Acco Brands Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the 2Q 2020 Agco Brands Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today, Christine Hanneman, Senior Director of Investor Relations. Please go ahead, ma'am.

Good morning.

This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands' second quarter 2020 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 anklebrands.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 our 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, as well as the regional and local economies in which we operate, uncertainties regarding how geographies, distribution channels, and consumer behavior will evolve over time in response to the pandemic 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 Ellisman.

Good morning, everyone. Thank you for joining us. I will spend a few minutes reviewing the second quarter results. Most of my time will be used for an update on the impact of COVID-19 on our business, actions taken in response, and implications for the second half. Neil will follow me with more color and details on the second quarter and provide additional comments on our cost reductions, balance sheets, and expected use of cash in 2020. Then we'll take your questions. Second quarter sales were down 29% to $367 million at the upper end of our guidance. Our adjusted EPS was $0.12, significantly above our estimate, largely from the aggressive cost reductions actions we took worldwide. All things considered, I'm pleased with our second quarter results. While every country is feeling economic effects from the pandemic, the impact on our business in any one country depends on a range of factors, including where it is in the reopening phase, general seasonality of the business, government support, channel structure, and others. In general, the US, EMEA, Australia, New Zealand, and Asia did relatively well, especially as the quarter progressed businesses reopened, and governments provided economic support to consumers and enterprises. Canada and Latin America had a more difficult quarter, either due to later reopening, in the case of Canada, or lack of government support in Latin America. Each month of the quarter improved sequentially in every region, and July has continued that trend. Our second quarter is always driven by our North America back-to-school sell-in. This quarter, our back-to-school results were as expected in the U.S., down modestly from last year's very strong performance. I'm especially pleased with selling to large mass in e-commerce customers, which were comparable to last year. In addition, our U.S. direct-to-consumer sales were up approximately 6%. Several of our product categories and brands benefited from work from home, distance learning, focus on well-being, and home leisure activities during the quarter. With strong sales growth in TrueSense air purifiers, Durban color pencils, and Kensington computer accessories, especially laptop docking stations, Kensington-branded products grew 28% in the quarter, and Kensington is becoming a leading PC accessories partner for the major players in the PC ecosystem. We also saw good performance from five-star note-taking products in the U.S. and repeat do-it-yourself tools in Europe. While some product categories and channels benefited from the current environment, those focused on businesses did not. Our commercial sales were down significantly because of lower demand, as many offices and schools closed in March and April because of COVID-19, and the pace of reopenings has been very different geographically. We have seen improved commercial sales in EMEA in June and July, but not in North America. Most of our production and warehouse facilities have remained open during the quarter to meet customer demand as we were designated an essential business in most jurisdictions, although some facilities had reduced staff and hours. Most of our office employees worked from home during the second quarter and continue to do so now. In February and March, we took early action to protect the health and safety of our employees and to aggressively reduce costs to protect our business in the near term. Now that we have had more time to monitor and assess the situation, we believe that the global economic effects from the pandemic will continue for some time. Therefore, we need to make more permanent and structural changes to our business to be successful in the changing world. These changes include additional cost reductions to offset lower demand, more aggressive repositioning of our business towards stronger brands and more consumer-centric product categories, and accelerating investments in products and channels such as mass merchants, e-commerce, and direct-to-consumer that are benefiting from the changing trends like working in education from home, buying online, and greater focus on wellness. This repositioning includes restructuring, which we initiated in North America and Mexico. The $7 million in restructuring charges that we took in the quarter are expected to produce an annualized run rate savings of $11 million, part of which will be reinvested to support the brands, categories, and channels that I just discussed. As we're making these changes and shifting from temporary to structural measures, We have also reinstated regular employee pay effective July 1. I want to thank our employees for their hard work and sacrifices during the quarter under very difficult conditions. Neil will give you additional details on the cost reductions that we undertook in the quarter and that still remain in place. While we have seen our business improve month over month, there's still a lot of uncertainty around when schools will reopen, when offices will reopen, and when the virus will be contained enough for more normal economic activities to take place. I am confident we will withstand the current challenges. Our management team has overcome difficult economic and industry conditions before, and we have made great strides over the years to create a more resilient and more profitable company. I also believe we need to take advantage of the opportunities the current environment creates to accelerate our transition to be more brand and consumer-centric company. We are a large, diversified global company with a strong balance sheet and will deliver consistent, strong free cash flow. 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. We have a long track record of evolving and coming out better and stronger as a valued partner to our customers and consumers, and I expect that to continue. Now, I will turn the call over to Neil for a review of the segments, our outlook, and other financial commentary, and then I'll rejoin him in answering your questions. Neil?

Thank you, Boris, and good morning, everyone. I'm going to discuss the impacts of COVID-19 throughout my comments. Those impacts include, among others, the financial and operational effects on our company, customers, and end users of our products due to school and business closures, work from home orders, government orders, and manufacturing distribution, supply chain, and other disruptions from COVID-19. Our second quarter reported net sales decreased 29% due to lower demand from the impact of COVID-19. As expected, April was our worst month. Since then, we have seen good improvement in our sales in each month, including what we have seen thus far in July. Second quarter net income was $5 million or $0.06 per share. Adjusted net income was $12 million and adjusted EPS was $0.12. In the quarter, we benefited $0.01 from a lower share count. Adjusted EPS was better than our outlook based on our cost reduction efforts. Our gross margin was 30% compared with 32% in 2019. The decrease was largely the result of unfavorable product mix, lower fixed cost absorption, and increased reserves for inventory, primarily because of lower demand from COVID-19 impacts. SG&A expenses were $77 million compared with $96 million last year, SG&A as a percentage of sales was 21% compared with 18%, primarily because of lower net sales. As we indicated in our first quarter earnings release, we took many cost reduction actions in response to COVID-19 and participated in government assistance programs where we qualified in order to keep employees rather than having to make layoffs or pay reductions. We anticipated $20 million in cost savings in the second quarter. We achieved $33 million of cost reductions from both short-term and long-term actions. In the second quarter, we took a restructuring charge of $7 million to reposition both our North America and Mexico businesses, which includes permanent headcount reductions. Those actions are expected to generate a savings run rate of $11 million on an annualized basis. Some of those savings will be reinvested in the business. Reported operating income was $19 million compared with $61 million last year, and operating margin was 5% versus 12%. Our adjusted tax rate of 28% was better than our anticipated 31% rate for the full year, and reflects the impact of where we earned the income. The lower adjusted rates in this year's second quarter versus last year reflects the difference in the geographic mix of earnings. Now let's turn to some details of our segment results. Net sales in North America decreased 25%. Solid back-to-school sell-in was more than offset by declines in the commercial office products part of the business, largely reflected the COVID-19 impact. as well as timing for part of the Canadian back-to-school sell-in that moved to July. In the quarter, we saw strong sales growth in our Kensington computer accessories business and TruSend's air purifiers. North America operating income and operating margin declined as a result of the lower sales, unfavorable mix, and increased slow-moving inventory reserves. These factors were partially offset by cost reductions. We will monitor sell-out for back-to-school products in the third quarter. We expect most students will go back to school in the fall. There may be some variation in the timing of school openings versus normal or combinations of school and remote learning, but we expect most children will need to replenish their school supplies. Now let's turn to EMEA. Net sales decreased 31% to $88 million from COVID-19 impacts which began in mid-March. Europe was the first area hit by the virus and has been earlier to recover. We have now seen three months of sequential improvement, with stronger recovery in our sales of commercial office products than we have seen in North America. EMEA posted a small adjusted operating loss as a result of the lower sales and higher back debt reserves. These were partially offset by cost savings. Moving to the international segment, Net sales and comparable sales declined significantly because of lower demand from the impact of COVID-19, especially in Latin America. Mexico and Brazil continue to be significantly impacted by COVID-19, whereas our businesses in Australia and New Zealand and Asia recovered more each month as the second quarter progressed, similar to what we saw in EMEA. As a result of very low sales in the quarter, this segment posted an adjusted operating loss of $3 million. Results were also hurt by adverse customer and product mix, higher bad debt reserves, and lower fixed cost absorption, partially offset by cost reductions. Ferroni posted a loss of $2 million from the impact of COVID-19, and it is also a seasonally low period for Brazil. Let's move now to our balance sheet and cash flow. In the second quarter, we used approximately $42 million in net cash from operating activities and had $44 million of free cash outflow. We paid dividends of $6 million and capex was only $2 million. As we noted in our first quarter release, the planned use of free cash flow 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, and we have spent $9 million year-to-date. At quarter end, we had used $257 million of our $600 million revolving credit facility, primarily for seasonal borrowings. We also had $129 million in cash on hand. The net leverage ratio was 3.48 times, which is well under our debt governance. Now let's turn to our outlook. It is difficult to forecast in this environment because there are so many moving pieces. Thus, we do not feel we know enough to give a full year outlook. Our second half demand is expected to continue to be down compared with last year, especially in the commercial office products area. We have better visibility near term and our third quarter outlook is for a sales decline in the range of 15 to 20%. Third quarter adjusted EPS is expected to be in the range of 13 to 19 cents. The third quarter outlook includes an adverse foreign exchange impact of 1 to 2% on sales and a negative 1 cent impact on adjusted EPS. We expect our cost reduction action, combined with our normal productivity programs, will deliver approximately $15 million in additional third quarter expense savings compared with last year. Our third quarter cost reductions include the benefits of recent restructuring decisions, as well as actions we took earlier this year, including lower incentive accruals, postponement of 2020 merit increases, suspension of the 401k match, furloughs, temporary layoffs, and reduced hours for reduced pay arrangements. We have ceased almost all travel and continue to postpone discretionary spending and some product development focused on commercial customers. We feel confident that we can 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 free cash flow. We are experiencing an increased level of late payments from customers in certain areas and have increased our bad debt reserves by $4 million in the second quarter. Our South American and Mexican customers, along with the wholesaler insolvency in EMEA, are the main concerns. We are actively managing our receivables and will restrict our own sales to mitigate our risk if necessary. Inventory should now continue to decrease as we ship the remainder of North America back to school products and continue to right-size our non-seasonal inventory for the anticipated lower demand environment. Now let's move to Q&A, where Doris and I will be happy to take your questions. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question and then return to the queue if you have additional questions. And our first question comes from Chris McGinnis with Sidoti & Company. Your line is now open.

Good morning. Thanks for taking my questions and next quarter. Good morning, Chris. Obviously, some pretty strong results. Can you maybe just talk about the conversation you're having on the sell-through? I know it's obviously very early, but just maybe with some of the retailers you're talking with, their expectation of how you see that playing out. Obviously, strong sell-in, but that sell-through is important.

Yes, Chris. If your question is particularly to back-to-school sell-through, it's really too early to have any information on that. Back-to-school sell-through is just beginning, and we and our retail partners expect it to be later this year, given the uncertainty in school openings. So we don't have enough information on that. Our general sell-through, which we track on a regular basis, is consistent with the comments that Neil made. We are seeing pretty good sell-through in large mass and very good sell-through in e-commerce channels, and we're seeing a lower sell-through, a declining sell-through in the commercial channels. But for back-to-school, it's still too early.

Okay. And then just as, you know, obviously it's a little bit more extended, but just with Brazil and kind of what's happening there, the back-to-school in Q4 is pretty important for you. Can you just maybe comment on what you're hearing there in terms of demand?

Yeah. Q2 is typically a very low seasonal quarter for us in Brazil. Normally, we ship some of the back-to-school inventory into the channel in Q2. This year, we did not do that, and hence we saw a very rapid decline in sales in Q2. We are going to do that in Q3. And then we're going to gauge the feedback from the channel and their confidence in this year's back to school to see what we need to do in Q4. So, you know, Q3 is going to be pretty important for Brazil. We're optimistic. The school schedules have come out, which is a good sign. So there is some certainty that we and our customers know when schools will be reopening in Brazil. Again, we'll have to monitor sales and we'll have to see what happens in Q3.

I appreciate that. Then just one quick one. Can you just maybe talk about just on the commercial side of the business, obviously in the US it sounds a lot more weak than Europe, but any indication that that comes back or how that's playing out and maybe just how much was that down in the quarter, if you don't mind?

You know, the commercial side of the business in North America was down roughly 50%. So North America overall was down 25%, so you can see how much better the retail and back-to-school did to offset the commercial. In Europe, the commercial side was a lot better. And in Europe, we're also seeing a very good improvement month over month. The reason behind it is that Europeans are going back to the offices. Offices are reopened and people are going back to work from the offices. In North America, even though businesses have reopened, most people are still working from home. So until we really see a movement from home into the office, we're not expecting significant improvement in the commercial sales in North America.

Great. Thanks for the info, and good luck in Q3, and thanks again for taking my questions. Thank you, Chris.

Thank you. Our next question comes from Kevin Sankey with Barrington Research. Good morning.

Good morning, Kevin.

I wanted to talk about the cost savings actions you're taking with regard to, you know, making permanent structural changes in reaction to the pandemic. Can you just kind of talk about what led to your decision there, you know, how much you expect the demand environment to change longer term that led to that decision? You know, just kind of the trends. Do you expect work from home to continue more permanently, et cetera?

Yeah, I'm not sure, Kevin, that we're ready to quantify that, except for we do expect that the recovery is going to be slow. We do expect that sales will be down certainly this year. given that we already had 29% decline in Q2, and we're expecting another 15% to 20% in Q3. And, you know, we'll see. It's uncertain how things will recover in 2021. But just given the economic impact and the expected slow recovery, we need to make some structural changes to the business because the revenue is going to be down that much lower. And it does start with – North America and Mexico because we have a more challenging channel structure in Mexico and North America. We have, you know, very concentrated sales in those two regions. So we needed to just right-size the businesses in the decisions in Q2. I don't think this is the end of it. I think we're going to see how business evolves and we'll, you know, be making additional decisions on – reducing costs for the next several months. We'll see what happens in Brazil, as we discussed, and it's likely we'll make some additional tweaks in North America as well.

Okay, great. And then you mentioned the need to accelerate your continued transition to a more consumer-focused, brand-focused company. Maybe any thoughts on how you plan to go about that and how acquisitions might play into that continued transition?

Sure. Let me just make some comments on the organic initiatives. We talked about certain categories benefiting from current trends, and we believe that they will continue to benefit from the changing consumer preference and the changing channel preferences. And those categories include wellness and our TrueSense air purifiers, as well as other products we'll introduce under the TrueSense brand. Arts and crafts, including our Durban color pencils. Computer accessories, especially docking station with our Kensington brand. And school products have fared fairly well, so we'll be continuing to emphasize note-taking and five-star. So we will... reprioritize our investments to strengthen those categories and brands and expand the offerings in those brands. If you look at channels, we're seeing a very rapid shift from brick and mortar to online, both e-commerce sales as well as our own direct-to-consumer sales, where we have that available. So we'll be reinvesting or adding investments to those areas. Those will come from lower investments in the declining channels, and all of that was obviously supported by the additional productivity and cost reduction efforts that we're going to make throughout the business. If you look at the inorganic growth, we are continuing to be on the lookout for shareholder accretive acquisitions, but Given the reduction in the business, given the increase in leverage that we're going to see this year as a result of that, certainly the bar for any acquisitions is higher. We will be more judicious. But if something pops up that can move us in the direction of stronger brands, more e-commerce and more direct-to-consumer and can increase the growth of the business, then we will certainly take a look at it. But again, I think we will be more judicious in the near term.

Okay, that's very helpful. And then just lastly, I want to ask about TrueSense, the air purifier product line specifically, maybe, you know, obviously it's been doing well in this current environment. So How is it tracking relative to your initial expectations, and what's the longer-term outlook that you see for that product line maybe relative to what you thought initially?

It's certainly doing a lot better than we thought. We sold more in the first six months than in the whole of last year, and we could have sold more if we had more product. We're still chasing supply. on that product line. So we're very bullish on this. We have a lot more product coming in. In the second half of the year, we're going to be expanding the category to have other products on the Two Trends brand. I certainly do expect that over the next couple of years, there will be a multi-tens million product line for us. And those are the types of products that I think will move our company forward. and will get us closer to the consumer.

Okay, great. Thanks for the update, and congratulations on the good results in a difficult environment.

Thank you, Kevin.

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

Good morning.

Good morning, Joe.

I was just wondering if you might be able to kind of give us a little – update or insight into the channels. You talked about some of the faster growing ones. During the quarter, if you could kind of quantify the size of the channel or business that came through the channels between office superstores, independent, the mass, e-com, what amount of revenues are the various channels accounted for in the quarter?

I'm not sure I have that information, Joe. Let me just talk directionally. This is back to school season. So in North America, the majority of our sales were made through the big retailers and big e-commerce players. And as I mentioned in my prepared remarks, those did well down a little bit to a very strong performance last year. And on your commercial channels, In North America, we saw a big decline. It was driven by basically mandated business closures in April and then very slow recovery after that. In EMEA, the commercial channels are doing well. And as Neil mentioned, we've seen strong recovery. Our business in EMEA is mostly commercial. There's very little retail in EMEA. So the recovery in EMEA has been driven by the commercial channels, and by the way, that has continued into June. If you look at Australia, you know, performance there similar to EMEA has been a fairly good recovery in Australia, and it's been fairly broad, including retail and commercial channels. And in Latin America, Things are very, very slow just due to seasonality as well as, you know, there's just lack of any kind of government support either to the consumers or to businesses during this pandemic. So things are very, very slow to recover.

Okay. Thanks for that insight. Talking about the back to school, you know, there's kind of – split into two, one you have the K through 12 and then you have the college. Do you guys have any indication of what percent of your back to school sales kind of go to the K through 12 versus the college? The college seems to be one where there might be more leaning towards that online learning as opposed to going back to campus.

You're absolutely right. I agree with you that colleges will be likely more in a virtual world, or many colleges will be more in a virtual world, whereas many of the K-12 will be more in a physical world. A vast majority of our back-to-school sales is K-12, and it's probably more like K-9. If you get into the later years of high school or in college, Certainly a lot of those kids are using digital learning tools for many, many years now. So it's really not where we've been selling our products. So that's why we believe that we'll be affected to a lesser extent by some of these decisions by colleges to go virtual because of the makeup of our sales.

Okay, great. Thanks for that, Boris. Appreciate it.

Thank you, Joe.

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

Hey, good morning. This is Andrew on for Brad. I was wondering if you could provide an update on price now that we have a better idea on industry demand and increased COVID-19 related costs. Do you still see prices potentially increasing in the future given increased COVID-19 related costs across the industry?

Yes, I see prices increasing starting early next year to cover the incremental cost associated with COVID-19, absolutely. I don't think it's going to be a significant increase because there's been an impact on productivity, but it's not huge. But certainly, I do expect low single-digit price increase to offset COVID costs. And then the typical price adjustments that we have to make to cover the foreign exchange rates. So that's also going to come into play.

Okay, understood. And then you noted a negative impact to gross margin for product mix. Could you talk about what drove that shift in mix and how you expect this to evolve going forward?

Probably the biggest effect that we saw from products mixed is lower sales of security in Kensington because people are not traveling, people aren't going to the office, so there's less of a need to buy additional security locks, and much higher sales of laptop docking stations to support the work-from-home environment, as well as we've won some large bids with governments with laptop docking stations. And security inherently has a much higher gross margin than laptop docking stations, so that has really affected the mix of our Kensington business, and Kensington is now a much bigger part of our business, too, because the sales grew 28% was overall sales decline 29%. So that's probably the biggest effect that we had related to product Neil also mentioned we took some additional charges on obsolete inventory just given the expected lower sales, and obviously fixed cost absorption also hurt our gross margins a little bit given declining in sales.

Okay. Thank you. That was helpful. That's all for me. Thanks, Boris.

Thank you, Andrew.

Thank you. Our next question comes from Bill Chappell with SunTrust Robinson Humphrey. Your line is now open.

Hi, this is Zaki on for Bill. Thanks for taking the question. Just had a quick question on Brazil. You mentioned that back to school in the U.S., you kind of expect that to be, you know, relatively normal, maybe some changes here and there. But when we think about the margin structure in Brazil, if the back-to-school season in Brazil was to get pushed back, how do you see that impacting your margin structure? Thank you.

Yeah, we don't really see the back-to-school season in Brazil being pushed back because the school schedules have been released. So there's high confidence in the back-to-school season happening. What may happen is the demand increases, may go down, so just the sales will go down. And we're monitoring that very carefully, and depending on what we see at the end of Q3, we would be adjusting our manufacturing and distribution headcount to support the peak of that fiscal shipments in Q4. So certainly it may have an impact on our sales. From a margin standpoint, I don't expect a huge because a lot of the costs for us are variable. So as long as we pay careful attention to it, which we plan to do, I expect that our margins to be consistent with what we had in the prior year.

Understood. Thank you.

Thank you. Our next question comes from William Reuter with Bank of America. Your line is now open.

Hi, this is Mary Ann for Bill. Thanks for taking our questions. So first, as decisions regarding how schools will operate this year are still being finalized, do you expect that parents will still be buying their children's school supplies even if they're learning from home? And would you expect a surge in demand if more schools did return to in-person learning after the holidays?

Yes, we do expect parents to be buying school supplies even if they are learning from home, the quantity may be different, the mix may be different, but we certainly do expect back-to-school sale to happen regardless. You know, as far as your question about resurgent demand, if schools reopen, You know, it's kind of late for that, I think. The season is pretty much baked. You know, people make their decisions in the May-June timeframe about what they're going to bring in. And given how short and peaky the season is, I'm doubtful that there will be a lot of replenishment regardless because people are going to switch out their inventory for, Halloween and Christmas season and nobody will wanna get stuck with additional inventory. So I think maybe on the margin, things will potentially be a little bit better, especially through e-commerce. But if you're talking about retail sales, I think that the season's pretty much baked and I don't really expect much variability from a sales perspective, regardless of what happens during the actual back to school.

Got it. And then have you seen any meaningful changes in market share and if there's anything else notable that you're seeing from competitors, if you could touch on that.

We don't have third-party market share information yet from NPD, which is what we use for the U.S. We'll have that probably next month for Q2, so no news to report there. We have seen some market share information in JFK in Europe. And we're seeing our brands benefiting in the current environment where the consumers are being more discriminatory in what they buy and value seems to be carrying more heft with them. They look to be buying more brands that are focused on quality and longevity and good price value equations. So we're seeing in Europe in any way lower private label sales and higher branded sales. And since we're a leader in our categories, we're benefiting from that.

Got it. That's all for me. Thank you.

Thank you.

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

Thanks for taking the call. I had two quick ones. The $11 million in savings that you're going to reinvest, does that start to flow through in the third quarter, or is that more fourth quarter weighted when you start to see that?

That's an annualized impact, so you could imagine you might get one quarter of it in the third quarter.

Okay, thank you. And then, Neil, you had also said that your inventory would be down because you guys had shipped in the back to school in the U.S., there's no risk to that inventory coming back to you if it doesn't sell through correctly?

No. It's sold product.

Sold product.

We don't have any rights of return, so what's sold is sold.

Perfect. Thank you so much. I appreciate it.

Thank you, Hal.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from Hamed Korsand with BWS Financial. Your line is now open.

Hey, good morning. So I just wanted to ask you, these restructurings that you've undertaken in the business, are these permanent? And if business changes, do these costs come back? And how have you adjusted the business if and when business does normalize?

These are permanent changes. So, you know, we're permanently taking test count outs. We're permanently combining businesses. We're permanently organizing businesses. If things are better than we think and they'll recover quicker than we think, then we'll adjust our investments in the future. As we normally do, this is nothing different. We certainly go through a bunch of what-ifs when we make these changes. These are obviously very important changes, not just for the business, but for our people. We do very, very careful analysis, and we have a lot of confidence that we're going to manage the upside if that comes about.

Okay, and then was there any benefit from back to school in the second quarter?

There was a lot of benefit from back to school selling in the second quarter. You know, the stores just get set in early July, so we really don't see any actual back to school sellout in the second quarter. But starting in late May and certainly throughout June, We ship a lot of products to our strategic customers for back-to-school, and with a lot of benefit in the U.S., for back-to-school selling, I think you do.

And was the discussion with the retailers and the channels that you're selling into just as similar as to what you were describing earlier in your pre-made remarks for back-to-school?

I'm not sure I understand how that's elaborated.

From a product standpoint, what they're purchasing and taking on ahead of the back-to-school shopping period, is it purely everything you've been selling is the five-star and the art products and so forth?

Yes, exactly. The five-star is our leading brand for back-to-school, so we saw strong shipments of five-star products. And also, you know, a lower end of our swing line range, lower end of our quartet range also has some play in back-to-school. We'll also sell some academic calendars, and those get shipped back to school. But Five Star is really the majority of the business. Okay. Thank you. Thank you, Hamid.

Thank you. I'm not showing any further questions at this time. I would like to turn the call back over to Boris Ellisman for closing remarks.

Thank you, Joelle. And thank you, everybody, 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 as a result of the proactive initiatives that we have taken. Looking longer term, we also remain confident about our future and our ability to continue to position the company for growth and strong returns for our shareholders. Have a great day, and we'll talk to you in a couple of months. Thank you.

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