Acco Brands Corporation

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands' fourth quarter and full year 2021 conference call. Speaking on the call today are Boris Ellisman, Chairman 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 transactions, integration, amortization, and restructuring costs, and other non-recurring items, including the change in fair value of the contingent consideration related to the Power A earn-out 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. 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.

We had a very strong 2021 highlighted by record sales, growing market shares, expanded operating margins, improved free cash flow, and lower leverage at the end of the year. The PowerA acquisition added 15% to last year's sales on top of 5% growth in comparable sales. 2021 was not an easy year for product companies with high inflation, supply chain issues, semiconductor shortages, and COVID complications. Despite those challenges, our team has delivered an excellent year and deserves a lot of credit for its hard work and resilience. I'm very proud of our results. Our business has pivoted to having more sales from consumer and technology products, and now almost 60% of our sales come from the faster-growing categories. We have good momentum going to 2022, and we expect sales, profit, and free cash flow growth to continue. Let me review a few highlights from last year, then Neil will take you through all the numbers. I will join him afterwards to take your questions. Our 2021 highlights begin with PowerA. They had a terrific year, growing performer sales approximately 22%, including 10% in the fourth quarter, and increasing market share in console gaming accessories in the US. The sales growth exceeded our initial expectations. It was even more impressive in a year of gaming console shortages that hurt overall industry sales, especially in the second half. I'm very pleased with PowerA's results and expect its profitable growth to continue. Equally impressive is EMEA, with 15% comparable sales growth in 2021. We expanded product and channel portfolios and leveraged our strong brands to grow sales and take market share, especially with at-home products and in online channels. Not only were last year's EMEA sales substantially higher than in 2020, they were also higher than in pre-COVID 2019. North America comparable sales grew 2%, but this headline number hides higher underlying growth in the business when you consider a large Kensington deal that benefited the U.S. in 2020 and did not repeat in 2021. Without it, North America 2021 comparable sales grew 7%. North America had a great back-to-school performance, taking share with five-star products, and finished the year on a high note with 13% fourth quarter comparable sales growth. Furthermore, including PowerA, and with cost reduction initiatives and price increases, North America expanded its adjusted operating margin 220 basis points during the year. On the product side, In addition to strong PowerA sales growth, we had double-digit growth in shredding, stapling products, air purifiers, art products, and note-taking. The 5% comparable sales growth for our total business was higher than our expected long-term sales growth of 2% to 4% due to the economic recovery. On the channel side, we continued our diversification initiatives and investments in growing channels. Our 2021 growth was led by retail and e-tail, helped by PowerAid. We also saw good growth in independent dealers and wholesalers. Walmart was our largest customer with almost 10% of global sales. Amazon was second with 9%. I'm very pleased with the work our sales and marketing teams have done in transforming our channel landscape to faster growth and healthier margins. Our company enters 2022 in excellent shape and with strong momentum. We expect to have another year of record sales, strong profit and pre-cash flow growth, and winning marketplace performance. Before I hand it over to Neil, I want to make a few comments about our announcement that Neil plans to retire later this year. I want to publicly thank Neil for his 37 years with Aquabrands, including 17 as our CFO. He's been instrumental in our transformation to a faster growing consumer and technology oriented company and successfully navigating us through the two most recent recessions, both of historic proportions. He's been a great CFO for our company and a wise counselor and friend to me. We're going to miss him. Neil will continue his current role until his successor is named and will help us with a smooth transition afterwards. With that, I will now hand the call over to Neil, and we'll come back to answer your questions. Neil.

Thank you, Boris, for your kind words, and good morning, everyone. Most of my comments will refer to our full year results. Our 2021 reported net sales increased 22% to $2.03 billion, largely due to the contribution from PowerA, which had sales of $257 million. Our comparable sales rose 5% as we had higher pricing and improved volume in most markets. Foreign exchange added 2%. Full year net income was $102 million or $1.05 per share. Adjusted net income was $137 million and adjusted EPS was $1.41, a $0.46 increase. improvement versus prior year. PowerA contributed 28 cents, while the comparable business added 18 cents. This included a 3 cent adverse impact from a higher tax rate and 1 cent negative impact from a higher share count in 2021. The quarterly cadence of the year was uneven. Our first quarter of 2021 still reflected COVID-19 declines as compared with the first quarter of 2020, which did not. Our business steadily improved in the subsequent quarters with comparable sales growth of 5% for the full year, but 11% for the last three quarters. Foreign exchange was favorable for the first three quarters, but turned adverse in the fourth quarter. Even with the supply chain pressures, we were able to successfully increase our adjusted gross margin by 80 basis points for the year to 30.5%. The increase was largely the result of our focus on cost reductions and also lower inventory charges. The benefit of our sales price increases did not fully offset our cost increases because we are chasing continually rising costs. SG&A expenses were 393 million compared to $336 million in 2020. Results in 2020 benefited from many pandemic-related temporary cost reduction efforts that impacted both SG&A and cost of goods sold. 2021's expenses are at a normal level for our company and also reflect the addition of Power A. SG&A expense as a percent of sales was 19.4%, below 2020's 20.3% due to higher sales. Reported operating income was 151 million compared to 112 million last year. And reported operating margin was almost 8%, one percentage point better than 2020 due to the improved gross margin and reduced SG&A margin. The Power A earn out is payable in two equal installments in March of 2022 and 2023 if certain sales and profit targets are met. Each quarter, we recognize any change in the fair value of the earn-out as an expense in our income statement. For 2021, PowerA exceeded its sales target and achieved 100% of the earn-out associated with those criteria. But due to higher costs for products and freight, it achieved less than 100% of the earn-out associated with the profit-based criteria. Our fourth quarter reflects the true-up of the earn-out based on PowerA's actual performance. For 2021, PowerA contributed 15 million to operating income, after 19 million related to the earn-out, 15 million of amortization related to the acquisition, and 6 million of inventory and transaction costs. For 2022, We expect quarterly charges throughout the remainder of the earn-out period for both sales and profit earn-out metrics. Turning now to taxes, our GAAP taxes reflected a $15 million benefit from a reversal of evaluation allowance related to our ability to utilize foreign sourced income. This beneficial change reduced both the GAAP and adjusted tax rates. The significantly larger fourth Quarter earnings also altered the geographic mix of earnings and specific rates applied to adjusting items, which led to our adjusted tax rate being 29% for the full year. This change in adjusted tax rate accounted for three cents of our EPS improvement versus previous guidance for the year. We anticipate that for the full year 2022, we will have a similar adjusted tax rate of approximately 29%. Now let's turn to some details of our segment results for the year. Net sales in North America increased 27% to $1.04 billion, largely due to the $200 million contribution from PowerA. Comparable sales rose 2%, primarily from higher prices and volume recovery from schools and offices reopening. During the year, we had a solid back-to-school season and saw some recovery in commercial sales starting in the second quarter. Our sales to the technology channel declined as we shipped a very large order in 2020 that did not repeat in 2021. North America adjusted operating income and margin increased because of Power A, long-term cost reductions, and lower inventory charges, particularly offset by higher SG&A costs that reflected normalized expenses and Power A. Now let's turn to EMEA. Net sales rose 27% to $663 million, and comparable sales rose 15% to $603 million, which are both above 2019 pre-COVID levels. The strong increases were the result of a general economic recovery, as well as market share gains, and a benefit of approximately $13 million from the addition of the Franken product line. we have now seen six consecutive quarters of strong business improvement in EMEA. EMEA posted a higher operating profit for the year, but lower growth and operating margins due to the lag in realizing the benefit of price increases. EMEA increased prices last October and has announced additional price increases in 2022 to offset inflation. Moving to the international segment, net sales increased 4% due to price increases Power A, and favorable foreign exchange. Comparable sales decreased 3%, primarily because of lower volume related to COVID-19, especially in the first quarter, but which continued throughout the year in Latin America, as schools largely remained closed for in-person education for most of the season. Mexico and Brazil continue to be impacted the most by COVID-19, although we are seeing improvement as vaccination rates have increased, particularly in Brazil. Mexico essentially did not have a normal back to school season in 2021 and Brazil's season shifted into the first quarter of 2022 instead of the fourth quarter of 2021. Schools began reopening in Mexico in January and most have now or will reopen in February in both Mexico and Brazil. As a result, we are seeing improved demand in Latin America in the first quarter. Our business in Australia posted higher sales from increases in both price and volume. However, sales were impacted by a difficult first quarter comparison and certain out of stocks due to supply chain disruptions. The international segment posted a higher operating profit due to lower reserves for bad debts and inventory, higher sales prices, cost reductions, and Power A. This was partially offset by higher expenses as the prior year benefited from many pandemic-related short-term cost reduction measures, which included $4 million in higher government assistance. Now let's move on to our balance sheet and cash flow. For the full year, we generated $160 million in net cash from operating activities and had $138 million of free cash flow. We paid dividends of $26 million and CapEx was $21 million. We achieved our pre-cash flow target. This resulted in a year-end bank net leverage ratio of 3.3 times, which is lower than it was at the time we acquired PowerA, and demonstrates our ability to rapidly delever after acquisition. We were pleased with a 39% increase in our EBITDA to 292 million, which represented 170 basis points improvement in our adjusted EBITDA to sales ratio. At year end, we had almost 600 million revolving credit facility available. We reduced debt 131 million in 2021. We ended 2021 with high levels of both inventory and payables driven by supply chain disruptions and inflation. A larger amount of goods in transit due to extended shipping times accounted for approximately 40 million of the inventory and payables increase. The remaining inventory increase was due to adding inventory to maintain customer service levels and cost inflation. Now let's turn to our outlook. We expect demand to continue to improve in 2022 as more offices and schools are in physical use, at least in hybrid mode, and world economies continue to recover from COVID-19. We are continuing to increase pricing to catch up and offset cumulative inflation rate cost increases, and we will drive additional productivity gains. Therefore, we anticipate an additional 50 to 100 basis points gross margin improvement in 2022. We remain committed to returning our longer-term gross margin to the 33% level, but due to both the increasing cost environment and the magnitude of inflation, it will take us more than one year to achieve that annual goal. We expect foreign exchange to be a headwind in 2022. For the full year, our outlook is for sales growth in a range of 1 to 6%, including a 1% negative impact from foreign exchange. Full year adjusted EPS is expected to be in a range of $1.48 to $1.58, including a 2 cent adverse impact from foreign exchange. The adjusted effective tax rate is expected to be approximately 29%. We will continue to help margins by our continuous productivity programs and expect to again deliver approximately 30 million in full year expense savings. A large part of our annual savings comes from the full year benefit of projects executed during the preceding year. Intangibles amortization for the full year is estimated to be 43 million which equates to approximately 31 cents of adjusted EPS. We expect our free cash flow to be at least $165 million, cash from operations of at least $190 million, less capex of $25 million. For 2022, we expect to return to a historically more balanced capital allocation that will include dividends, debt reduction, and opportunistic repurchases of our shares. we have 125 million remaining on our stock repurchase authorization. We expect to finish the year with a net leverage ratio of less than three times. We maintain significant revolver availability and good relations with our banks to support acquisitions should any arise in 2022. We are returning to an annual guidance and will not be continuing with quarterly guidance. However, for the first quarter, we are providing an outlook as our first quarter is small and we expect significant impacts from inflation, foreign exchange, and prior year comparisons. You may recall that in the first quarter of 2021, PowerA posted 100% sales growth, and we don't expect that first quarter volume level to repeat. In the first quarter, we expect a sales increase of 2.5%, which includes 2.5% impact of adverse foreign exchange. Adjusted EPS is expected to be between $0.06 and $0.10, with a negligible impact from foreign exchange. Now let's move on to Q&A, where Boris and I will be happy to take your questions. Operator?