Acco Brands Corporation

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2020 ACO Brands Corporations Earnings Conference Call. At this time, all participants are in medicine only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during that portion of the call, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star and zero. I will now hand the conference over to your speaker today, Christine Hanneman. You may begin.

Christine Hanneman Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands Third 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 accobrands.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 are 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 third quarter results, including the impact of COVID-19 on our business and implications for the fourth quarter. Neil will follow me with more color and details on the third quarter and provide additional comments on our cost reductions, balance sheet, and cash outlook. Then we'll take your questions. I'm very pleased with our third quarter results. Net sales declined at a lesser rate than we expected, down 12% versus prior year to, what, $444 million. That's a substantial improvement over the second quarter when sales declined 29%. Our adjusted EPS was 19 cents at the high end of our guidance as we benefited from relatively better sales and broad cost reduction actions we have taken worldwide. While the economic environment improved in the third quarter compared with the second quarter, we're still in the middle of the worst recession of our lifetimes, with demand for our products being impacted in many geographies by remote education, working from home, high unemployment, and low business confidence. This makes our third quarter results that much more impressive. They demonstrate the strength breadth, and balance of our global business and product portfolio. We are not dependent on any one area for success and have done a good job partially mitigating channel, customer, or product line declines with growth somewhere else. The parts of our product portfolio that are focused on consumers, technology, or home usage had strong demand. We saw good sales growth in Kensington computer accessories, especially laptop docking stations, TrueSense air purifiers, DIY tools, and Derwent art supplies. Areas that are focused on in-office or in-school use had lower demand. Sales of large whiteboards, bulletin boards, large shredders and laminators, binding machines and binders were soft. Online and technology channels did really well, while traditional brick-and-mortar stores and resellers were impacted by weak back-to-school demand reduced store traffic, and lower business demand. We also did an excellent job managing expenses, reducing them by $20 million in the quarter and $63 million since the beginning of the year. Again, I'm very pleased with our results. Overall, EMEA had a strong quarter, and North America, Asia, and Australia and New Zealand did relatively well. During the third quarter, more businesses reopened, some students returned to physical schools, and many governments continue to provide economic support to consumers and companies. As more people return to schools and offices, our sales recovery increased. In Europe, we had the strongest sales recovery with comparable sales down only 2% in the quarter. Despite its current challenges, Europe managed the economic impact of the pandemic better than our other geographies. Most European countries have reopened, Schools restarted in person on September 1st throughout the area, and many employees went to their offices, at least for a few days a week. But it is not just the improved environment that is the reason for our strong performance in EMEA. Our teams did a great job servicing and calling on customers throughout the pandemic. We stayed open and supported them when many of our competitors couldn't or wouldn't. As a result, we gained more business and took market share in the third quarter. We saw good growth in manual shredders, DIY tools, lamination and signage products, all categories that are seeing increased demand due to the pandemic. We also introduced new products, such as partitions, to meet demand for social distancing at the office. I'm very pleased with our results in EMEA. North America had a less robust but still good quarter, especially when considering the environment. Third quarter sales were negatively impacted by remote back-to-school starts in the US. Industry estimates that 70% of K-12 students in the US were not participating in in-person learning in the third quarter. That number in Canada was approximately 30%. This situation reduced demand for school products in the quarter. As more students go back to in-person education in the fourth quarter, we believe the demand for school products will extend beyond its traditional summer season, well into the fall and even winter. While overall back-to-school sales were down, we believe we have maintained or taken share in the no-taking category led by our five-star brand. Kensington had an outstanding quarter in North America, growing over 100% year-on-year from the strength of a large deal and a strong demand for work-from-home products. Our third quarter was down significantly in Latin America because schools are still closed in Brazil and operating remotely in Mexico. We expect difficulties in Latin America to continue in the fourth quarter and through the early part of next year. All of our production and warehouse facilities have remained open in the quarter to the extent necessary to meet customer demand. Most of our office employees work from home during the third quarter and continue to do so now. While we have seen our business improve, there's still a lot of uncertainty around when offices and schools will fully reopen and when the virus will be contained enough for more normal economic activities to take place. We'll continue to adapt our strategy to respond to both challenges and opportunities in the current environment as we expect the economic recovery to take quite some time. We're assuming a shift in consumer behavior post-recovery and we are changing product and channel portfolio investments as a result. We're increasing support of TrueSense, our wellness products brand, by launching specialty air filters to target flu, allergies, pet odors, and smoke. You will see other TrueSense wellness products launching later this year and next year to build upon our strong momentum. Our Kensington line is also adding new work-from-home items and has a solid pipeline of customer orders. We will be expanding our line of personal shredders to appeal to increasing work from home needs. And we're investing in our direct e-commerce capabilities to satisfy growing consumer demand for direct fulfillment. On the other side, we are reducing our investment in some of the commercial office products, such as wide format laminators and large white boards, as we expect demand for such products to remain weak. We are confident we will withstand the current challenges. We also believe we need to take advantage of the opportunities the current environment creates to accelerate our transition to a more brand and consumer-centric company. We are pleased with our progress thus far and will continue to work to accelerate the pace of this transformation. We are a large, diversified, global company with a strong balance sheet and we 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. 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 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 join him in answering your questions. Neil.