Acco Brands Corporation

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021 ACCO Brands Earnings Conference Call. 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 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 over to your speaker today, Christine Hanneman, Senior Director of Investor Relations. Thank you. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands' first quarter 2021 earnings conference call. Speaking on the call today are Boris Ellison, 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 Echobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude transaction, integration, amortization, and restructuring costs and other non-recurring items and reflect an adjusted tax rate. Schedules of adjusted results and other non-GAAP financial measures and the 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. Beginning with the first quarter, we changed the way we calculate and report adjusted non-GAAP results by excluding non-cash amortization of intangible assets. Please see our press release for further explanation of this change. 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. 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 Zellisman.

Good morning, everyone. Thank you for joining us. I will spend the next few minutes highlighting key elements of our first quarter performance. Neil will follow me with more details on the quarter, and provide additional comments on our bond and bank debt refinancing. Then we'll take your questions. Overall, I'm very pleased with our first quarter results, and in particular, the performance of PowerA and the continued strength in EMEA. The 7% total company sales growth will perform better than we expected, despite comparing a COVID-19 affected quarter against the mostly pre-COVID 19 quarter last year. Even more impressive, our sales were 4% above our sales in the first quarter of 2019. First quarter profits were also better than our expectations. We have been seeing a recovery in EMEA for the past three quarters as offices have been reopening and many schools never fully closed. Our team did a great job servicing customers, investing in growth initiatives, reorienting towards at-home products, and taking market share. In the first quarter, comparable sales in EMEA were up 7% with good organic growth from TrueSense air purifiers, do-it-yourself tools, Kensington computer accessories, the wild and cozy ranges of organizational products, lights, shredders, and Derwent art supplies. We're proud to say that three of our lights products won Red Dot Design Awards, several of the Cozy line of home office items, our premium shredders, which are stylish and quiet and are designed for home use, and our functional recycle line of office products, in which every product is made with recycled materials. EMEA's sales to e-tailers were up over 80%, and we also saw good sales growth with many independents and tech specialists. North America also had a good quarter, driven by Power A. Excluding Power A, sales declined because of the impacts of COVID-19, but we began to see improvement in March as sales grew with many retail and e-commerce customers. This is a good sign that there is more demand now for school supplies, as close to 60% of K-12 schools in the U.S. have returned to fully in-person education, and another 30% are using a hybrid approach. Many schools have also indicated they will have an earlier start to the fall semester. This change should bode well for the second half as our customers work through their inventory overhang from 2020. We have adequate inventory on hand to be able to rapidly replenish their stock as needed. Turning to the international segment, Australia, New Zealand and Asia have been performing better, but it will take a while for the entire segment to improve, given continuing school and office closures and a slow vaccination rollout in Latin America. We hope to see the beginning of a recovery in Latin America later in the second half and into 2022. We're confident in our strategy. We'll continue to focus on improving sales growth and profitability by shifting our business towards more consumer-centric products. Our growth will come from acquisitions such as PowerA, which I will comment on in a few minutes, and from organic sales generation. Our products that are focused on consumers, technology, or home usage saw strong demand throughout 2020 and in the first quarter. TrueSense air purifiers, do-it-yourself tools, organization and storage products for home office use, Kensington computer accessories, Derwent art supplies, and manual home shredders all sold well as people outfitted their home offices, entertained themselves at home, and remained concerned about wellness. We expect this will remain true in 2021 and believe solid performance from the product lines will continue. For example, our TrueSense product line has grown from its introduction in 2019 to 25 million business currently. Late last year, we introduced smart air purifiers, and we have some additional product introductions on tap for later this year and in 2022. While competition has increased, over time we think the wellness category will be one in which we can establish a significant position. Last year, our Kensington computer accessories business received the largest order it has ever had. That means a difficult comparison this year in some quarters. However, excluding that order, the core business is expected to grow strongly as we continue to introduce new innovative products. As an example, in the first quarter, Kensington introduced the studio dock for the Apple iPad Pro and iPad Air. iPad tablets can be magnetically attached to the docking station in either portrait or landscape modes, and through the dock, connect to a host of peripherals and charging options. A strong testament to our efforts is that the Kensington Studio Dock won a CES Innovation Award as well as a Red Dot Design Award during the first quarter. Turning now to PowerA, for those of you who may not know, PowerRay is a leading player in video gaming accessories such as controllers, power charging stations, and headphones that we bought in late December 2020. I am very pleased with PowerRay's results and how smoothly the integration is going. There seems to be a particularly good fit on the people side with everyone meshing in terms of culture and with everyone focused on supporting the transition and PowerRay's growth. The gaming market continues to vivid strong growth trends. Market intelligence reports forecast that between 2021 and 2026, the gaming console industry is expected to grow approximately 18% per year. The amount of time spent by consumers on gaming is increasing, with the global average now over seven hours a week. Morgan Stanley estimates that mobile gaming users grew 20% in 2020, adding approximately four years' worth of new gamers during the pandemic. Most analysts believe this is a permanent shift. Moreover, in the fourth quarter of last year, Sony and Microsoft launched new generation console products, which are so popular that they're having difficulty keeping up with the demand for controllers. So PowerA is filling that void. PowerA's first quarter performance was exceptionally strong, with an increase of more than 100% over its pro forma 2020 sales. While we don't expect that rate of growth to continue, we expect strong sales for the rest of the year. In fact, we now think PowerAce sales will grow 25% this year rather than the 15% we initially projected. Another element of our overall strategy is to continue to shift our product sales towards growing channels such as retail, mass merchants, and direct-to-consumer platforms, while maintaining our presence with successful independents and tech specialists. This shift has resulted in more growth with customers such as Walmart, Target, and Amazon, which are among our top five customers and performed well throughout the pandemic. Also aligned with this shift, consumer, school, and technology categories now represent 59% of our sales and are the fastest-growing parts of our portfolio. Moving on, our productivity program is back to normal levels after accelerated cost reductions taken last year due to the pandemic. We have reinstated merit increases and bonus opportunities, so our SG&A expenses will normalize this year. Our full-year productivity savings for the year are expected to be over $30 million. Our free cash flow for this year is expected to be at least $135 million. We intend to use the cash to pay our dividend and to reduce our debt. Neil will comment further on this a bit later. In summary, our business benefits from the breadth and balance of our geographic and product portfolio. We're not dependent on any one area for success and have done a good job partially offsetting channel customer and product line declines with growth elsewhere. I'm proud of the way we have adapted quickly to take advantage of the changing environment. We're assuming a shift in consumer behavior post-pandemic and are changing our product and channel 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 that we expect will remain weak longer term, such as wide format laminators and large whiteboards, although we expect some post-pandemic recovery. We will emerge from the pandemic as a strong, growing, financially sound company that is ready to aggressively pursue the opportunities ahead. Now I will turn the call over to Neil for a view of the segments, our outlook, and other financial commentary, and then I'll join him in answering your questions. Neil?