
The down shift in demand overall.
Overall.
Hi, Greg.
It's both.
Anything about the shortages have been plaguing the.
Comp sales for a while and Thats continuing.
It can get.
Hello, Playstation five or a switch or an Xbox.
In most places where we want it.
But also there's a demand impact as well.
Opening up of the economy post COVID-19 with revenge travel going on people being out and.
Other things.
We've seen the demand for.
Sure.
Gaming.
Has gone down and that's been the mode.
While reported by multiple players.
Recently you saw from.
And video I think at least for Nvidia from Corsair from Turtle Beach level reporting the same thing so the demand.
Is down as people are doing other things the long term prospect of gaming is still very very positive and you still have billions of people that would be.
Gaming all over the world.
The long term.
Prospects are positive, but you've got this huge buildup of demand doing COVID-19 years.
Sure.
The demand for gaming and gaming accessories.
<unk> exceeded anyone's expectations and now it would be normalizing the resetting to kind of a normal normal trend. So we're coming down from high <unk> to normal levels of demand.
Okay. So.
If it comes off 10% to 15%. This year is that the base to grow off of or is there still more.
Like to get to get back to pre Covid trend is there more downside to that.
No. We think we think with a 10% to 15% it will get to where it was to get to what we call. The trend and we think we can go off of that in 2023.
Okay.
And then with that in mind.
In terms of.
Expanding beyond North America to Europe , and maybe Asia, what are the plans there and the timing of.
<unk>.
Yes, great Great question.
<unk> is going really well most of the demand reduction that we've seen is in the U S. Specifically.
The business is doing fairly well in Asia and EMEA.
This kind of flattish in Europe , and it was working.
Actually grew in Q2.
<unk>.
In Asia, and we are accelerating our plans to.
<unk>.
Use our on the ground sales force in EMEA and Asia to sell more gaming products.
We can make incremental progress there and drive additional sales and that's certainly our expectation is for growth in the second half in those two regions that small for us its still about 25% of power sales for us.
But we're certainly accelerating the efforts in those regions.
Okay, and then lastly, I know you said you were prioritizing.
Debt reduction.
And dividends, but you did buy back a little bit of stock. This quarters is that something thats.
On the radar screen now.
We took as we've talked about we took the opportunistic approach and given where the stock price was.
And where it was trading we took that opportunity to buy our shares.
As you saw 3 million shares.
Going forward, we've always said, we will have a balanced capital allocation.
And so the opportunistic approach to prioritizing dividends and debt.
Okay. Thank you.
Thanks, Greg.
The next question is from William Reuter from Bank of America.
Go ahead.
Hi, good morning.
My first question pointed out in the.
Hi, <unk>.
In the 4% to 6%.
Comparable sales growth how much of that is pricing and what's implied for units.
Price is higher than that and units are down.
Okay.
Yes.
I've said that in the quarter, where.
Prices were up 8%.
And since we are raising prices you'd assume therefore, the yield even higher than that okay.
The volume of negative that's our assumption.
Got it okay. Yeah. So the most recent July 1st price increase that was the that one was 8%.
Arie.
It really depends on the country I don't think it was 8% on average it was lower than that correct.
But Q2 pricing Q2 pricing San Francisco last year, plus 8% cumulative effect of pricing yes.
Okay and then.
You were talking about the longer term outlook for power as you continue to expect I think low double digit growth.
What gives you the confidence that that will be the long term outlook what are the data points are things in the industry.
That you are hearing that would suggest is the right amount I don't know enough about video games.
Yes, if you look at <unk> track record historically, they've grown faster than the industry. If you look at.
The industry historically has grown about 13% and <unk> certainly has exceeded that if you remember last year. The group for example, 23%.
We've seen estimates of growth from industry analysts.
And forecasting as an industry.
Mid single digit growth going forward.
But with the incremental opex for us to expand our share.
Sure.
Underrepresented in India.
In Asia.
We think we should be growing faster than that and we think we should be growing at.
The low.
Double digit growth rates.
Okay and then just lastly for me I am not sure. If we're at a point now where you would call. It normalization of office work, but when you look at the office components of your office supply business.
Or are we relative to pre pandemic levels, how much of that business may have been permanently reduced or do you think that's more or less being offset by.
Those products being purchased for home and hybrid work environment.
Yes overall, if you look look at it from a comparable basis, we are slightly below where we were.
2019 overall.
And kind of a degree depends on the region and where we are vis vis their recovery from COVID-19 pandemic spin.
Specific to office.
The positive for us.
If you look at our commercial sales that were up seven.
7%.
So in the quarter compared to last year.
CLS Ta and people returning to work.
If you look at that.
The Castle office.
Occupancy track as a proxy for that they've recently hit a high of market office occupancy is still significantly below where it was in 2009.
19, but it's moving in the right direction and it is a tailwind for sales and we expect that to continue we don't think we will that will be at a 100% office occupancy we think the hybrid is the future.
Future model, but certainly that hybrid includes people being at work two to three days a week.
<unk>.
That's a good thing for us because there'll be demand office supplies business supplies in the office and whether they use them in the office or home from a kind of a sales perspective, and a channel fill perspective, that's a positive thing for us.
Great. That's all for me thank you.
Excellent.
Just a reminder, forgot to ask a question Thats star followed by one on your telephone keypad.
The next question comes from Calgary Martinson from Jefferies. Please go ahead.
Good morning.
When you look at the retailers being in service service with replenishment I was there.
The back to school ordering to begin with where are we at inventories at retail today.
Yes that the scope was good as.
As Deb mentioned in her remarks.
Retailers took product early they want assurance of supply. So we have we had a little bit earlier loading that historically, a little bit in Q1 and a lot in Q2.
They know they need to have inventory for this for the season. So they were.
Didn't see any.
Delays in back to school.
Folks are being with channel as being a little bit more conservative on the everyday set and the replenishment of the everyday side.
Okay, and when do replenishment orders for back to school.
Normally happen.
When would you have insight into that figure.
Normally we see it.
Second or third week of August so there should be happening as we speak we are still early in back to school. This is bill.
Roughly a quarter of the season through.
But.
Sure.
Next week or so this week and next week is when the orders now both on it.
Alright.
When we look at the.
The office orders certainly commercial sales up seven whats the outlook. When you look at your overall growth guidance for commercial for the rest of the year.
Okay.
I'm not sure we broke it down that way color I mean overall, we're looking at 4% to 6%.
Growth. So my expectation is will afford a 6% comparable growth this positive growth for office for the year, but I don't have the exact margin collateral that you have.
I don't know, we havent looked at it that way when I look at it that way for the year.
No worries at all and then with the free cash flow the debt pay down priorities I'm, assuming gear, we pay down the revolver correct.
Yes, that's right yes.
Thank you very much I appreciate it.
Thank you.
As we have no further questions I'll hand, it back to the management team for any closing remarks.
Thank you Adam.
Thank you everybody for your interest in ACCO brands.
Company has a proven track record of managing well in.
And increasing our competitive advantage in periods of economic uncertainty.
I'm confident we have the right strategy and believe we are well positioned to continue to deliver organic sales growth compelling market performance and improved financial results in the second half of this year and beyond.
We look forward to talking to you in a couple of months to report on our third quarter results.
Thank you.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
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