Acco Brands Corporation

Thank you for your patience. The ACCO Brands 3Q 2022 Earnings Conference calls you to begin shortly. Thank you. Ladies and gentlemen, hello and welcome to the Akko Brands 3Q 2022 Earnings Conference Call. My name is Maxine and I'll be coordinating today's call. If you would like to ask a question during the call, you may do so by pressing Star Food by 1 on your telephone keypad. I will now hand over to Chris McGinnis, Senior Director of Investor Relations, to begin. Chris, please go ahead when you're ready.

Good morning, and welcome to Accel Brands' third quarter 2022 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today are Boris Ellisman, Chairman and Chief Executive Officer at Accel Brands Corporation, and Deb O'Connor, 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, amortization, and restructuring costs, a non-cash goodwill impairment charge, and a change in fair value of the contingent consideration related to the PowerA earn-out and other non-recurring items 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 the 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 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'll turn the call over to Boris Ellsman.

Good morning, everyone. Thank you for joining us. In mid-October, we issued a press release updating our third quarter and full year outlook, highlighting the fact that the third quarter proved to be more challenging given the economic environment, especially in Europe, and more cautious inventory replenishment by retailers. Last night, we issued our third quarter results reflecting sales at the midpoint and adjusted EPS at the high end of our guidance, with our full year outlook unchanged. Let me start by saying the solid fundamentals of our business are intact, and we believe we have the right strategy and team to weather the economic challenges and deliver sustainable organic revenue growth once the economy improves. The transformative actions we have taken over the past few years to be more consumer-centric and geographically diverse have helped us maintain a global market share in 2022. There were many positives in the quarter. We had a solid back-to-school sell-through in North America. Our five-star brand grew sales and market share in the back-to-school season and outperformed the overall market in dollars and units. Sales of our commercial products have benefited from a return to office trend, especially in North America, where office occupancy rates continue to improve and have recently reached a post-pandemic high. Our Kensington brand and computer accessories category grew double digits globally in the third quarter and year to date. Our international segment grew comparable sales over 30% and almost doubled adjusted operating income in the third quarter as in-person education returned in Brazil and Mexico. These successes were more than offset by a more cautious stance than anticipated from retailers on inventory replenishment and reduced sales of gaming accessories in North America, as well as reduced demand from a challenging environment in Europe. The significant high inflation, war in Ukraine, current energy crisis, and the stronger US dollar have weighed on consumer sentiment, leading to sales and profit shortfalls. In addition, lower sales volume has resulted in stranded fixed costs in our manufacturing facilities. To counter the high rate of inflation in the region, we will be implementing our fourth round of price increases over the last 18 months on January 1st, 2023. In addition, we have reduced variable labor costs and discretionary spending in response to the lower demand and are looking at structural cost reduction initiatives to be implemented in 2023. While the third quarter sales environment was challenging in EMEA, Both computer accessories and gaming accessories continued strong comparable sales growth trajectories in that market, and combined were up low double-digit percent in the quarter and year-to-date. As we look out to 2023, we're still on track to expand our gaming accessories initiatives to strengthen EMEA growth profiles. In North America, the continued strength in back-to-school and return to office trends were more than offset by retailers' more cautious inventory replenishment and lower sales of gaming accessories. The North American margin rate in the third quarter was negatively impacted by expense to leveraging from the volume declines and higher inflation related to finished goods, inbound freight, and outbound transportation. These costs are currently elevated but are beginning to moderate. We expect higher commodities and trade costs to flow through the P&L in the fourth quarter. While we believe that the overall product inflation in North America has peaked, there are certain commodities that will stay at higher levels in the near and medium term. Regarding our video game accessories category, we continue to believe in its long-term growth opportunity, which will increase our organic growth rate as we expand our product assortment and accelerate growth in our immediate and international segments. Third quarter sales sequentially improved, but are still down from the pandemic high of prior year. We continue to hold a leading market share position in the third-party gaming accessories controller market and have increased our market share position in 2022, highlighting the strength of the product assortment, placements, and PowerA brand. The gaming market is in the midst of a normalization from the high demand related to the pandemic. The market continues to be challenged by the lack of semiconductor chips, which inhibit new console production, and the availability of some gaming accessories. We now expect gaming accessories to be down approximately 15% for the full year, which is at the lower end of our previous expectations. Our longer-term expectation is for sales in this product category to return to pre-pandemic industry growth trends, which historically were at low double-digit growth rates. While ACCO Brands is not immune to the current economic environment, we have the right strategy and an experienced management team to navigate its challenges. We've been aggressive with our pricing and cost actions while continuing to invest in our product development and go-to-market initiatives. We expect the environment to remain challenging and are currently evaluating other cost reduction initiatives, including our geographic footprint and facility rationalization projects. We hope to share more details with you on these initiatives on our fourth quarter call in February. Additionally, we remain confident in our transformation to drive sustainable organic revenue growth and are well capitalized with no debt maturities until 2026, fixed interest rates for over half of our outstanding debt, and low annual interest costs. We have taken actions to protect profitability and free cash flow by curtailing hiring, reducing inventory, and limiting discretionary spending and capital expenditures. Importantly, our third quarter cash flow generation was significant, and we prioritized dividend payment and debt reduction. We also amended our bank debt covenant to provide for greater flexibility, which combined with the company's strong cash flow generation will allow Apple brands to successfully navigate the current economic environment. I will now hand it over to Deb, and we'll come back to answer your questions. Deb?