Q2 2023 ACCO Brands Corp Earnings Call
Hello, everyone and welcome to the ACCO brands second quarter 2023 earnings Conference call. My name is Emily and I will be coordinating Yoko today. After the prepared remarks there'll be the opportunity for any questions, which you can ask by pressing star followed by the number one on your telephone keypad I will now.
Turn the call over to Ah Hi, Chris Mcginnis Senior director of Investor Relations I pay brands Corporation. Please go ahead.
Morning, and welcome to ACCO brands second quarter 2023 conference call.
Mckinnon senior director of Investor Relations.
Speaking on the call today, our board Feldmann, Chairman and Chief Executive Officer of ACCO Brands Corporation will provide an overview of our second quarter results and an update on our 2023 priorities.
Peppered President and Chief operating Officer will discuss the fact that pool season.
New product innovation and provide an update on cost savings in it and our soon to be early 2022 ESG report.
Following Tom debit.
Debit partner Executive Vice President and Chief Financial Officer, who will provide greater detail on our second quarter results.
The outlook for the third quarter and full year.
We'll then open up the line for questions.
Slides that accompany this call have been posted to the Investor Relations section of <unk> Dot com.
Speaking about our results we may refer to adjusted results adjusted results exclude transaction integration amortization and restructuring was.
A non cash goodwill impairment charge the change in fair value of the contingent consideration related to the power of <unk> earn out and other nonrecurring item and reflect an adjusted tax rate.
Schedules of adjusted results and other non-GAAP financial measure 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.
We're looking statements made during the call are based on the beliefs and assumptions of management based on information available to us at the time of the statements are made.
Forward looking statements are subject to risks and uncertainties actual results could differ materially.
Please refer to our earnings release, and SEC filings for an explanation of certain risk factors and assumptions.
Our forward looking statements are made as of today and we assume no obligation to update them going forward.
During our prepared remarks, we will hold a Q&A session now I will turn the call over to board element. Thank.
Thank you Brett and good morning, everyone. Thank you for joining us.
Before we discuss the quarter I'd like to begin with the announcement, we made last night.
Guarding comtech, becoming ACCO brands next.
Does that give officer and a co worker.
We will also be joining the board of directors at that time.
I could not be more pleased to announce my successor.
Haven't had the pleasure of working with.
Over the past 13 years.
Outmost confidence in his ability to lead the company.
He will ensure a seamless transition.
Is there a ACCO brands and all its stakeholders as executive Chairman of the board with my planned retirement in the first half of 2024.
The <unk> transition.
An orderly multiyear effective plan that the board and I put in place.
And it's exciting to finally get the news with all of you.
<unk> is exceptionally well qualified and prepared to lead ACCO brands.
Our new.
Strategic path for Nathan.
Centered on driving sustainable organic revenue growth.
Tom has demonstrated success in.
Every position held during his career at ACCO brands.
Most recently serving as president.
Operating officer.
Played an integral part.
And our transformational strategy and growth initiatives.
I'm confident that under Tom's leadership.
We will continue to drive growth.
<unk> Kong diverse brand.
Congratulations Tom.
Now, let me discuss our second quarter results.
We are pleased with our results for the second quarter.
With sales above the midpoint of our outlook and adapted EPS significantly above our outlook.
These results.
Let the strength of our brands and solid execution by our team.
As well as the actions we have taken to transform our business.
Standing our product categories.
How geographically.
Bringing new consumers.
Consumer sensitive products to market.
And streamlining our cost structure.
We made significant progress in our margin recovery efforts in the second quarter.
With gross margin, increasing 450 basis points.
And adjusted operating margins.
Aided by 220 basis points.
Year on year.
Our pricing productivity and restructuring actions.
We have gained greater craft of Wow.
<unk> thousand 23.
While we are pleased with our strong start to the year.
We are more cautious on the second half demand environment due to higher input create and prolonged economic uncertainty.
We expect consumers.
Businesses.
And our partners to remain prudent with our discretionary spending and inventory.
In the second half.
We will continue to prioritize margin recovery and improved free cash flow as we manage through this.
And economy.
Second quarter comparable global sales.
One 5% versus last year.
Erica.
Were down due to difficult comparisons for.
A weaker macroeconomic environment.
And the more normalized supply chain and <unk> fleet.
Last year, we tailor goodbye.
In greater quantities.
The older induced supply chain.
In this year's second quarter.
The pool that will lower our better than expected.
We also saw a return of growth in <unk>.
Gaming exactly sale.
The current economic backdrop of higher inflation and interest rates.
Continue to lead to softer consumer and retailer demand.
And we're now lapping the benefit of recurrence of warfarin.
Office occupancy rate has stabilized at about 50% in the U S.
Lastly.
Sales of our computer accessories category continued to be negatively impacted.
The IP pending.
North America operating margin improved 200 basis points.
Due to our cumulative pricing.
Active.
Okay.
In EMEA.
Macroeconomic environment in the region.
Even with the challenge of demand from both consumer and business customers.
Yes.
Line.
The combination of <unk>.
Cost initiatives.
The significantly slower lock profitability as our adjusted operating margin expanded 610 basis points and adjusted operating income more than tripled.
Last year EMEA was data as very high inflation.
Downmarket.
I'm very pleased with our margin recovery in that segment.
Within our international segment sales were down a bit in what is a seasonally small quarter.
And impacted by lower demand in Asia, and Australia due to a thoughtful macroeconomic environment.
Latin America continues to perform well.
We expect sales growth in the segment.
And half of the year.
Strong demand for our Latin America back to school offerings.
Due to seasonality.
Adjusted operating margin was down very slightly in the second quarter, but up a healthy 245 basis points for the first six months.
We remain confident in our outlook for gross margins in the second half.
Before cutting in our 2023 key priorities I want to update you on our global technology accessory sales.
Consist of a computer.
New products.
Gaming accessories posted growth in the fourth quarter.
Aided by a combination of the greater supply of ships for wireless gaming controller.
New product launches and our strongest slate of triple a game releases.
We expect wireless to be readily available for the remainder.
Our supply chain challenges have been alleviated.
We remain focused on our international expansion of gaming sectors.
But I experiencing a slower rollout than expected.
We're making progress and remain confident in the long term growth opportunity for <unk>.
And both our India and internationally.
We expect demand to grow in the second half.
Computer accessory sales were weaker than expected.
The slowdown we experienced in the fourth quarter.
Sure.
So any improvement in the second.
The business will continue to be cautious about their spending in the current macroeconomic environment.
We expect computer accessories with both sequential improvement throughout the remainder of 2023.
Given new product Rollouts.
I had a lower level than we previously anticipated.
As a result.
Longer expect the category to grow for the year.
The start of the year I shared with you four key priorities for 2023.
They are.
Restoration of our gross margin.
Profitable management of our top line.
Continued investment in our brands and new products.
Tight management of our expenses and any thoughts.
We continue to make progress on all four in the second quarter.
The recovery on our gross margin has been our top priority.
And the combination of people that have global price increases and cost savings actions.
<unk> recovered much of.
<unk> profitability and the high levels of in place and we have experienced over the last few years.
As I said earlier, we're seeing greater traction from our absence brought that 120 <unk>.
Which gives us confidence that these gains are sustainable over the longer term.
We'll continue to manage our topline well in a challenging global economic environment.
This is a testament to the strength of our brands.
Our broad assortment of consumer desired products.
Our superior customer productivity.
On the expense line, we did a good job managing head count and continued to closely monitor our discretionary spending.
We also reduced our inventory by 16% or about $75 million.
Versus the prior year.
Driving improvement in our operating cash flow.
Before I turn it over to Tom I want to say I am encouraged by our results in the first half of 2023.
We're executing well on our plan, we remain confident in our ability to drive long term sustainable and profitable organic revenue growth as global economies improve.
We have the right team in place to weather, a difficult economic environment and are well capitalized with no debt maturities until 2026 and low interest rates for over half of our outstanding debt.
We expect to continue to generate consistent strong backflow, and we'll prioritize dividend payments on debt reduction in 2023.
Now I will turn the call over to Tom to discuss back to school with product innovation and update you on our restructuring initiative and the upcoming report com.
Thank you Boris and good morning, everyone.
I am honored and excited to lead this outstanding organization, and our talented and dedicated team of professionals.
Following a great leader like board is equivalent.
<unk> Board and our board of directors.
With their support and preparing me for this role.
I'd like to thank board reviews, or Sip and on behalf of all of our employees recognized.
Recognize his outstanding leadership of ACCO brands as our CEO .
Fourth has been a transformational leader keeping our people brands and customers at the forefront.
While expanding ACCO brands geographic reach and product offerings.
As CEO I am excited about the opportunity to work with our leadership team.
Word of directors.
And all of the talented employees around the world at Apple brand.
As we share owner value by delivering against our key initiatives.
I believe that our commitment to superior service to our valued customers.
Our innovative product offering.
Reported by iconic category leading brands.
And our loyal consumers.
<unk>, great opportunity for sustainable organic growth.
We also have significant opportunities to simplify our operations and our cost structure as.
As we progress along our multiyear asset rationalization project.
These efforts will be at the forefront of our leadership team focus.
Drive value for our investors.
Congratulations on your upcoming retirement, and we look forward to your continued support.
Executive Chairman.
Now, let me transition to a few comments about the 2023 back to school season.
In North America back to school had a good start.
The timing of back to school shipments was earlier than anticipated.
Our expectation is these sales are from Q3.
And not incremental to our North America back to school season.
While we believe our channel partners will rely more on replenishment this back to school season.
We now expect them to manage their inventory more tightly.
This is changing our sales expectations for the North American back to school season.
From approximately flat to modestly lower.
This channel sales were better than anticipated, we are uniquely positioned to support our retail partners because of our domestic production capability.
In our international segment, we are seeing strong growth for our back to school offering in Mexico, which also falls into the second and third quarter.
Early indications for back to school demand in Brazil, which is in the fourth and third quarters is also strong.
Suggest another year of solid growth from our Latin America back to school business.
Moving to product innovation, and new product introductions, we continued to build on our momentum and believe our investments in innovation and new product development.
We will be key to delivering organic growth.
And our technology accessories business. The Kensington team was recently awarded three Red Dot Design Award.
But recognize the innovative design.
And our new computer accessories offerings.
In EMEA, we have introduced an exciting line of light ergonomic product solutions that support work from home environment.
Net sales exceeded our expectations.
The alliance further diversifies, our product portfolio through more consumer focused products.
This is an example of the pivot our product teams are making at hybrid work.
Sir.
Beginning accessories, the recently introduced new products and the controller and basic categories in conjunction with Nintendo's successful release of the legend of Zelda video games, which are contributing to positive.
Growth in gaming accessory.
Moving to our restructuring initiatives, we continue to see benefits from our 2022 fourth quarter restructuring actions.
And are on track to deliver.
<unk> $13 million.
The annual cost savings.
Year to date, we have recognized $6 $5 million in savings.
In EMEA the facility closure that we announced in the third quarter is expected to be finished by the end of the third quarter with the savings to come in 2024.
Last month, we announced the closure of a small assembly operation in North America.
We continue to analyze our global footprint for opportunities for further cost optimization and consolidated.
We also remain on track to deliver on another $15 million of incremental savings from our ongoing productivity initiatives.
Finally, we remain committed to our ESG initiatives and goals.
We'll soon released our 2022 ESG report.
In it we detail our progress towards a better tomorrow highlight.
Highlighting the focus on our people our product and our planet.
I encourage you to read it when it is released.
Today I want to highlight our employee safety record as we have been recently recognized as one of America's safest companies by DEA depth today.
A leading environmental health and safety publication.
In addition to this well deserved award, our Sydney, and New York Factory and distribution facility.
Just celebrated 1 million hours work safely.
I am very proud of our team's commitment to a safe work environment and the recognition that ACCO brands has received over the past year.
I will now hand, it over to them and we will come back to answer your questions.
Deb.
Thank you Tom and good morning, everyone.
I just wanted to take a moment on behalf of the executive leadership team to thank for and to congratulate him on being our next CEO .
When we last spoke in May we highlighted the slow demand environment due to the current macroeconomic backdrop.
Despite this environment continuing in the second quarter.
We're able to deliver our expected level of sales.
We also continue to make progress in recovering our loss margin from the extreme inflation.
Balance the company's margin profile over the last few years.
Our margin profile significantly improved in the second quarter, which allowed us to deliver adjusted EPS above our outlook.
In the second quarter of 2023 reported sales decreased 5% versus the prior year.
Comparable sales excluding foreign exchange were also down 5% versus a strong prior year and comparable sales grew 5%.
The sales decline was due to lower volumes across all three of our operating segments.
More than offsetting global price increases.
Gross profit for the second quarter was $164 million an increase of 10%.
<unk> lowered sales as gross margin improved 450 basis points on the cumulative impact of our pricing and cost reduction here.
Adjusted SG&A expense of $98 million.
It was up from $92 million in 2022.
Adjusted SG&A as a percentage of sales increased 230 basis points to 19, 9%.
Wrong prostitute growth were more than offset by increases in incentive compensation expense and deleveraging from the lower level of sales.
Adjusted operating income was $66 million up 14% compared with the $58 million last year.
Our GAAP EPS was <unk> 38 versus 37% in 2022 as our growth in adjusted operating income was largely offset by increases in interest and nonoperating pension expenses.
Now, let's turn to our segment results.
North America reported sales declined 5% and comparable sales were down 4%.
As volume declined more than offset the pricing actions.
Sales in the second quarter were impacted by lower business and retailer demand due to the weak economic environment as well as declines in our computer accessories category due to softer it spending.
North America, adjusted operating income margin increased 200 basis points to 27% from the prior year second quarter, driven by pricing improved mix and cost savings actions.
The second quarter is typically the highest revenue quarter in North America and benefit from economies of scale.
Now, let's turn to EMEA.
Both reported and comparable sales for the quarter were down about 9% to $126 million, mainly due to volume declines.
Demand continues to be impacted by the overall environment in the region.
And both consumer and business customers.
Sales of technology accessories declined in EMEA, as well, reflecting industry wide trends.
Market share is in the region remained stable, but we have seen some trade down to our lower priced offerings.
In the second quarter EMEA posted adjusted operating income of $95 million at.
A significant increase from the $2 million a year ago.
The operating margin rate improved 610 basis points from the prior year to seven 6%.
The improvement in adjusted operating income was due to our pricing and cost reduction actions.
Moving to the international segment reported and comparable sales in the second quarter decreased 2%.
The decline was due to lower volumes in Asia, and Australia, due to a weaker economic environment and lower sales of technology accessories, which more than offset price increases and growth in Latin America.
The International segment posted adjusted operating income of $8 million essentially flat to the prior year.
Switching to cash flow and balance sheet items due to the seasonality, we generally use cash in the first half of the year and generate significant cash flow in the second half of the year year to date adjusted free cash flow was a use of $45 million versus a use of $96 million a year.
<unk>.
The improvement was driven by improved working capital management, as we lowered inventory levels by 16% versus the prior year and had lower prior year incentive payout.
We ended the quarter with a consolidated leverage ratio of four three times well below our five times covenant ratio and now expect to end the year with a range of three three to three five times lower than previous expectations.
Longer term, we are still targeting two to two and a half time.
At quarter end, we had $424 million of remaining availability on our $600 million revolving credit facility.
Found on our earnings slide more than half of our debt is at a fixed interest rate of 4.25% and does not mature until 2029.
We ended the quarter with total gross debt.
Of 1 billion 85 over $100 million lower than the prior year period, and our cash balance was $82 million.
Turning to our outlook we.
We are providing a third quarter outlook and updating our full year guidance for 2023.
For the third quarter of 2023, we expect reported net sales to be flat to down 3%, which includes a positive 4% benefit from foreign exchange.
We expect adjusted EPS of 21% to 24th.
To provide context on our quarterly margin profile historically gross margins in the third quarter has sequentially decreased from the second quarter due to changes in customer and product mix.
This third quarter, we expect our gross margins to follow that similar trend.
With an expectation of a year over year improvement in the gross margin rate.
Additionally, in the third quarter SG&A costs are expected to be higher than the prior year due to higher marketing cost to support back to school and increased incentive compensation.
Third quarter interest and nonoperating pension expenses are also expected to negatively impact adjusted EPS by 3% compared to last year.
For the full year, we are updating our expectation for reported net sales to be within a range of down 1% down 3%, which includes a positive one 5% benefit from foreign exchange.
We are lowering our expectation for comparable sales growth for the year to be down 5% to four 5% due to the prolonged economic uncertainty and lower sales of computer accessories.
As Boris and Tom mentioned earlier, we are seeing cost of consumer and business sentiment and greater conservatism from our channel partners.
This is creating greater uncertainty regarding demand in the second half and we think it is prudent to take a more cautious approach with our sales outlook in this environment.
Interest expense has increased since our last forecast through two more rate hikes by the fed and ECB.
Our expected mix of profitability by country has also slightly things and modestly increased our expected tax rate.
This has been partially mitigated by a more favorable impact from foreign exchange translation.
Our gross margins are tracking ahead of our expectations and we now expect full year gross margins in the range of 31% to 32%.
We continue to target a long term range of 32% to 33%.
In 2023, we expect higher SG&A costs due to increases in incentive compensation versus the prior year.
For the full year, we expect adjusted EPS to increase 4% to 8% to $1 eight to $1 12.
Adjusted operating income is expected to grow at mid teen levels, partially offset by higher net interest cost of about $14 million and higher noncash nonoperating pension expenses of $5 million.
On slide 15 of the earnings presentation, we highlight the improved operational performance and foreign exchange expectations, which are being offset by higher interest expense and taxes.
The adjusted tax rate is expected to be approximately 30%.
Intangible amortization for the full year is expected to be $44 million, which equates to approximately 30% of adjusted EPS.
We are now expecting a free cash flow to be at least $100 million after capex of $20 million and to end the year with a consolidated leverage ratio within a range of three three to three five times.
Looking at cash uses in 2023, we expect to continue 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.
Operator.
Thank you if you'd like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad.
If you change your mind and we'd like to be remains from the Th. Please press star and then K when preparing to ask your question. We ask that you. Please ensure your microphone is unmatched lately.
Our first question today comes from the line of Greg Burns with Sidoti Greg. Please go ahead. Your line is now open.
Good morning.
I just wanted to get maybe a little bit more color on the state of.
Channel inventories, where they stand why do you think.
It sounds like you're a little bit more cautious in terms of.
The outlook, there, but I just wanted to get a sense of.
Channel inventories your view for maybe the potential for fall two orders is there is there potential upside in your guidance.
If maybe sell through is a little bit stronger than I expected. Thanks.
Okay, Greg Hi, This is Tom let me take an opportunity to respond to that so.
Channel inventories are down modestly versus prior year across most of our product categories.
As it relates to back to school, specifically, we're really early in the season, Greg So it's hard for us to.
Great clarity as to how the season will finish as I said in my comments, we are uniquely positioned.
To support demand.
The customers demand forecasts are greater than they are currently forecasting our customers are aware of that and we're always in a great position to chase late season demand.
Right now, it's just too early for Bts to comment on whether that demand will ultimately materialize or not so we wait patiently and were prepared in response prepared to respond if demand is better than forecasted.
Okay. Thanks.
How far from peak.
From the prior peak or technology sales.
Technology sales are down in the order of 20% or so from the prior peak.
We expect these things to recover throughout the year.
We haven't seen that yet in the first half so we've.
<unk> reduced our expectations for the full year now we believe that the sales for technology access fees will be down overall for the year, even though we do expect subsequent for improvement.
Due to <unk>.
Refresh the refresh cycles and upgrade cycles.
But.
As I mentioned that just down too much to recover the full decline in the first year, specifically for Kensington right correct Assembly for Kensington.
Okay. So when you view the outlook for that business. When you look at kind of the new product launches.
Turning to market typical refresh cycles do you feel like.
That business is.
Kind of trough to reach the low end you can build off of here or is there potential.
More downside if the macro worsens.
No absolutely. We think we think the worst is behind US, we think that things will improve throughout the year.
It's what's been happening on the <unk> side specifically.
There's been a lot of forward buying over the last couple of years. So people have bought a lot of Pcs and accessories. So now.
We're all digesting.
Adjusting what we bought now that's going to.
Get annualized.
Really should annualize in the second half of this year and certainly in 2024. So we do expect an improvement in the remainder of the year.
Okay, and you mentioned a slower global rollout for power.
What's driving that could you just maybe give us an update on your plans there.
Yeah, Gregg those are really what I call.
Kind of transitional issues, when we notified our distribution partners.
All of our attention to start selling direct they basically stopped selling so we have availability of a gap between them.
Stopping their activities and our global teams one team is picking them up so we're not we're not as far along as we expected to be but we're certainly making up ground I expect us to catch up real soon so thats why we mentioned the international expansion a bit slower than we previously anticipated.
Yes.
Oh.
Okay.
That dynamic I know you said power revenues were up but has that impacted the top line for power right that maybe you get a.
And interact with the Internet of things right.
It impacted the international top line growth would have been even higher growth in Q2 was driven by North America for power.
But certainly as the international kicks in in the second half of the year, we expect them to be a greater contributor to growth.
Okay, great. Thank you.
Thanks, Greg.
Our next question comes from Joe Gomes with Noble capital market. Jay. Please go ahead. Your line is open.
Good morning, guys. This is Josh was over filling in for Joe.
Thanks.
Good morning.
So I just had a quick question on the SKU reduction I just wanted to kind of get a progress on that how much of you guys reduced your skus and how much more you guys are willing to go on those.
Yes, so we speak about this fairly frequently.
And our public statements, it's an ongoing process for us we've accelerated that over the last year as we started to face the realities of the uncertainty economic environment and changes in consumer preferences as the impacts of the prolonged.
Work from home environment really are here to stay.
So we I would say we are going to continue the work that we're doing.
We feel like we're in a really good spot in terms of our SKU reduction process, we're not in a position to talk about the specific numbers.
But we feel like we're making progress against our internal objectives with the primary focus being in two segments North America and EMEA.
Okay perfect.
And so forgive me if I missed this but I saw that SG&A expenses increased both really sequentially and year over year is that really all like incentive compensation or was there more or pushing that.
No that's right, it's pretty much the incentive compensation.
Last year.
We we're relieving some of the incentive comp in the back half in the second quarter.
So youll continue to see that into the back half.
Yes.
Okay.
Okay great.
Last thing from me I guess.
So.
I saw that.
You said that.
You guys are obviously, a little bit into the back to school years, but what is the spin the impression to the season. So far now obviously, it's still early but.
Is there anything that you guys have noticed so far in the season.
Yes, I think the first thing that I would say is.
We've executed very well early right. The first step in back to school a successful back to school is ensuring our channel partners have inventory.
At the right time, so our supply chain teams and our sales teams have done a great job of preparing our retail partners to have a successful back to school season, I will tell you that we have seen a bit of a mix shift on shelf.
So we're seeing a little more offerings across the lower price point spectrum.
See how that translates throughout the season as I mentioned in my prepared remarks and to the first question. We're really early so it's dangerous to draw conclusions at this point in the season.
But we watch it closely every single week.
Okay, great. Thank you guys. Thanks.
Thank you Jessa.
The next question comes from Kevin with Barrington Research Kevin. Please go ahead. Your line is open.
Okay.
Thank you good morning, just wondering if you could.
Discuss the.
Comparable sales.
Percentage change outlook.
<unk> three.
Three <unk>.
Geographic regions as you think about it for the full year.
Sure Kevin.
So for the full year.
Okay.
From a comparable sales standpoint for total company, we expect sales to be down two five to four 5% at a comparable level.
And then.
In international we expect growth low double digit growth in international.
And for both North America, and EMEA, we expect mid single digit decline.
Okay perfect. Thank you.
Can you talk about the factors.
It enables you to.
Increase your free cash flow.
Outlook a bit for full year 2023 as well.
Are you able to favorably.
Revise your.
Year end leverage ratio target.
Yeah.
Have seen as you saw in the second quarter, what we reported strong.
Working capital management, which has allowed us to significantly improve over the prior year I talked about it last time, where we ended.
'twenty, one with high inventory.
That got paid for in 'twenty, two and then in 'twenty. Two we ended up with lower inventory that we're not needing to pay for in 'twenty. Three so we've seen some significant.
Improvement in cash flows that should not go away. We've also got about $17 million of incentive comp that didn't pay out this year.
That paid out last year and all of those factors carrying through to the full year. The improvement I would say in the cash flow is really from our continued expectation of that working capital management, we've done a nice job on receivables.
On payables and so we're anticipating at least $110 million of free cash flow at this point.
And our leverage ratio reflects that as well as slightly higher EBITDA.
As we look to that.
Okay, great. Thank you.
Also.
Gross margin is trending better than your original expectations I believe you had talked about.
During the 2021 levels in 2023, which would have been 35% roughly and now youre talking about 31% to 32% for the full year 2023. So can you talk about maybe what's trended more favorably there.
The original expectations on the gross margin front.
It's all of the cumulative impact from the pricing efforts that we've done over the last two years and all of the cost reduction and restructuring efforts that were put in place.
We're still seeing some inflation.
And goods both in the quarter in Q2.
And our year to date, and we expect some inflation to continue for the remainder of the year, but the impact of the offsetting impact of all of the cost reduction efforts.
Is.
Driving better gross margins, we now expect them to be in the 31 to 32 range for the year.
Very nice job of just executing.
And recovering its really all recovering what we've lost over the last two years.
Okay, Great and then lastly.
You feel like you're fully caught up on inflation.
Have you seen any moderation there and what's the outlook for price increases.
We think we have caught up with inflation in 2023, we.
We don't expect certainly not in U S and Europe additional price increases in 2023, we may do some tweaking in.
Our other regions just driven by currency.
Exchange rates, but.
But not in our major geographies.
<unk> is down but it's there.
Today, it's really being driven by labor inflation.
And Thats permeating into pretty much every aspect of the P&L and we expect labor inflation to continue into next year. So I do anticipate price increases next year because.
Because we do have to offset that inflation.
But nothing but nothing in 2023.
Okay perfect. Thank you for taking the questions.
Thanks, Kevin.
The next question comes from how much cushion with BWXT financial.
Please go ahead. Your line is now open.
Okay.
Good morning.
First off just about your comments about volume decline.
Where does that go as the consumer moved away from buying your products or is completely moved away from the categories.
Is this a couple of things to that.
A big part of volume decline is driven by.
Our computer accessories business, we mentioned that's down substantially there was no price increases and computer accessories. So all of the decline in revenues decline in volume and Thats just <unk>.
Shifting.
We grew the computer accessory business, 38% from $19 million 2019 through 2022.
Some of that was a shift in purchases from 'twenty three into 'twenty two into 'twenty, one and thats going away all of that will come back we feel very very confident about that.
And on.
The other part of the volume shift is lower usage due to.
Less people working in offices, a significant percentage of our portfolio is still driven by office products usage.
Especially so in our EMEA segment.
And given that we are at call it roughly 50%.
Office capacity any one time there is less usage.
Our types of products.
And that's something that we need to adjust and this is what Tom mentioned in his prepared remarks in terms of.
Optimization footprint optimization.
Asset utilization optimization initiatives that we have to make sure that we are adjusting both our.
Footprint to that reality as well as our product innovation program to really focus on more hybrid work and shifting more to consumer and hybrid as opposed to an office types of environment.
Okay, and then as far as the.
The implied Q4 Guy.
Guidance goes.
Suggesting you are going to be up sequentially.
From Q3 quite a bit it's never been up that much I think youre, implying something around $60 million in sales, that's usually been $20 million to $30 million. What's the clarity that you have in your expectation that Q4 could be a solid.
Suggesting your full year guidance.
Well.
Yeah, obviously, we give it some thought and Thats, our best estimate of what it would be but it is six months away or five months away. So there's always uncertainty and some of that guidance.
I would say the the compares that you alluded to is more of Q3 being a little bit lower than typical rather than Q4 being higher than typical they are more cautious on Q3.
It's even indicated by hour.
Q3 revenue guidance comparable guidance of minus four to minus seven that Deb Deb alluded to.
<unk>.
So from a from a sequential standpoint.
We don't look at Q4.
As being that that abnormal and then versus prior year comparison because of the there is also a strong improvement versus prior year. That's more of a last year issue, where we had very big inventory channel inventory reduction last year on the on the revenue side and we had.
Very high inflation costs in our in our Cogs last year, which are all behind us so.
That's the reason for for the.
Q4 outlook.
And that I don't know if you have any additional actually okay.
That last part was exactly right.
Alright. Thank.
Thank you Boris congratulations inventory.
Thank you. Thank you got it.
Okay.
Our next question comes from Hale Holden with Barclays.
Please go ahead. Your line is now open.
Hi, good morning, congratulations on the forest and Tom.
I had two.
Two questions. The first one is on the softer economic outlook for macro outlook that you have in the second half.
I understand the accounting piece.
I was curious on North America, specifically, if you could sort of talk about if there were.
Greater weakness on the business side or the retail side or.
A way from Kensington, if there are other products or categories.
So we're driving it or if it was more more equal weighted.
Okay.
It's more on the both consumer business side less so on.
Technology accessories.
Some of it is the things that all of you read about in terms of.
Fed.
Increasing rates and things being a little bit slower and some of it is the commentary we're hearing from our channel partners.
On the retail and business side that given this uncertainty.
<unk> to be a little bit more conservative in their inventory carrying in purchasing policies.
So with all of that feedback we thought it was prudent to be more conservative in our in our sales guidance.
Yes.
Okay.
Yes.
Right.
And then historically you guys have done a pretty good job versus some of the private label offerings.
And this kind of environment.
It wouldn't be Abnormalcy private label take more share.
I just wanted to confirm the firewalls from a case here.
Yes.
Okay.
No I mean, youre, absolutely right historically, our brands have done really well in a difficult environment.
Last year Q3 was was already.
We're already talking recession, I'm talking about recession.
And <unk>.
Channel was reducing inventory and yet flagstar gained.
A couple of points of share during the back to school season. So we have performed well.
But as Tom said.
Retailers are featuring more private label and given them more of a presence on the shelf. So we'll have to just see how that all plays out we do expect our brands.
To do well, but.
Probably will be some trade down to lower price point.
Products, either from us or from from private label.
Thank you.
Great. Thank you I appreciate it.
Thanks Al.
At this time, we have no further questions. So I'll turn the call back to the management team for any closing remarks.
Thank you Emily and thank you everybody for your interest in ACCO brands, we're encouraged about our first half results.
And about the remainder of 2023 as we stay focused on executing against our priorities keeping margin improvement at the forefront.
We've managed well in difficult environments and are confident in our ability to navigate the current economic challenges we have the right strategy and we believe we are well positioned to continue to deliver organic sales growth compelling market performance and improved financial results as global economies recover.
We look forward to talking to you in a couple of months to report on our third quarter. Thank you.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Okay.
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Yes.
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Okay.
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