Acco Brands Corporation

Ladies and gentlemen, welcome to the Acro Brands' first quarter 2023 earnings conference call. My name is Glenn, and I'll be the operator for today's call. If you'd like to ask a question during the presentation, you may do so by pressing star 1 on the telephone keypad. I will now hand you over to your host, Chris McGinnis, to begin. Chris, please go ahead.

Good morning, and welcome to the Acro Brands' first quarter 2023 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 Aquagrams Corporation, who will provide an overview of our first quarter results and an update on our 2023 priorities. Tom Tedford, President and Chief Operating Officer, who will discuss the upcoming back to school season, new product innovation, and provide an update on cost savings initiatives. And Deb O'Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our first quarter results and the outlook for the second quarter and full year. Following this, we will open the line for questions. 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, 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 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 Ellison.

Thank you, Chris, and good morning, everyone. Thank you for joining us. We're pleased with our results for the first quarter, which exceeded the high end of our guidance for sales and adjusted earnings per share. These results were led by the continued strength of our brands, the geographic balance of our portfolio, and the strong execution by our team, despite a challenging consumer and retail environment. We made significant progress against our margin improvement efforts in the first quarter, with gross margins growing by 250 basis points and adjusted operating margins improving 90 basis points year on year. Comparable sales were down 6% versus near-record Q1 sales last year. In North America, in addition to the weaker economy, we, in many in our industry, face a difficult year-over-year comparison due to last year's early shipments of back-to-school products due to supply chain constraints, which did not repeat in 2023. With normalization of supply chains, we're back to the typical cadence of back-to-school shipments, which normally occur in Q2 and Q3. This was a large component of comparable sales decline in North America. We also saw continued pressure in the gaming market and the industry-wide slowdown in IT spending impact our technology accessory sales. North America did benefit in the quarter from improved price, our restructuring actions, and strong SG&A cost controls. In EMEA, demand was impacted by the weak macroeconomic environment compared to a strong pre-war quarter last year. Despite that, we made significant progress in restoring our margins through pricing and cost actions, with adjusted operating margins improving by over 400 basis points and adjusted operating income growing by 50% in the first quarter. Our market shares remained strong. Our international segment benefited from price and volume increases led by the recovery of in-person education and returned to office in our Latin American markets. Sales grew 17% year on year. Price, cost savings, and benefits of scale led to adjusted operating margin expanding 490 basis points and adjusted operating income growing 90%. Before I update you on our 2023 key priorities, I want to provide color on our global technology accessory sales, which consists of our computer and gaming accessories products. Parts of the gaming market continue to be challenged due to the lack of availability of certain wireless chips for our controllers and supply chain constraints of a console. We expect great availability of chipsets in our supply chain beginning in the second quarter, which along with anticipated strong slate of new game releases and new product introductions should help improve our volumes going forward. We hold leading market share positions in third-party gaming accessories and expect this category to grow for the full year. Importantly, the expansion efforts in our EMEA and international segments are on track and we remain excited about the long-term global growth opportunities for gaming accessories. Within computer accessories, after five years of growth, we've seen demand slow as businesses are being more cautious about their IT spending in response to the current macroeconomic environment. Our sales pipeline continues to grow and we are winning new business, but timing of purchases is being deferred. We expect computer accessories will show sequential improvement throughout the remainder of 2023 given the strength of the pipeline and our new products rollouts. In February, I shared with you four key priorities for 2023. Restoration of our gross margins is our top priority, followed by profit management of our top line, continued investment in our brands and new products, and tight management of our expenses and inventory. We have made progress on all fronts in the first quarter, which gives us confidence heading into the remainder of the year. We successfully implemented global price increases in January and in combination with our cost savings actions, believe this year we will be able to recover much of the lost profitability from the high levels of inflation we have experienced over the last two years. In the quarter, We've made significant progress in our EMEA and international segments and expect greater benefits from these actions in our North American segment as we enter our high volume quarters. We'll continue to manage our top line well in what is a slow economic environment. Given the strength of our brands, which hold leading market share positions, and our service capabilities, we are the supplier of choice for many of our channel partners. We offer them and the consumer a complimentary assortment of brands that occupy value to premium price points. This breadth of offerings with strong brands allows our partners to win across multiple categories in peak seasons, like the upcoming North America Back to School or the Autumn European Back to Business Seasons. We also did a good job with our expenses in the quarter for management of headcount and closely watching discretionary spend. Both headcount and SG&A expenses were down year on year. Before I turn it over to Tom, I want to say I'm encouraged by the momentum we built in the first quarter and remain confident in our transformation to drive long-term, sustainable, organic, profitable revenue growth as global economies improve. We have the right team in place to weather difficult economic environments and well capitalized with no debt maturities until 2026 and low fixed interest rates for over half of our outstanding debt. We will continue to generate consistent strong cash flow and will prioritize dividend payments and debt reduction in 2023. Now, I will turn the call over to Tom Tetford to discuss back to school new product innovation, and update you on our restructuring initiatives.