Acco Brands Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 ECHO Brand Corp Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Christine Hanneman. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to Echobrand's first quarter 2020 conference call. Speaking on the call today are Boris Ellisman, Chairman, President, and Chief Executive Officer of Akko 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 akkobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude transaction, integration, and restructuring costs 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 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 a forward-looking adjusted earnings per share, free cash flow, net leverage ratio, or adjusted tax rate guidance. 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 the statements are made. Our forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially. Among the factors that could cause our results to differ materially from our forward-looking statements is the scope and duration of the COVID-19 pandemic, government actions, and third-party responses to it, and the consequences for the global economy and its impact on our business operations, results of operation, financial condition, and liquidity. Please refer to our earnings release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements are made as of today, and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session. Now, I will turn the call over to Boris Elisman. Good morning, everyone.

Thank you for joining us. I will spend the next few minutes reviewing the first quarter results, but I will spend most of my time giving you an update on our response to the coronavirus and its business implications on the second quarter. Neil will follow me with more color and details on the first quarter and provide additional comments on our cost reductions, balance sheet, and expected use of cash in 2020. Then we'll take your questions. Our first quarter is our smallest quarter of the year. Sales were down 2.5% to $384 million. Our adjusted EPS were 7 cents, down 1 cent from last year. These results were roughly in line with our expectations. The year started well, but March sales softened, especially in the last two weeks, due to COVID-19 related business and school closures. April, which is typically the softest month of the year for our business, deteriorated further due to incremental global government mandates and business closures, in addition to the timing of Easter. As we manage our response to the pandemic, our top priority is the health and safety of our employees. In mid-March, employees who could do their job from home began working from home. Most of our production and warehouse facilities remain open to meet customer demand as we are designated an essential business in most jurisdictions, although many have reduced staff and hours. We modified operating procedures at our production and warehousing facilities based on government guidelines and have taken additional steps to protect our employees. Those steps vary from location to location and include taking workers' temperatures daily, practicing social distancing, wearing masks, additional deep cleaning and disinfecting procedures, quarantines consistent with CDC and WHO guidelines, and adjusting our working schedules as appropriate to space out employee interaction. I want to thank all our employees for their efforts under these difficult conditions. We have also undertaken many cost reduction initiatives to better align our cost structure with the expected impact of much lower near-term demand. These efforts are in addition to our normal productivity programs. We're doing everything we can in the short term to mitigate the impact of the pandemic to ensure the long-term health and prosperity of our company and our employees. We just amended our bank agreement to provide additional flexibility to cover the possible impact of COVID-19. Neil will give you the specifics in a few minutes. Our board of directors approved the second quarter dividend payment, which will be paid in mid-June to shareholders of record. Moving on to my comments regarding the second quarter. As many of you know, our North America Vector School sell-in occurs mainly in the second and early third quarters. We manufacture over half of that inventory in the U.S., 30% in Vietnam, and less than 20% in China. Our supply chain is running normally after some minor disruption in February and March in China due to factory closures. We currently don't foresee any significant supply chain issues in meeting back-to-school orders. We were impacted by Amazon's decision in mid-March to stop replenishing inventory for what they deemed to be non-essential items. This reduced our March sales by a few million dollars, but in mid-April, Amazon began replenishing the inventory on many of our items. Also in March and continuing to April, we have seen strong demand for products that aid working, schooling, and crafting from home. In particular, our Kensington docking stations, five-star notebooks, TrueSense air purifiers, and Derwent art products have been so popular that we have been out of stock on some of these items due to high demand. However, overall demand for the second quarter is expected to be down significantly as many of our commercial customers and schools are closed or their customers are closed and not using our products. Let me now make some comments as to why I believe we're well positioned to withstand the current challenges. Our management team has faced difficult economic conditions before and has been working for the last 10 years to create a more resilient company. In 2008, 2009, we were primarily selling office products to large office supply stores. Today, we're a much more diversified global company. Beginning with the acquisition of the meat consumer and office products business in 2012, our strategy has been to expand our global presence, diversify our challenge of distribution, and add stronger brands and more differentiation to our product portfolio. We pursued this strategy through organic initiatives and with acquisitions. As a result, our business now is 50% consumer with a higher consumables mix, healthier go-to-market channels, and a broader range of customers. This makes us better able to withstand economic disruptions, which we believe will disproportionately impact the part of our business that is related to commercial office products, which is more susceptible to lower demand and channel disruption. Our financial situation is much different as well. In 2008, 2009, we were in a weak financial position, and it was difficult for us to borrow. We ended 2019 in strong financial shape. And at the end of the first quarter, with over $90 million in cash on hand, and $450 million undrawn on our $600 million committed credit facility. As noted earlier, we also amended our bank debt maintenance covenant, which will add flexibility to our facility. We have no debt maturities before May 2024. Given our financial strength and the proactive steps we have taken to reduce costs, we expect to be able to maintain good liquidity as we manage through the current environment. Finally, we're an organization that knows how to adapt to change. We will continue to evaluate our business strategy and participation as it relates to product categories, geographies, channels, and consumer behavior, and we will change as necessary as we deal with the uncertainties and near and long-term consequences of COVID-19. I'm confident in our market position, our brands, our financial strength, our people, and in our management team, which is experienced in dealing with difficult times. With that, I will turn the call over to Neil for a review of the segments, our outlook, and other financial commentary, and then I'll join him in answering your questions.

Neil? Thank you, Boris, and good morning, everyone. Our first quarter reported net sales decreased 3% due to adverse foreign exchange. Excluding Foroni and foreign exchange, Comparable sales decreased 4% as declines in Europe and the international segment offset solid performance in North America. As Boris mentioned, in mid-March, we began seeing government-mandated business and school closures and shelter-in-place orders in many countries in Europe, New Zealand, and several states in the United States. By the end of March, this was widespread. We continue to comply with those and other orders as they evolve. We are considered an essential business in many countries and states, so we have been able to continue manufacturing and shipping in many of our facilities as demand warrants. However, due to soft demand and social distancing requirements, we are currently operating many of these facilities with a smaller staff. First quarter net income was $8 million versus a small loss in 2019. Adjusted net income was $7 million, down from $9 million in 2019. Adjusted EPS was $0.07 versus $0.08 in 2019. In the quarter, we spent $19 million of our free cash flow to buy back shares. Our gross margin was 29.2%, compared with 31.9% in 2019. The decrease was largely the result of unfavorable fixed-cost absorption, largely in North America, and an unfavorable product mix, primarily in Europe. The reduced gross margin in international was from the inclusion of Ferroni, without which segment margins would have been flat and gross margins for the total business 50 basis points higher. SG&A expenses as incentive sales decreased to 22.4 percent from 24.3 percent. The improvement was primarily from lower incentive accruals, as we will not earn any annual incentive bonuses this year in any segment, as well as reductions in discretionary spending. The inclusion of Ferroni, which has both lower gross profit and SG&A than ACCO's average, was a 30 basis point benefit. Reported operating income of $17.4 million was similar to last year's $17.9 million, and operating margin in both years was 4.5%. Ferroni has a negligible impact on reported operating income and margin. Our adjusted tax rate of 30.7% was in line with our anticipated 31% rate for the full year. The lower adjusted rate in this year's first quarter versus last year primarily reflects the tax strategy we implemented to reduce excessive interest levels in certain jurisdictions. Now let's turn to some details on our segment. Net sales in North America rose 5%, mainly as a result of higher prices that reflected the full benefit of tariff-related increases that occurred last year. We saw a strong sales growth of Kensington, Swingline, Quartet, and Five Star products. Our back-to-school orders were strong, and at this point, we expect back-to-school sell-in to mass merchants and e-tailers to be similar to last year. However, we also expect reduced sales to traditional commercial office product channels and other retailers in the second quarter. North America operating income and operating margin grew as a result of the absence of restructuring charges this quarter. Now let's turn to EMEA. Net sales decreased 13% and comparable sales were down 10% due to the impact of COVID-19 related business closures. The business was hurt beginning in mid-March as many economies in Europe shut down and we experienced a significant slowdown in new orders as well as an inability to deliver to some customers. EMEA's adjusted operating income and adjusted operating margin declined primarily due to lower volume, and an unfavorable product mix. Growth and operating margin were further affected by lower absorption and the inflationary impact of the strong U.S. dollar on the cost of Asian-sourced product costs. These were partially offset by cost savings, including lower incentive accruals. Moving to the international segment, net sales rose 2% from the inclusion of Ferroni in Brazil, which added 14 million. excluding foreign exchange and Ferroni, comparable net sales decreased 8%. The decline was the result of slowing customer orders due to COVID-19 business closures, as well as out-of-stock situations in Mexico related to Chinese supply chain issues. International reported operating income was slightly higher than last year due to lower SG&A costs. Ferroni had an immaterial impact on operating income adjusted operating income of $6 million decreased as the impact of COVID-19 was only partially offset by lower restructuring charges and lower SG&A, including lower incentive accruals. Let's move now to our balance sheet and cash flow. In the first quarter, we used approximately $25 million in net cash from operating activities and $32 million of pre-cash flow. We repurchased 2.9 million shares for a net 19.1 million, and we also paid a dividend of 6.2 million. The planned use of cash for the remainder of 2020 will be to fund our dividend and to reduce debt. We do not plan to repurchase shares for the remainder of the year. Our capex outlook for 2020 is 20 million, much of which is related to North America and IT conversions which became operational in early April. At quarter end, we had used 150 million of our 600 million revolving credit facility, primarily for seasonal borrowings. The net leverage ratio was 2.8 times. As Boris mentioned, to address the impact of COVID-19, we have undertaken a number of cost reduction initiatives to better align our cost structure with the expected decline in 2020 sales. These initiatives include, one, temporary salary reductions for our executives, our board of directors, senior leaders, and our staff worldwide. These reductions range from between 50 to 10 percent. All of the salary reductions will be in effect until the end of June, at which point we will decide whether or not we will need to continue based on company performance and economic conditions. Two, indefinite postponement of 2020 merit increases with a few exceptions where required by law. Three, eliminating the 2020 bonus accruals since our original financial objectives will not be achieved. Four, furloughs for some of our global employees and temporary layoffs for some production and distribution employees due to lower demand. We have also postponed discretionary spending, including most marketing programs focused on commercial customers, and we have delayed some capital improvement projects and some product development programs. We expect these cost reduction actions, when combined with our normal productivity programs, will deliver approximately $20 million in additional second quarter expense savings compared with last year. Some of the actions and corresponding savings will continue for the remainder of the year. Others are more temporary in nature. We will evaluate the need to extend, adjust, or convert these actions into more permanent changes later in the quarter, depending on the economic and business situation. Now let's turn to our outlook. It is difficult to forecast in this environment, and thus we don't know enough to give full-year guidance. It is not our normal practice to give a quarterly outlook, but we are not in normal times, and we have more short-term visibility than long-term visibility right now for our sales and profits. Our sales in April have been very soft, and we expect our second quarter sales to be down significantly. Our outlook for the second quarter sales decline is in the range of 25% to 40%, including 3% impact from adverse foreign exchange. This is a very broad range because we don't know the pace or the timing of reopenings and recovery. However, we expect April to be the worst month in the second quarter. Second quarter adjusted EPS are expected to be a loss of 5 cents to a positive 7 cents. with negligible impact from foreign exchange and Ferroni. We believe that our seasonal borrowings could be larger because lower sales in April will result in lower collections from receivables in the quarter, and we also anticipate an increased level of late payments. In addition, we did not anticipate such a steep drop in demand when we placed orders for purchased finished goods from Asia early in the first quarter. which is likely to result in elevated inventory levels at the end of the second quarter. Our second half visibility is very limited, but demand is expected to continue to be down compared with last year, especially in the office products area. Our traditional office products customers are seeing the largest impact with their customers not open or themselves not being operational. We anticipate that a prolonged period of closure may cause financial distress and potential bad debts with some of them. We are actively managing our receivables and will potentially restrict our own sales to mitigate our risk. For the full year, we anticipate a slowly improving demand level with a wide range of sales assumptions. The business continues to generate a solid level of operating cash flow. While lower sales reduce profit, they also reduce our level of investment in working capital, and we feel confident that we will generate at least 120 million of operating cash flow for the full year, and with CapEx expected to be 20 million, we will generate at least 100 million in pre-cash flow. We also amended our bank debt covenant to give us greater financial flexibility as we manage through this crisis. The net debt to EBITDA leverage covenant ratio has been increased to 4.75 times from 3.75 times all the way through June 2021 to ensure that we remain compliant with our covenants regardless of the situation. While we may not need the added headroom, we believe that it was prudent to ensure that we could manage through whatever we need to without concern for tripping a covenant. In summary, at this point, the second quarter back-to-school orders for mass merchant and e-tailer sell-in are similar to last year, and we will monitor the sellout for back-to-school products in the third quarter as we expect students to go back to school in the fall. There may be some variation in the timing of school openings versus normal, but we do expect most schools will be open in the fall. Now let's move on to Q&A, where Boris and I will be happy to take your questions. Operator?

Thank you. As a reminder, to ask a question, you would need to press star then 1 on your telephone. To withdraw your question, please press the pound key. Again, that is star then 1 if you would like to ask a question. Our first question comes from the line of William Reuter with Bank of America. Your line is now open.

Hi, this is Marion for Bill. Thanks for taking my questions. So to start, You touched on it briefly, but can you just expand on the health of your customers and what kind of changes that you've been making to payment terms?

It's difficult to say. Our customers vary in their profile. We have lots of customers who are very healthy and whose sales are actually up, and business is probably going to grow as a result. And we have some customers that are more in the specialty channels, and these are customers that are focused primarily on the office supplies business that are likely to be stressed by the current economic challenges. It's hard to paint with a broad brush. Customers that we feel are higher risk, we are having discussions with and apply custom solutions for their particular environment. And as Neil mentioned in his prepared remarks, sometimes it means that we will reduce our sales to those customers in order to protect our receivables.

Got it. And then given just overall weak demand, are you feeling any pressure on price? And if so, what kind of pressure do you expect going forward in this environment?

No, there is no pressure on price. In fact, I think there'll be pressure the other way. The commodity environment is very benign, so we don't see any inflation from the commodity costs. But certainly, operating a business in a COVID-19 environment requires additional costs. Social distancing means reduced productivity. So I think over time, some of these costs, if not all of these costs, will be passed through higher pricing. And it's not just for our business. That will be the case everywhere. And I'm sure you're seeing it in retail already where prices have gone up for the last couple of months. But that will come to our industry as well.

Got it. And lastly, just on the e-commerce channels, what kind of – Are you seeing anything specific to what products are being sold online versus what's typically being bought in stores? Any demand changes with that or any color, I guess, for what you've seen with most of these sales going online?

Yeah. I mean, online is clearly benefiting from the current environment. We're seeing very rapid growth through retail. you know, in the first quarter it approached triple digits for us. And then our own direct-to-consumer sales were up 17% in the first quarter. So not just third-party, I think there's demand, or we're seeing demand online pretty much from every angle. So clearly one of the big benefits in this environment will be online sales.

Got it. That's all from me. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Chris McGinnis with Sedotian Company. Your line is now open.

Good morning. Thanks for taking my questions, and nice job on the quarter, and thanks for providing some guidance for Q2. Good morning. Good morning. Can you just maybe, Boris, just talk a little bit about maybe the inventory levels on the commercial side and, you know, as states start to reopen, you know, have those conversations changed, you know, outside of what you saw in April?

Yeah, inventory overall right now is pretty low for us, and it's low for a couple of reasons. One is there were some supply chain disruptions in February and March from China, so as we did Q1, inventory was in the lower place. And then in April... Some of that is coming back online, but we expect more of that to come into our warehouses in the May and June timeframe. And as Neil mentioned, we do expect to exit Q2 with a little bit higher level of inventory because the orders were placed back in Q1 and the sales are going to be down substantially. When it comes to our customers, they're taking their inventory down by a lot as well because they're anticipating a lower level of sales. So one of the reasons that April was such a soft month, in addition to just lower demand, this incremental stocking that customers are doing, they anticipate lower demand in future months as well.

Okay, okay. And then just on a regional basis, obviously it's a pretty wide range of sales decline for Q2, but if you just think about the regions, and if you said that, I apologize, but just your thought process through the segments of where you're going to see the most pressure.

Clearly, North America did relatively well in Q1, and we saw weakness in EMEA and in international markets. If I look at Q2, we expect North America to benefit from back-to-school selling. That's likely to be the strongest part of the business. And then outside of back-to-school selling, if I look at the commercial environment, we're seeing similar trends, similar weakness all over the world. And then seasonally, Q2 is going to be a pretty low quarter or is a pretty low quarter for EMEA and most of international as well, and that's not likely going to change. Thanks for taking my questions, and good luck to you, too, and stay safe. Thanks, Chris.

Thank you. Our next question comes from the line of Kevin Steinke with Barrington Research. Your line is now open.

Hey, good morning. Good morning, Kevin. Just curious about, obviously April was very soft, but did you see any stabilization in sales trends maybe on a week-to-week basis as you move throughout the month?

You know, it's difficult to tell because we don't do a year-on-year compares on a weekly basis. We did see Sales were better in the second half, just overall, of April. Sales were very, very soft up and through Easter. I think a lot of countries used that to really shut down businesses and schools and send everybody on vacations. But then post-Easter, especially the last week or so, we saw some improvement in sales. It's still much, much lower than prior year. We do expect May and June to be better, both because we are seeing some openings in some of the international countries. We are seeing discussion of openings and actually some openings in early May in some of the U.S. states. We haven't seen any business impact of that yet, but certainly there are openings going on. And then our back-to-school sell-in shipments are really May, June, July. So with May and June falling into Q2, we expect that to help those two months.

Okay. All right. That's helpful. And that kind of dovetails to my next question here. You mentioned some countries in Europe starting to tentatively reopen. I know it's still very, very early in that process, but... Have you seen any green shoots emerging in your sales trends from certain countries beginning to reopen?

We haven't seen any green shoots yet, Kevin, but countries are open and shipping, which is a good thing. For part of March and early April, Italy and Spain and a couple of other countries were pretty much completely shut down. Now they're open. Our warehouses are shipping. So I do expect that we will have stronger May than we had in April.

Okay. And then you mentioned the strong demand for certain work-from-home, stay-at-home items. Can you give us a sense as to how much of your portfolio those items account for and maybe – have you been able to address the out-of-stock items that you mentioned there as well?

Yeah, if we look at our sales for those types of products, which is Kensington, TrueSense, Derwent, some notebooks, it's probably in the range of 10% to 15% of our portfolio. We are addressing out-of-stock issues. Certainly, we expect may to be better, but the demand's been so strong that even as we get additional supply of those products, they go out very, very quickly. So, you know, it's a good thing, and I'm confident we will resolve the stock issues, but still, the overwhelming majority of our portfolio is down significantly in terms of sales.

Okay. Is the China supply chain pretty back close to normal now, or is that still, I think you said, ramping up? What's the state of supply out of China now?

Yeah, the China supply chain is close to normal. Right now we're just facing typical forecasting issues where we just can't forecast the increase in demand that we're seeing on some SKUs, and given the length of the supply chain, it takes a little bit to recover. So these are Good things. I'd much rather be chasing supply than demand. Back to school, I feel very, very confident in. But, you know, in certain Kensington or TrueSense or Derwent SKUs, we're still chasing supply.

Okay. And then just lastly, just talk about the decision to declare a dividend. And, you know, I assume that you continue to or expect to continue paying one going forward. It sounds like at least a positive signal of your financial strength, so just curious about that.

Yeah, we're very, very confident in our operating cash flow and free cash flow. Dividend is clearly a very important part of total shareholder return, and the board felt, certainly for Q2, that we should be paying a dividend given our view on the company in the future. And the board will continue to evaluate on a quarterly basis, but certainly, you know, given the importance of dividends, something drastic has to happen for us to change our view on that.

Okay, great. Thanks for taking the questions.

Thanks, Kevin.

Thank you. Our next question comes from the line of Joe Gomez with Noble Capital. Your line is now open.

Good morning. Good morning, Joe. First question, given as you were talking about, you're expecting to see prices to rise given some of the extra cost here related to the COVID crisis. Do you have any fears or worries about that that could cause a faster shift to the generic side versus the branded side?

No, I'm not worried about that, Joe. I think that the price increases that we're talking about are nominal, and the increases are going to be comparable to what everybody's doing. Everybody's implementing similar policies and seeing the same cost increases. Clearly, we will need to remain competitive. But within all of that scope, I do expect to be a pressure on increasing costs, increasing prices.

Okay. And could you just remind us what percent of revenue is derived from consumables?

It's roughly 50%. It's approximately half. Yeah, it's approximately 50%.

Okay. Thanks on that one. And how has the if it has, the current crisis had any impact on some of the new product rollouts that you guys were expecting to do this year?

We are still committed to innovation and product development. Some of the shutdowns in China earlier in the year delayed some of the interaction with suppliers that are manufacturing some of these new products for us. So I think some of these products will be delayed by a couple of months as a result. And then the plus one types of products, so derivatives and some of the minor changes are getting delayed. to prior year. As Neil mentioned in his prepared remarks, we are reducing some of the capex that supports these less innovative products. But the core group of innovative products is staying on schedule. We're still committed to it, albeit there's going to be a couple of months potential slip with just businesses not being able to operate as effectively as before.

Okay, great. Thanks for taking the questions.

Thank you, Joe.

Thank you. Our next question comes from the line of Brad Thomas with KeyBank Capital Markets. Your line is now open.

Thank you. Hi. Good morning, Boris, Neil, and Christine. Thanks for taking my questions. Good morning. Good morning, Boris. I want to jump in on maybe looking at the contribution margin and the leverage that you all are expecting. I think some quick math, Neil, maybe implies a 30% to 35% decremental margin on the sales decline in 2Q. Am I in the ballpark with that? And any insights you'd like to share about how we should think about that flow-through rate as we try and fine-tune our models for the balance of the year here?

Yeah, your math is correct, Brad. But that's, of course, after we've taken certain actions to reduce costs on a temporary basis. So the pre-cost reduction detrimental rate on margins is actually in the low 40s. And then, obviously, we took a series of special actions to reduce SG&A in the short term with all the pay cuts, et cetera, that we've done, which takes it down into around 30%.

Okay, great. Thank you. And then maybe a big picture question here for you, Boris. Just as you all have started to think about what the world looks like as we get back to normal, if people are working from home more, if they're potentially changing office layouts or office protocols, how do you think that affects the industry as you think about a recovery as we move into next year?

Yeah, we began to think about those things and we do think that they will, some of these changes will take place as the world recovers. I'm not sure going back to normal is in the cards yet, but certainly I do expect a recovery of some sorts. And there will be likely more people working from home and more people schooling from home, more people buying through online and convenience channels, less travel, more emphasis on local products and services, probably more awareness of physical and mental health issues, and a search for a way to improve both. So as a result of all of that, we will be Adapting to the changes in consumer and channel behavior, and it's very likely that we will continue to invest and improve our D2C capabilities around the world, continue to partner with e-tailers, not just with Amazon as the obvious leader in that space, but also with a lot of local e-tailers that exist all over the world. Transition our sourcing and manufacturing over time to be closer to our selling locations, make additional investments in such product categories as wellness, arts and crafts, computer and school products, change the colorways from more office colors to more home colors conducive to home environment, reduce the pack sizes and inner sizes in our cartons and shipments to facilitate shipments in smaller quantities and more to home locations as opposed to business locations. Those are just some initial thoughts and initial ways we're looking to be more attuned to the current changes in the environment we're seeing. Obviously, over time, we will learn more and more about the more permanent changes in consumer behavior, and we will continue to adjust.

That's very helpful. Thank you so much. Thanks, Brad.

Thank you. Our next question comes from the line of Hale Holden with Barclays. Your line is now open.

Good question. This is Ed Brooker on for Hale. I wanted to ask about the balance sheet. I noticed you gave your long-term leverage target, or I guess maintained it at two to two and a half times. You're close to it now at 2.8. So my first question, I guess, was on how you plan to get there and the timing on that, you know, whether it being debt reduction or earnings growth in the future, and then, you know, what you expect it to kind of be maybe year-end.

Yeah, Ed, you know, obviously earnings is the most unpredictable thing between now and end of year because the course of this virus is unpredicted and the response to it so I'm not going to give any target for the end of the year we gave the guidance that we felt we could give and clearly to give leverage guidance I'd have to give earnings guidance and I'm not intending to do that however we do not anticipate the virus staying with us on a permanent basis and so as you move out of this year and you return into a normal level of activity obviously earnings will recover And once earnings recovers, and as we did point out, we will plan to pay down debt this year, we will end the year with less debt, and we will hopefully see a recovery of earnings. And then clearly our leverage target will quickly come back into the right zone.

Thanks. And then for the covenant relief, did you have to give anything up for that? You are, you know, what seems to be well within even the – what the leverage covenant was before. Was there anything specifically you gave up for that?

So fundamentally, the agreement, while we stay within the original terms prior to this amendment, are very similar. The only change is a LIBOR base rate in the U.S., which will come into effect. But outside of that change... The only change that occurs is if we go above the old 3.75 leverage cap, in which case we would become constrained from purchasing shares, repurchasing our shares. But we wouldn't intend to do that in the short term anyway when we're in that period, so it's an academic restriction. And obviously there are higher interest rate tiers that apply if we get into that level as well. Got it.

And my last question is on, well, I guess, Are you seeing any additional costs that you're having to look at given what's going on in the plants in relation to the distancing restrictions or cleaning the plants, et cetera? And how do we think about that in relation to the $20 million of cost savings in the second quarter and then throughout the rest of the year?

The $20 million in the second quarter is all in and includes all of the cost increases versus cost reductions. You know, we are seeing increased costs as we're managing our response to COVID-19. And as I mentioned in response to my prior questions, some of that will have to pass through in the form of higher pricing. And I anticipate those costs not to be short-term costs. I think the way we work is going to change. And that will drive almost necessarily higher costs lower productivity, which will translate into higher costs per unit. So some of that is going to get passed through in higher pricing. Great. Thanks, guys. Thanks, Ed.

Thank you. Our next question comes from the line of Carol Martinson with Jefferies. Your line is now open.

Good morning. When you look at the range of sales down 25% to 40%, you know, in line with what we've been hearing from others. What are the parameters of what guides that wide range? What has to happen that we come in at the short end and where do we come in at the long end in terms of the pace of openings, the return back to work? School obviously is not coming back this spring here.

It's really going to be guided by how the commercial side of the business will do. As we mentioned, we saw a very deep decline in April driven by the commercial side of the business. If businesses start opening up and they start reordering product and it's done on a fairly broad scale, multiple countries, multiple states, then we should track to a A lower end of that scale and if you know if the environment stays. Similar or if it opens up slower or if it reverts back, let's say it opens up and then a couple of weeks later there's a spike and it's going to be incremental shutdown that will tend to push it towards the higher decrease number. You know the back to school. That's a salad number, so that's going to be. roughly what it's going to be because the orders are mostly in. We're going to ship them in May and June. So that's not going to vary a great deal outside of just the normal what ships in June versus what ships in July thing. But the commercial side is going to have the biggest effect on it.

Okay. And then when we look at the positive cash flow for the year, certainly cushion for you guys to continue to pay the dividend and Any thought given to bolstering that cushion that you guys have? Your leverage is materially low. We've seen others raising capital just to put cash on the balance sheet as a safety cushion. Any thoughts on the capital structure with that?

We have ample availability under our bank lines. At the end of the quarter, we had $450 million of available credit on our revolving credit facility. So we do not anticipate using anywhere near that amount. It was actually increased to allow us M&A firepower. And so we have no particular needs to bolster the balance sheet right now. We have ample liquidity and we have ample access to it. So we're very happy with our liquidity position.

And you alluded to my next question. In terms of M&A, are you seeing some of the smaller competitors out there having financial difficulties? Is there stuff coming to market in terms of the pipeline?

I think it's probably a little bit premature for things just to pop up only in the last few weeks. But things obviously will come just given the financial squeeze that's going on. And, you know, there's plenty of stuff out there. The bar for all of these acquisitions has gone up, given what's going on, so we will continue to be very prudent, and the priority for our free cash flow is delivering in dividends in 2020.

Thank you very much, guys. Appreciate it.

Thank you, Phil. Thank you.

Thank you. Our next question comes from the line of Hamid Korsan with BWS Financial. Your line is now open.

Good morning. Could you talk about if you're seeing any share loss or any competitive pressures from mass merchants using lower-priced competitors versus your higher-quality products?

Hi, Hamid. No, we have not seen that. You know, we mentioned – well, actually, we mentioned the last few years that with private label, we're fairly tactical when it comes to private label. And, you know, some years we'll win it, some years we'll lose it. That's not any different. And those decisions are made, you know, probably nine months in advance. So this year I expect us to be – playing a smaller role in private label products than we did last year, for example. But again, those decisions were made about nine months ago. In answer to your question, we're not seeing any incremental share loss. In fact, it's a little bit the other way around. We're seeing some of our customers having a difficult time right now getting some products, just given what's going on, both to logistics issues and some liquidity issues. So there could be a near-term incremental opportunity for our products, given that we make a lot of them here in the U.S. or in other countries where we do business.

And how are you managing capacity utilization, given that, one, right now it's weak sales, but then eventually with things opening up? How do you adjust that with commercial and school equipment sales? Do you have enough inventory for that?

We don't think inventory is an issue. We have different plants that are focused on making different things. We have some plants right now that are on full or partial furlough as a result of lower demand. And these plans are focused primarily on commercial products or end-of-the-year products. And then we have some plans that are focused on back-to-school, and they're in full swing, really working 24-7 in order to pre-build inventory necessary for back-to-school. So we have a very scalable model. And, you know, our employees have been very supportive during these difficult times and are working with us to make sure that we can adjust our cost structure appropriately given the expected demand trends. Okay. Thank you. Thank you, Haned.

Thank you. Our next question comes from the line of Bill Chappell with SunTrust. Your line is now open. Bill Chappell, if your line is on mute, please unmute your line.

Sorry about that. Good morning. Hope you and your families are doing well. Thanks, Bill. Thank you. Wanted to just talk more about, you know, as we come out of this environment, more of, if you can, yeah, or if you can kind of talk about the business in a recession, be it three, six months or even longer, just how it's changed versus the last recession, how you're maybe prepared more or less in terms of products and offering and private label and kind of what the business looks like as we compare versus seven, eight, nine years ago?

Yeah, we think it's a very, very different situation. First of all, we think The nature of this recession is going to be probably deeper than what we saw in 2008, 2009 timeframe, and probably broader, affecting more businesses, more countries than the last one did. But we think our business is in a much better shape and much more healthier to withstand whatever will come our way. We're much more geographically diversified. We have a much bigger part of our business that's selling through mass and retail than we did in the prior recession. And we think those channels will be the winners in this particular time and will do just fine. Much more of our product portfolio is consumables versus durables. and durables in the last recession took a huge hit as businesses just stopped buying anything that's discretionary. And we think that in this environment, it's likely to happen again. But again, a much bigger portion of our business is consumables, and we think that's going to withstand the environment quite well. I mentioned in my prepared remarks we're seeing an increased demand In some of our product categories, you know, Kensington, TrueSense, Derwent, some of the five-star notebooks, and many of those things we didn't have before in our portfolio. So, you know, I feel very, very confident in our ability to withstand this, the recession, however long it lasts. In fact, you know, we look at this as an opportunity to, you know, accelerate the our differentiation versus competition and to expand the distance between us and other competitors out there. We think that companies will want to consolidate their supplier base. Our customers will want to consolidate their supplier base. And we think given our strength and our breadth and our brands, they will want to consolidate onto us. So whereas it's going to be very, very difficult, and I don't underestimate that, I think from a competitive standpoint, we're in much better shape, and this could be actually a good opportunity for us.

Great. Thanks so much for the color.

Thanks, Bill.

Thank you. This concludes today's question and answer session. I would now like to turn the call back to Boris Ellison for closing remarks.

Thank you, Sarah. Thank you, everyone, for your interest in Echo Brands. To summarize the ramifications we're seeing from COVID-19, are very disruptive to our business, but we are confident in our ability to withstand this crisis. Looking longer term, we also remain confident of our future and the ability to continue to position the company for growth and strong results for our shareholders. We will be participating in some virtual conferences and non-deal roadshows in the second quarter. Please let Christine Hanneman know if you're interested in speaking with us. Thank you, and we'll see you after Q2.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.