Acco Brands Corporation

Good day, ladies and gentlemen, and welcome to the ACCO Brands' fourth quarter and full year 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jennifer Rice, Vice President, Investor Relations. Ma'am, you may begin.

Good morning, and welcome to our fourth quarter and full year 2018 conference call. Speaking on the call today are Boris Ellisman, Chairman, President, and Chief Executive Officer of Acco Brands Corporation, and Neil Fenwick, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the investor relations section of accobrands.com. We also posted a newly refreshed investor overview presentation to our investor relations website this morning. When speaking to quarterly results, we may refer to adjusted results. Adjusted results exclude transaction, integration, and restructuring costs and apply a tax rate of 32% for the current quarter and 30% for the current year. This is a change from our previous assumption. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP measures are in this morning's earnings release and the slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, We do not reconcile our forward-looking adjusted earnings per share, free cash flow, net leverage ratio, or normalized tax rate guidance. Forward-looking statements made during the call are based on certain risks and uncertainties, and our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements are made as of today's date, and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session. Now, it is my pleasure to turn the call over to Boris Ellisman.

Boris Ellisman Good morning, everyone. Our fourth quarter results were somewhat mixed. Our free cash flow was higher than our revised expectations, but our sales and earnings were lower. The softer sales resulted from lower than expected orders in December, especially in the last two weeks of the month. Our adjusted earnings were lower than anticipated, due to the adverse impact from a higher tax rate, which reduced EPS by two cents. Our results were also mixed for the year in total. Sales and profits were down in the U.S. and international, but we had an excellent year in EMEA. My comments this morning will focus on the main drivers behind our performance in 2018 and describe the actions we have taken and will take in response. I will also comment on our strategy for the new year. I will begin with and spend most of my time on the U.S., since this is where we saw a significant degradation of financial performance, which was disappointing to me and to my management team. Prior to 2018, our business in the U.S. had four straight years of profit improvements with moderate sales declines, largely caused by the office superstore consolidation. Our team did a great job managing the consolidation and associated channel transitions with growth in mass and e-tail channels, largely offsetting reduced sales to office superstores as they closed retail locations and distribution centers. Office wholesalers and independents were relatively stable over those years. On the cost side, U.S. inflation was mild during these years, and we were able to drive significant profitability improvements in our U.S. business through cost reductions and better productivity. It is largely the U.S. improvements that drove organic profit improvements in our total business prior to 2018. But what was so different about 2018 than the preceding four years? On the revenue side, the major difference can be explained by the two office wholesalers. They were in merger planning throughout most of the year, and their actions to prepare for the merger, as well as the uncertainty the merger created in the independent dealer community, significantly affected sales. U.S. sales declined 7% in 2018, and roughly 4% of that was due to a sales decline with the two office wholesalers. Without that, our U.S. sales decline would have been around 3%, consistent with the range that we have seen in recent years. Two other factors that impacted our U.S. sales and global sales, especially in Q4, were lost share in planning products and no end-of-year buying ahead of price increases, especially in December, as I mentioned earlier. Our U.S. gross margin was also impacted by lower sales to office wholesalers and independents, especially in the second half of the year, and higher sales to dollar stores or back to school as well as lower sales of planning products, especially in Q4. On the cost side, we saw major increases in the raw materials and logistics costs beginning in the spring of 2018 with paper, steel, transportation, and fuel up double digits from 2017 levels. In addition, beginning in April, we began to experience a progressive increase in tariffs on Chinese imports that continued through the year. All in, inflation and tariffs added approximately $15.15 million to our costs for the year. It is normal in our industry to give notice to customers for price increases, so there's typically a three to six months lag time between our decision to increase prices and our ability to implement. As a result, In a rapidly rising inflationary environment, such as the one we experienced in 2018 in the US, it was not possible to implement price increases fast enough to fully offset the increased costs. We raised prices in the US in October, but that was based on the latest cost information available at the time of the pricing notification. As costs kept rising and new tariffs went into place at the end of September, October increases weren't enough to recover margins. We're raising prices again beginning in January of this year in the U.S. and in most other countries. And if the U.S. tariffs stay as they are today and commodities oscillate within the expected ranges, we should fully recover last year's cost increases. As you know, there's a possibility that the U.S. will further raise tariffs on Chinese imports beginning in March. And if that happens, we have already notified our customers that we plan to immediately increase prices on effective products in the U.S. We have also taken several actions to reduce our operating costs in the U.S. In addition to ongoing productivity initiatives, last quarter we communicated $5 million in cost reductions associated with reducing our U.S. headcount. We are now expanding our plans to reduce structural costs in the U.S. by another $6 million, which includes both headcount as well as improved manufacturing efficiencies. This brings the total of new structural cost reductions to $11 million, which we expect to realize mostly in 2019. In the U.S., we expect these and other actions will deliver flat to moderate sales declines and improved profitability in 2019. In terms of sales, we expect the U.S. channel environment to remain difficult. We expect wholesaler independent dealer sales to be roughly flat. A few months ago, we launched a program to incentivize independent dealers to buy directly from us. The purpose of the program is to make independent dealers more price competitive with e-tailers and superstores. The initial results from the program are very positive, and we plan to continue its activation with dealers in 2019. We expect office superstores to continue to decline, but their decline is expected to be mostly offset by growth in mass, retail, and tech channels. We grew back-to-school sales 2% last year, and based on early customer information, we expect 2019 back-to-school sales growth to be comparable to 2018. We continue to reorient our portfolio towards consumer-centric categories and brands, and back to school is an increasingly important part of our U.S. results. In addition, Kensington Computer Accessories grew 6% last year in the U.S., and we believe their growth through the tech channel will continue this year. Turning now to EMEA, we had great results in that segment in 2018. Comparable sales were up approximately 2% with broad growth of branded products throughout the region, offsetting declines in private label sales and the insolvency of a significant customer. We had especially strong growth with Rexel shredders, Kensington computer accessories, and Derwent art pencils. We have expanded product listings in EMEA for 2019, which we expect to drive continued positive sales momentum. Beyond sales growth, we realized substantial cost synergies from the merger with Ascelti, and margins for the year were up significantly. I'm very pleased with our results in EMEA. We are positioned well strategically throughout the region. Our execution is very strong, and I'm optimistic to have another year of low single-digit organic sales growth and further profit expansion. Our international performance was mixed, but we saw sequential comparable sales improvement every quarter throughout the year. We had another outstanding year in Brazil with sales up high single digits despite a difficult economy. Sell-in for this back-to-school season was very strong and we're hoping for a solid sell-out season. Business confidence in Brazil has improved post-election and GDP growth is forecasted to increase. Australia had a slow start to the year as two large customers merged but comparable sales trends improved throughout the year, despite the environment remaining challenging. Mexico had a difficult year, especially in the first half, with our major customer implementing a more conservative inventory management strategy. On the other hand, we're very pleased with the initial six months from the GOBA acquisition and believe our combined Mexican business is positioned for strong growth in 2019. Asia also had a difficult first half, but stronger growth in Q3 and Q4. There is improving momentum in international, and altogether we expect mid-single-digit growth in 2019. Now to review our strategy. Over the last several years, we have been shifting our business through organic initiatives and acquisitions towards stronger brands, more value-added products, faster-growing geographies, and a more diversified customer base. We've complemented these investments with ongoing cost reductions and productivity improvement initiatives, especially in more mature countries and with declining channels. As a result of the strategy, we were able to grow our free cash flow from $146 million in 2014 to $161 million in 2018. And we returned some of this cash to our shareholders initiating a share repurchase program in 2014 and a dividend last year. In total, we returned $216 million to shareholders over the last four and a half years, including $100 million in 2018. We believe we have the right strategy for our company. We'll continue to reorient our business towards faster growing product categories and geographies, stronger brands, and complementary channels, both organically and through acquisitions. We'll continue to drive aggressive productivity initiatives and scale our costs with revenues as appropriate. And we'll continue to use our free cash flow in a balanced way to reposition our business and reward our shareholders. Neil will discuss our 2019 guidance, but I will review our longer-term business expectations. Beyond 2019, based on the strategies we have in place today, We expect our company to deliver top-line growth in the range of 0% to 2% compounded annually. We expect this growth to be driven by a 0% to 2% growth in EMEA and a 3% to 5% growth in international. This will offset North America, which should be flat to down 2%. We anticipate our gross margin being in the 33% to 34% range in SG&A in the mid-19% range. In summary, despite a challenging year in 2018, we remain confident about our future and continue to position the company for growth. As Jennifer mentioned at the beginning of this call, we have developed an updated investor presentation available in the IR section of our website that provides more granularity into our business and strategy and long-term targets which we hope you will find helpful. With that, I will hand it over to Neil to give you more details on our quarter.