Acco Brands Corporation

Hello, everyone, and welcome to the ACCO Brands 4Q 22 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. After the prepared remarks, you'll have the opportunity to ask any questions by pressing Start, followed by the number 1 on your telephone keypads. I'll now turn the call over to ACCO Brands Senior Director of Investor Relations, Chris McGinnis. Please go ahead, Chris.

Good morning, and welcome to the ACCO Brands 4Q 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 of Aquabrands Corporation, Tom Tedford, President and Chief Operating Officer, and Deb O'Connor, Executive Vice President and Chief Financial Officer. Slides of the company in this call have been posted to the investor relations section of Aquabrands.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 the change in fair value of the contingent consideration related to the power rate 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 Ellesman.

Thank you, Chris, and good morning, everyone. Thank you for joining us. Before I talk about our 2022 performance and priorities for 2023, I want to say that the solid fundamentals of our business are intact, and we believe we have the right strategy and team to weather the current economic slowdown and continue to deliver sustained organic revenue growth as the economy improves. The transformative actions we have taken over the past few years to be more consumer-centric and geographically diverse helped us achieve record comparable sales and maintain or grow market share in many of our key brands in 2022. 2022 was a tale of two halves. We began the year strong. as customers turned to us for surety of product for the important back-to-school season, and as office occupancy rates rebounded in North America. In our EMEA segment, we had strong volume growth for computer and business products with sales tracking above pre-pandemic levels for the first half of the year. The trends in EMEA began to change in the summer of 22, as high levels of inflation the war in Ukraine, and the energy crisis dampened consumer and business demand. In North America, retailers became concerned about an impending economic slowdown, and they began to take an aggressive stance on reducing inventory levels in the third quarter that continued throughout the fourth quarter, leading to lower overall demand in our North America segment. These actions were on top of the impacts from pulling orders forward into the first half of the year. All of these factors reduced our sales volume in the back half of 2022. Profits in 2022 followed a similar trend as the rate of inflation continued to increase throughout 2022 for raw materials, finished goods, and transportation and now paced our aggressive pricing actions, which included numerous price increases throughout the year. We have been active on the cost front, limited discretionary spending, implementing office hiring freezes, flexing direct labor headcount with volume, and closely managing our SG&A cost structure throughout the year. In Q4, we actioned additional cost savings and restructuring activities in North America and EMEA intended to expand margin through initiatives focused on improving operating efficiency and reducing costs. Importantly, we're seeing deflation in ocean freight rates and moderating rates of inflation in other product costs. We believe that the lessening rate of inflation combined with our pricing and cost actions including our January 1st price increase, better position us to expand margins in 2023. While one month does not make a quarter or a year, we are encouraged by the gross margin improvements we saw in January. As largely reflected by the rest of the industry, our sales of gaming accessories were down 26% for the year. In 2022, the gaming market faced a number of challenges and a difficult comparison to 2020 and 2021, when consumers spent more on in-home entertainment activities due to the pandemic. As demand for the category softened with the reopening of experiential activities, many retailers engaged in aggressive inventory destocking. The gaming market also experienced semiconductor chip shortages throughout 2022. which limited both video gaming consoles and gaming accessories production. While we continue to hold the leading market share position for third-party gaming accessories, we temporarily lost some market share in the fourth quarter due to lack of product availability and a very competitive and promotional holiday season. Despite these challenges, we continue to believe in the long-term growth opportunity for gaming accessories and are executing our plans to expand our product assortment and accelerate growth in our EMEA and international segments. In 2023, we expect the industry backdrop to stabilize and improve as the year progresses and our semiconductor chip supply and new console production improves. In addition, there are several new game titles coming to market in 2023, which historically has spurred greater gamer engagement and the sales of associated gaming accessories. Now, let me share with you some highlights from 2022. Outside of gaming accessories, comparable product sales increased 5% fueled by the strength of our brands. Kensington, our computer accessories brand, grew 10% in North America during the fourth quarter and was up over 13% globally for the full year as we continued to bring new products to market and expand our enterprise sales. This is our fifth straight year of growth for the Kensington business. We have continued to enhance the offering, introducing a host of new products, largely related to connectivity and security. During the 2022 back to school season, our five-star brand gained two points of share and grew 10% for the year. It was the second largest back to school brand in the US during the season. We demonstrated the strength of our supply chain capabilities to support customers with on-time deliveries during highly seasonal and high-volume engagement. Our international segment had an exceptional year, posting 19% comparable sales growth for the full year and delivering over 40% improvement in adjusted operating profit. This growth was fueled by our market leading to Libra and Ferroni brands in Brazil as in-person education continues its recovery in Latin America. These successes and strong brand performances from GBC, Quartet, Novo, and Barilito, among others, give us confidence that our commitment to bringing innovative, value-added new products to market and investing behind our brands, operations, and customer service is transforming our company towards faster organic sales growth. As we look to 2023, we're focused on four key priorities. First, we have laser focus on restoring our gross margin. As I mentioned earlier, we have implemented multiple rounds of price increases, including our most recent round on January 1st of this year, and we have the ability to continue to raise prices to offset inflation if warranted. Our ongoing productivity program delivered 20 million in mostly COGS savings in 2022. This included actions to improve our supply chain processes and consolidate our manufacturing distribution footprints in North America. We also plan to reduce the number of SKUs we offer globally to simplify the manufacturing distribution processes, improve our sourcing capabilities, and re-engineer current product specs for lower costs. These actions will meaningfully mitigate the inflationary pressures we have experienced over the last 18 months and improve our gross margin. We will continue to evaluate additional cost reduction measures, including facilities consolidations in response to current macroeconomic environment and secular trends. Our second priority is to profitably manage the top line in what is expected to be a slow economic environment especially in the first half. We have a complementary assortment of products and brands that occupy value to premium price points and that we profitably position for various customer segments, including the value segment. Historically, we have been able to do that with five-star in-need brands, five-star in-Hillroy, and lights and assorted brands as examples. We'll need to ensure that we're disciplined in offering the right assortment for the price point and not discounting our premium feature-rich brands. Third, we will continue to invest in new product innovation, key brands, and growth initiatives. Innovation and new product development have been a key factor behind successes of our brands and their ability to grow or maintain our leading market share positions. We have a host of new product introductions that will continue to drive our growth in 2023. Fourth, we will continue to manage our SG&A spend through prudent management of PEP counts and discretionary expenses. Offsetting these actions in 2023 will be the restoration of the annual incentive plans. While Atgo Brands is not immune to current changes in economic conditions, we have the right strategy and an experienced management team to navigate the current operating environment. We remain confident in our transformation to drive long-term sustainable organic revenue growth and are well capitalized with no debt maturities until 2026 and low fixed interest rates for over half of our outstanding debt. We'll continue to generate consistent strong cash flow and we'll prioritize dividend payments and debt reductions in 2023. As I mentioned earlier, the margin expansion is a top priority for the company. Our management of price and cost will determine how successful we will be in achieving margin expansion goals. Pricing will be largely established in the marketplace, but our value-added cost is something we can control and manage. I've asked Tom Tetford, Echobrand's President and Chief Operating Officer, to lead a multi-year effort to improve the efficiency of our physical assets in human capital investments. Tom has been with Aquabrands for 13 years and in his current role for the last 18 months. I will now turn the call over to Tom to share with you the details of this initiative.