Acco Brands Corporation

Ladies and gentlemen, thank you for standing by. And welcome to the fourth quarter and full year Aquabrands earnings. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to turn the conference call over to your speaker today, Christine Hanneman. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to Atco Brands' fourth quarter and full year 2020 earnings conference call. Speaking on the call today are Boris Ellisman, Chairman, President, and Chief Executive Officer of Atco 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 AtcoBrands.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 non-GAAP measures. 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 operations, 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 the next few minutes reviewing our fourth quarter and full year 2020 results, including the impact of the pandemic, and commenting on the progress we're making against some of our strategic imperatives. Neil will follow me with more details and provide additional comments on our cost reductions, balance sheet, and cash outlook. Then we'll take your questions. I'm pleased with our fourth quarter and full year results in light of the pandemic and the current economic conditions. In the quarter, both sales and profits were within our expectations, with fourth quarter comparable sales down 16%, an adjusted EPS of 32 cents compared with 46 cents in 2019. A large part of our adjusted EPS performance in the quarter is the result of many cost reduction actions we took throughout the year. Neil will discuss that in more detail in a few minutes. As anticipated, the fourth quarter sales declined largely as a result of slow sales in Latin America and a seasonal swing to commercial channels in North America. In Brazil, there was very limited back-to-school business as public schools remained closed. Likewise, our Mexico business was down significantly as schools and many offices remained closed there as well. As a result, comparable sales in Latin America were down 35% versus 2019. In North America, A resurgence in COVID-19 cases in November and December kept offices and most schools closed. This, combined with a seasonal sales swing to slower growing commercial channels, were the primary reason North America comparable sales were down 21%. Sales of large whiteboards, bulletin boards, large shredders and laminators, Binding machines and binders continue to be weak. But there are also several bright spots. Our products that are focused on consumers, technology, or home usage continue to see strong demand. Several of our product lines did well all year. Our Kensington computer accessories, TruSense air purifiers, and Derwent art supplies all sold well. as people continue to outfit their home offices, entertain themselves at home, and remain concerned about wellness. Late in the quarter, we introduced smart air purifiers, and we have other launches on tap in 2021 to build on our momentum in the wellness area, which we think would be a significant category for us over time. EMEA continued its good performance with comparable sales in the fourth quarter down just one percent country and channel fragmentation in europe benefits us in addition our teams did a great job of servicing customers throughout the pandemic and we believe we have taken market share under our lights brand which is highly recognizable in europe we introduced lights wow and lights cozy colorful home office storage and organizational products take advantage of work-from-home needs. Sales of personal shredders and DIY tools remained strong as more people worked from home. Kensington Products also posted a solid sales gain in EMEA for the full year, with a particularly strong fourth quarter. Overall, Kensington became our top-selling brand in 2020, with strong double-digit sales growth, including a significant order we referenced in the third quarter. We were also encouraged by progress in Australia and Asia as the rate of sales decline in these areas has improved sequentially since the second quarter. During the quarter, we acquired PowerA and are very excited to have that business under our umbrella. For those of you who may not know, PowerA is a leading player in video gaming accessories such as controllers, power charging stations, and headphones. As many of you may be aware, the video gaming companies introduced the next generation of platforms in late 2020, and another refresh is expected in 2021 or 2022. Historically, this has generated strong demand for gaming accessories for a lengthy period following the platform introductions. We anticipate PowerA will benefit from this for a few years. In 2021, We are expecting PowerA sales growth of approximately 15% and EBITDA in the range of 55 to 60 million. We are very pleased to report that our 2020 free cash flow continues to be robust, coming in at 104 million, including the transaction costs of the PowerA acquisition. Overall, we continue to manage the business well. amid a historic pandemic and a difficult economic environment, with demand for our products being impacted in many geographies by remote education, working from home, high unemployment, and closed or disrupted business situations. Our business benefits from the breadth and balance of our geographic and product portfolio were not dependent on any one area for success and had done a good job partially mitigating channel customer and product line declines with growth somewhere else. While we have seen our business improve in the second half of 2020, there's still a lot of uncertainty around when offices and schools will fully reopen, which will increase demand for many of our products. All of our production and warehouse facilities have remained open to the extent necessary to meet customer demand. Most of our office employees continue to work from home. We'll continue to adapt our strategy to respond to both challenges and opportunities in the current environment. We're assuming a shift in consumer behavior post-pandemic and are changing product and channel portfolio investments as a result. This includes making larger investments in growth areas such as video gaming accessories, wellness products, work, learn, or play from home products and computer accessories, while reducing our investments in some commercial office products, such as wide-format laminators and large whiteboards, as we expect demand for such products to remain weak. We are a large, diversified, global company with a strong balance sheet, and we deliver consistent, strong free cash flow. As such, we are positioned well to take advantage of the economic recovery, which we believe could occur later in 2021. 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?

Thank you, Boris, and good morning, everyone. I'm going to discuss the impacts of COVID-19 throughout my comments. Those impacts include the operational, financial and other effects on ACCO brands, our customers and end users of our products, of school and business closures, work from home, remote and hybrid learning, government borders and manufacturing distribution supply chain or other disruptions resulting from COVID-19. And the actions ACCO brands, our customers and end users have taken in response to the pandemic, including actions we have taken to manage our inventory credit risk under the circumstances. Most of my comments will be related to our full year results. Our 2020 reported and comparable net sales both decreased approximately 15% due to lower demand from the impact of COVID-19. As Boris noted, we saw strong sales growth in product lines that focus on work from home, such as our Kensington computer accessories, and TruSend's air purifiers. Sales to commercial channels remained very weak and drove most of the full-year sales decline. Compared with 2019, sales to commercial and B2B customers declined 25%, accounting for 80% of our sales decline. On the other hand, e-commerce sales rose 17%, while sales through tech specialist channels rose 31%. partially due to a large contract in the third quarter, and retail and mass sales were down 15% due to declines in store traffic. Full-year net income was 62 million, or 65 cents per share. Adjusted net income was 67 million, and adjusted EPS was 70 cents. The primary driver of the year-over-year sales decline was lower volume. Factors benefiting adjusted EPS were were our cost reduction efforts, better profits in EMEA, a lower tax rate, lower interest expense, and share count. Our growth margin was approximately 30% compared to 32% in 2019. Decreases occurred in all segments, largely as a result of an unfavorable customer and product mix, primarily because of lower demand for certain high-margin commercial products, as well as higher import and freight costs and lower fixed cost absorption. These factors were only partially offset by cost savings. SG&A expenses were $336 million compared with $390 million in 2019. SG&A as a percent of sales was 20%, roughly flat with last year, primarily because of cost reduction efforts. In addition to the savings related to cost of goods, we effectively maintained our SG&A costs to sales ratio despite a 16% reduction in full-year comparable sales. That was an outstanding achievement. As we indicated previously, we have taken many cost reduction actions in response to COVID-19, and we've participated in government assistance programs when we qualified in order to keep employees rather than implementing layoffs or furloughs. In the first quarter of 2020, we took early temporary actions to protect the health and safety of our employees and to aggressively reduce costs to protect our business in the near term. In the second quarter, we announced a restructuring charge to make more permanent and structural changes to our business, including headcount reductions, which we initiated in the third quarter. In the fourth quarter, we announced additional cost reduction actions, Year-end headcount was down 13% versus 2019. When you add it all up, in 2020, we realized $83 million in cost savings from all our various programs. Moving on, adjusted operating income was $128 million compared with $211 million last year, primarily due to lower sales, but also from inefficiencies due to lower volume, and additional provisions for bad debt expenses. The adjusted operating margin was 8% versus 11%. Our adjusted tax rate for the full year was 26.7% and 22.7% for the quarter. The lower tax rate in both periods was primarily driven by the U.S. GILTI regulations issued in 2020, which benefited the company. lower than expected non-deductible executive compensation expense, and increased research and development incentives. We anticipate our 2021 tax rate will be approximately 29%, as the benefits connected with executive compensation and research and development incentives are not likely to repeat. Now let's turn to some details of our segment results. Full-year comparable net sales in North America decreased 16%, to $817 million. As was the case for the total company, lower commercial channel sales drove the North America decline, as many offices were closed or had limited openings. Detail and tech channel sales both increased, but retail sales were weaker. Sales of back-to-school products for the full year were down approximately 9%. While second quarter sell-in was strong, the second half sell-out of back-to-school products was sluggish. On the positive side, we saw strong sales of Kensington computer accessories, and PowerA contributed almost $6 million to North America sales after we closed the deal in mid-December. Full-year North America adjusted operating income was $91 million versus $137 million last year. And adjusted operating margin was 11% compared with 14%. The decline was primarily a result of lower sales, but we also experienced cost inflation, inefficiencies due to lower volume, and unfavorable customer and product mix. These factors were partially offset by cost reductions and government assistance programs. Now let's turn to EMEA. For the full year, EMEA net sales decreased 8% to $524 million, with favorable foreign exchange partially offsetting the decline in comparable sales which were down approximately 10% due to the impacts of COVID-19. The reductions in commercial sales were partially offset by growth in Kensington computer accessories, Light's personal shredders, and TruSend's air purifiers. PowerA contributed $2 million to sales. We have seen improvement in EMEA, with several months of less adverse results based on a partial recovery in our sales of commercial products. In addition, Our new lines of storage and organization products for work from home have been well received. EMEA posted an adjusted operating profit of $52 million versus $61 million in 2019, primarily due to lower sales and related inefficiencies. We also took high reserves for inventory and bad debt. These headwinds were largely offset by cost savings and government assistance. Adjusted operating margin was 10% versus 11% last year. Moving to the international segment, comparable sales declined significantly because of lower demand from the impact of COVID-19. While all markets suffered in the second and third quarters, Australia's sales improved in the fourth quarter as the lockdown in Victoria was rescinded, and Asia sales posted sequential improvements. Mexico and Brazil continue to be severely impacted by COVID-19, as many schools and offices in both countries remain closed, and the retail and commercial customers that account for the vast majority of our sales in those markets were down significantly. In these markets, e-tail is underdeveloped, so there is no meaningful opportunity to offset the retail and commercial channel declines. The current expectation is that this situation will continue into the first half of 2021. International adjusted operating income was $19 million compared with $53 million last year, primarily as a result of the lower sales. We also had inefficiencies due to lower volume and higher bad debt reserves in Latin America, partially offset by cost reductions and government assistance. Let's move now to our balance sheet and cash flow. We continue to experience a higher level of late payments from customers in Latin America and export markets, and our bad debt expense was $8 million for the full year 2020 compared with $1 million in 2019. Our South American and Mexican customers are the main concerns. We are actively managing our receivables and will continue to restrict our own sales to mitigate our risk as necessary. In the fourth quarter, we reduced our provision for slow-moving inventory by approximately 4 million compared with 2019's fourth quarter, primarily due to better management and earlier recording of dated product reserves. On a year-to-date basis, total provisions were 17 million, 1 million higher than 2019 levels. For the full year, we generated approximately 119 million of net cash from operating activities and $104 million of free cash flow, including PowerAid transaction costs of $4 million and with capex of $15 million. We repurchased 2.9 million shares for a net $16 million, paid approximately $24 million in dividends, and repaid $51 million of debt. In the fourth quarter, we generated approximately $97 million in net cash from operating activities and had 94 million of free cash flow, including PowerA transaction costs of 4 million and 3 million of CapEx. We used our fourth quarter cash flow to partially refinance the PowerA acquisition and paid dividends of 6 million. Our CapEx outlook for 2021 is approximately 30 million. As we noted when we acquired PowerA and increased our debt, in the near term, we plan to use our cash fund our dividend and to reduce debt. Longer term, we plan to use our free cash flow to fund our dividend, reduce debt, repurchase shares, and make acquisitions. At year end, we had used $343 million of our $600 million revolving credit facility and had $37 million of cash on hand. Our pro forma bank net leverage ratio was 4.3 times. which is in line with where we expected it to be after the purchase of PowerAid. 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. Now let's turn to our outlook. It continues to be difficult to forecast longer term in this environment because there is so much uncertainty as a result of COVID-19. For 2021, we expect business impacts from COVID-19 will continue to vary significantly by geographic region and country, depending upon a range of factors, including how seriously the pandemic is affecting public health in the country, the delivery and effectiveness of vaccines, whether and to what degree businesses and schools are open, and the general seasonality of our business in a country, the nature and level of government support, and the channel structure. We are hopeful that as mass vaccinations roll out, we will see reduced impacts from COVID-19, particularly in the second half of this year when we anticipate an economic recovery. This should continue through all of 2022. Our first quarter is typically our seasonally smallest quarter. Excluding Power A, we expect overall demand in the first quarter to be down relative to 2020 when we saw very little impact from COVID-19. This is the last quarter we'll face comparisons with the pre-COVID world. First quarter demand is anticipated to be especially weak in Latin America, and our commercial products will continue to reflect weaker demand versus the pre-pandemic comparisons. Partially offsetting this, we expect to continue to make strong progress on our growth initiatives globally and regionally. We expect to have organic sales growth in EMEA. Beginning with the first quarter of 2021, we are changing the way we calculate and report adjusted non-GAAP results by excluding non-cash amortization of intangible assets. The company has made several large acquisitions over the past few years and has publicly committed to continue to transform its business through acquisitions in the near future. As a result of our acquisition strategy, We have, and likely will continue to have in the foreseeable future, a large amount of acquisition-related amortization expense. We believe that this change will enhance the usefulness of these non-GAAP measures to investors because it reflects the underlying operating results before amortization expense, which is not associated with core operations, and facilitates meaningful period-to-period and peer comparisons. In our attachment to the earnings release, we have restated our 2020 and 2019 non-GAAP measures to reflect the new adjustment. Our first quarter 2021 outlook reflects our new definition of adjusted earnings. We anticipate a strong first quarter for Power A. As such, our first quarter outlook for the entire company is for sales to be in the range of flat to up 4%. The first quarter adjusted earnings per share, excluding amortization, are expected to be in a range of 0 to 6 cents. The outlook includes a favorable foreign exchange impact of 4% on sales and 2 cents on adjusted EPS. We anticipate approximately 12 million of pre-tax intangible amortization will be excluded in the first quarter based on our new definition of adjusted earnings. which represents $0.09 on an adjusted EPS basis. We have reinstated the compensation and benefit reductions we took in 2020. We also are planning to invest more in growth initiatives to support an anticipated stronger second half demand. As such, our SG&A expenses will increase in 2021 in all quarters. We expect our productivity programs will deliver a more normal level of approximately $30 to $40 million in savings for the full year. With respect to our cash flow outlook, we feel confident that we can generate at least $165 million of operating cash flow for the full year. With CapEx expected to be approximately $30 million, we expect to generate at least $135 million of free cash flow. Our A will not make a normal level of free cash flow contribution in 2021 due to the structure of the acquisition agreement. In late December, we effectively acquired PowerA without normal levels of accounts receivable and payable. This will be subsequently reflected as a reduction in the purchase price. As we restore normal levels of accounts receivable and payable in 2021, we will see a reduced level of free cash flow from PowerA as working capital will be abnormally high use of cash. We will return to a normal working capital cycle and free cash flow contribution from PowerA next year. Now let's move on to Q&A, where Boris and I will be happy to take your questions. Operator?

Thank you. At this time, we'd like to remind everyone, if you would like to ask a question, please press star 1 on your telephone keypad. And we also ask that everybody gets their question in to please limit yourself to one question and then pop back into the queue for a follow-up. Your first question comes from Chris McGinnis from Sidoria and Company. Your line is open.

Good morning. Thanks for taking my questions. Good morning, Chris. I know it's early, but I did just want to ask, you know, back in school, maybe the conversations you're having with retailers now, maybe it's too early. It seems like it should be a bit more positive year than maybe hopefully last year. And then I also just wanted to ask about the change in e-commerce. You know, how does that shift the buying patterns? And can you just explain your thoughts around, you know, the back to school for North America this upcoming year and, you know, any color you can provide on that? Thank you.

Yeah, thanks for the question, Chris. It is a little bit too early for back to school. But let me share with you how we're thinking about it. We do think that North America back to school will be much more skewed towards physical presence of school children. If you remember last year when we talked about back to school in Q3, we said that around 75% were remote or hybrid and only 25% were going to school physically. We believe that the numbers will probably be reversed. Again, this is our current belief. It's a fluid situation, but certainly what we are hearing is pointing that way. Retailers do have carryover inventory that they have from last season because the sellout was weak. So we expect as a result of that and all of the uncertainty, they'll be fairly conservative in their upfront purchases. And then as they see the sellout, they will chase the supply, which will likely benefit domestic manufacturers such as Echo Brands. You know, there's nothing more specific that we can provide at this point because due to all the uncertainty, some of the decisions are being delayed until later time until more clarity is provided. But that's kind of how we're thinking about it going into it. You know, as far as e-commerce is concerned, you know, as Neil mentioned, for us it was a big winner in 2020 with 17%. a growth in that channel for the year. All the trends there continue. We think e-commerce will continue to be a winner in 2021, both overall, but also for back to school. They were a big winner for back to school as well. And that should continue. And we are well positioned to benefit from growth in e-commerce, both third party e-commerce players, as well as our own direct to consumer sales.

Thanks for taking the question. I'll jump back in, too. Thank you. Thanks, Chris.

And your next question will come from Bradley Thomas from KeyBank Capital Market. Your line is open.

Good morning. This is Andrew on for Brad. You know, I just wanted to talk about, you know, we've all heard the news that Staples has proposed to acquire Office Depot. I was wondering if you could remind us how big those customers are to you. And what level of risk might there be if that deal came to fruition?

Both customers are less than 10% for us. So, you know, beyond that, we don't really provide details, but they're significantly smaller than they used to be. You know, we think if something were to happen there, the risk is very manageable. forecasting period that fails in that particular channel will continue to decline. So if they decline a little bit more as a result of any potential combination, we think we can manage that pretty well.

Understood. Thank you. I will jump back in the queue. Thank you, Andrew.

And your next question will come from Joe Gomez from Noble Capital. Your line is open.

Good morning, Boris and Neil. Thanks for taking the question.

Good morning, Joe.

I was wondering, you know, EMEA had a really nice quarter relative to what's going on here. But, you know, towards the end of the year, now here into the, you know, obviously into January, we're seeing the new stories of, you know, new types of virus strains, especially in the U.K., If you could kind of go over the quarter, did you see monthly sequential improvement, and how has that kind of played out so far here in the first quarter? Is it kind of stalled due to some more of these new variants of the virus coming out? Thank you.

Thanks, Joe. EMEA continues to perform really well. It will continue to perform really well in the second half of the year, and that was certainly the case in Q4, where their sales were down slightly over 1% versus 2019. You know, there are several factors that benefit us in EMEA. The fact that we sell to 27 different countries and we're not dependent on anyone to execute flawlessly is a big benefit. The very fragmented channel structure is a big benefit. How the European governments have managed the pandemic, and especially the support they provided to employment, to keeping people employed, is a big benefit. The fact that Much of our sales, around 40% of our sales in EMEA take place in Germany, and Germany is one of the countries that best managed the pandemic. And the job that our team has done both in supporting customers through these difficult times and becoming a de facto go-to company during these difficult times as well as the emphasis we have on growth initiatives in EMEA, and they're fairly broad compared to some of our other regions. So all of those in combination portend really well for us. And, you know, we're six weeks into 2021, and that momentum that we had in the second half of the year in Q4 in EMEA certainly has continued into the initial couple of weeks of 2021.

Thanks for that, Morris. I'll get back to you. Thank you, Joe.

And your next question will come from Kevin Steinke from Barrington Research. Your line is open.

Good morning. Neil, in your prepared comments, you talked about, I believe, reinstating incentive compensation in 2021 and also growth initiatives this year, and then also the 30 to 40 million of savings you expect. I'm just trying to get a sense for, you know, the size of the incentive compensation and growth initiatives, how much we should expect that to be in terms of increased expense versus 2020.

Yeah, I guess the first point is it will be variable depending on our performance. because all of our incentives are. But it is a headwind year over year, and it's a significant one in the kind of double digits, you know, millions. So closer to awards, 17-ish million in terms of total headwind, assuming that we hit all of our performance targets. And, you know, it's an important piece of... the momentum that we expect to see in the business is getting the worldwide teams focused on growing the business again. It's for the full year, obviously, that impact, and it'll have an impact each quarter, but the business hopefully will be recovering to drive that.

Okay, great. That's very helpful. Thanks for taking the questions. Thanks, Kevin.

Your next question will come from Hale Holden from Barclays. Your line is open.

Good morning. Thanks for taking my call. I just had two questions. In the slide deck, you called out some commodity cost headwinds or input cost headwinds. And I was wondering if you could give us a little bit more color on that. And then in the presentation, Boris, you talked a little bit about how reopening in Australia had gone well. once Victoria had lifts to restrictions, and I was wondering if there are any takeaways we could get from that for what the broader business could look like when restrictions fall away.

Sure. Regarding inflation, and I'll let Neil add to that as well, but right now what we're seeing driving the most inflation is supply chain costs associated with product coming from Asia to the other parts of the world. There's a container shortage in China as a result of the imbalance in trade between what's coming in into China, what's going out of China. And that's driving huge increases in container costs and inbound freight. And we're seeing that throughout the world in U.S. and in Europe and in other parts of the world. We expect those costs to stay elevated in the near term. Hopefully they'll decline. in the second half of the year, but certainly in the near term, we expect them to stay elevated. That's what's driving the fairly significant inflation that we're seeing right now. As far as other commodities are concerned, it's been fairly benign, although certainly oil is up compared to the prior year, so that's going to drive some level of inflation. And then, you know, people costs, as Neil answered to a previous question, will certainly be a source of inflation as well. Neil, do you have anything to add to that?

Yeah, there's one other, which was we saw a lot of currency fluctuations during the year as a whole. And so overall, FX for us was an adverse drag. And because we source a lot of product in China and U.S. dollars and sell it in international markets and local currencies, it's a source of inflation in those markets.

Hale, I'm sorry, and remind me of your second question, please.

You had talked about reopening in Australia and some of the benefits you had seen there when the restrictions fell away, I think, in Victoria. I was just wondering if there were takeaways from other markets we could think through.

Yeah. Yeah, Australia, as many of you know also, is one of the countries that manage the pandemic very well. They have very low incidence of COVID-19. Their schools are open. Their offices are open. We saw little decline in Australia in the second half of the year, little decline in Q4. In fact, in December, their sales were up compared to prior year. So certainly we're hopeful that if that's how the world's going to look like after we recover from COVID that, you know, as people go back to the offices, we'll see similar levels of performance and demand. But Australian numbers were good in the second half of the year.

Great. Thank you very much.

Thanks, Hale.

And your next question will come from William Roeder from Bank of America. Your line is open.

Hi. So my first question is on the cost savings issue. the 80 million or so that you saved last year, some of those were temporary and some were permanent. Have you talked about what component of those may be coming back this year?

Well, certainly the incentive part that Neil talked about is going to come back. Some of the – we also took some salary cuts, and that's obviously – is going to come back. And then we also significantly reduce discretionary spend throughout the company with the sales decline. And that's going to be variable. If the sales are coming back, then we will invest more. Obviously, if things get delayed as far as recovery is concerned, that we will tamper down on those expenses as well. We don't really have it broken down by a proportion of how much is temporary, how much is permanent. As Neil mentioned in response to the previous question, most of our anticipated increases in expenses this year have to do with restoring the incentive compensation, and then the discretionary expense will depend on sales.

Okay. And then you mentioned, Frey, I know that logistics in terms of supply chains from Asia have been getting a little bit messed up at times. In terms of PowerA, given the console launches, I would imagine they have some pretty good tailwinds here, and it's important to get product on the shelves. Is there any concern that there could be some disruption there that may, I guess, delay sales or eliminate them?

PowerA has managed their supply chain fairly well, given what's going on. The lead times associated with some of their products are up to six months or so, so they have to be well ahead of it. And they're planning for growth, so they're ordering the products up front. We could always use more product. Right now we are really supply-constrained versus demand-constrained. But kind of given the plans that I've outlined and given what we anticipate to happen throughout 2021, I think PowerA is in a fairly decent shape.

And a lot of the delays in the port in the West Coast are starting to reduce. So that's also helping.

Good to hear. All right. I'll pass to others. Thank you. Thanks, Bill.

And your next question will come from Carew Martinson from Jefferies. Your line is open.

Good morning. With the success of the PowerA acquisition and certainly the demand being there, what's the outlook for M&A for you guys as you look at your capital structures and kind of getting back to that two to two-and-a-half times target leverage ratio?

Well, this year we're going to be focusing on delivering the business and supporting our dividend. If there's a small acquisition, and when I say small, let's say less than $15 million, that's a token. That makes sense. We will take a look at it. But we're not contemplating anything large this year. We'll be focused on integrating PowerAid. and delivering the business. And then come 2022, we think we'll be in position potentially to do more. But right now, the focus is on integration and delivering.

Okay. And just given the cap structure, the notes of 2024 callable, what's your thoughts there?

You know, we monitor what happens in the capital markets all of the time. And, you know, it's something we're well aware of. And as you know, It's cool to get cheaper later in the year as well.

All right. Thank you very much. Appreciate it.

Thanks, Carl.

And your next question will come from Hammett Corsand from BWS Financial. Your line is open.

Good morning. I just wanted to see how much of the delta between last year's sales and 2019, that was significant. harm because of equipment sales. How much of that do you think comes back this year, and are you planning to increase any of the equipment manufacturing to have adequate supply?

Thanks for the question, Hamed. You know, it's difficult to say. We have better visibility on your term. That's why we provided guidance for Q1 only, and certainly in Q1. We don't expect a recovery compared to 2019. We expect the kind of level of sales that we saw or the trend that we saw in the second half of the year and in Q4 to continue in Q1. We're certainly hopeful that things will begin to recover in the second half of the year, and if they do, and people start going back to the offices, that we do expect a recovery in equipment sales as well. You know, right now we don't really anticipate that even if that happens, they'll recover to the level of 2019. We think that's a little bit too quickly. But any recovery will be good recovery. That's an important business for us, and if it starts growing, it will certainly help with our performance.

Just to reiterate that point, in different countries, the recovery will be at different times. And, you know, we certainly expect South America to recover slower. And so, you know, we do anticipate a recovering environment going all the way through 2022, as I mentioned in my remarks. Got it. Thank you very much. Thanks, Hamid.

Again, if anybody would like to ask a question, please put star 1 on your telephone keypad. Your next question comes from Jeff Hutz from J.P. Morgan. Your line is open.

Hi, thanks for taking the question. Just two quick ones on PowerA. Did you say how PowerA is doing since you acquired it, meaning May, January, and February? That's question one. And the second part is, can you remind us, is PowerA gross margin and EBITDA margin accretive? We know it's growth accretive, but just on the margin front, is it accretive, or how does it stack up? Thanks.

Thanks, Jeff. We didn't say, but PowerA is doing really well in the six weeks since we acquired them. So we're very pleased with their performance and growth. And as far as margins are concerned, I know they are EBITDA accretive, very significantly EBITDA accretive. As far as gross margins, Neil, I'll let you comment on that, whether they're positive or accretive. They're very much in line. in line with our averages on the gross margin level.

And part of why they're EBITDA accretive is because we left their former owner with all of the fixed costs. So once we're off the transition services agreement, we're able to leverage our fixed cost base, and that's what makes it really incrementally much stronger EBITDA.

Great. Thank you. Thanks, Jeff.

I have no further questions in queue at this time. I turn the call back over to the presenters for closing remarks.

Thank you, Michelle. Thank you, everybody, for your interest in Echo Brands. To summarize, while we continue to see impacts of COVID-19 in our business in Q4, I'm pleased with our overall response and relative results. With the addition of PowerA, we continue to transform our business towards being more consumer-focused and are well-positioned to benefit from economic recovery, which could occur later this year. We look forward to reporting on our progress at our next call. Have a great day.

Thank you everyone for joining us today. This will conclude today's conference call. You may now disconnect.