Acco Brands Corporation

Hello everyone and welcome to the ACCO Brands second quarter 2023 earnings conference call. My name is Emily and I'll be coordinating your call today. After the prepared remarks, there will be the opportunity for any questions which you can ask by pressing start followed by the number one on your telephone keypads. I will now turn the call over to our host, Chris McGinnis, Senior Director of Investor Relations at ACCO Brands Corporation. Please go ahead.

Good morning and welcome to ACCO Brands second 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 Axel Brands Corporation, who will provide an overview of our second quarter results and an update on our 2023 priorities. Tom Tedford, President and Chief Operating Officer, will discuss the back-to-school season, new product innovation, and provide an update on fall savings initiatives and our soon-to-be-released 2022 ESG report. Following Tom, Deb O'Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our second quarter results and the outlook for the third quarter and full year. We will then open up 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 include transactions, immigration, amortization, and restructuring costs, a non-caste 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 relief 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 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. Actual results could differ materially. Please refer to our earnings release and FCC filing 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 will turn the call over to Boris Ellisman.

Thank you, Chris, and good morning, everyone. Thank you for joining us. Before we discuss the quarter, I'd like to begin with the announcement we made last night regarding Tom Tetford becoming ACCO Brand's next Chief Executive Officer on October 1st. He will also be joining the Board of Directors at that time. I could not be more pleased to announce Tom as my successor. Having had the pleasure of working with Tom over the past 13 years, I have the utmost confidence in his ability to lead this company. To ensure a seamless transition, I will continue to serve Echo Brands and all its stakeholders as executive chairman of the board with my planned retirement in the first half of 2024. This announced transition follows an orderly multi-year succession plan that the board and I put in place. And it's exciting to finally share the news with all of you. Tom is exceptionally well qualified and prepared to lead Aqua Brands as it enters a new phase of its strategic transformation centered on driving sustainable organic revenue growth. Tom has demonstrated success in every position held during his career at Aqua Brands, most recently serving as President and Chief Operating Officer We played an integral part in executing on our transformational strategies and growth initiatives. I am confident that under Tom's leadership, Michael Brands will continue to drive growth viewed by our strong, diverse brands. Congratulations, Tom. Now let me discuss our second quarter results. We are pleased with our results for the second quarter. with sales above the midpoint of our outlook and adjusted EPS significantly above our outlook. These results reflect the strength of our brand and solid execution by our team, as well as the actions we have taken to transform our business, expanding our product categories, bringing new innovative consumer-centered products to market, and streamlining our cost structure. We made significant progress in our margin recovery efforts in the second quarter, with gross margins increasing at 450 basis points and adjusted operating margins increasing by 220 basis points year on year. Our pricing productivity and restructuring absence have gained greater traction as well as the first half of 2023. While we're pleased with our strong start to the year, we are more cautious on the second half demand environment due to higher interest rates and prolonged economic uncertainty. We expect consumers, businesses, and our channel partners to remain prudent with their discretionary spending and inventory in the second half. We will continue to prioritize margin recovery and improve the cash flow as we manage through this uncertain economy. The second quarter of comparable global sales was down 5% versus last year. In North America, it was down due to difficult comparisons, a weaker macroeconomic environment, and a more normalized supply chain in 2023. Last year, Retailers were buying ahead of the season in greater quantities because of COVID-induced supply chain issues. In this year's second quarter, vector school sales were lower instead of unexpected. We also saw a return on growth in gaming accessory sales. The current economic backdrop of higher inflation and interest rates continues to lead to software consumer and retailer demand. And we're now lapping the benefits of return to work friends as office occupancy rates have stabilized at about 50% in the U.S. Lastly, sales of our computer accessories category continues to be negatively impacted by weaker IT spending. North America operating market improved 200 basis points due to our cumulative pricing and cost action. In EMEA, the weak macroeconomic environment in the region continues to challenge demand from both consumer and business customers. With all this decline, the combination of pricing and cost initiatives has helped to significantly restore lost profitability as our adjusted operating margin expanded 610 basis points and adjusted operating income more than tripled. Last year, EMEA was battered and very high inflation, which depressed our margins. I'm very pleased with our margin recovery in that segment. Within our international segment, sales were down a bit in what is a seasonally small quarter and impacted by lower demand in Asia and Australia due to a softer macroeconomic environment. Latin America continues to perform well, and we expect sales growth in the segment to resume in the second half of the year on strong demand for our Latin America back-to-school offering. Due to the humanity, our adjusted operating margin was down very slightly in the second quarter, but up a healthy 245 basis points for the first six months. We remain confident in our outlook for stronger margins in the second half. Before touching on our 2023 key priorities, I want to update you on our global technology accessory sales, which consists of our computer, game accessories products. Gaming accessories posted growth in the second quarter, aided by a combination of the greater supply of chips for wireless gaming controllers, new product launches, and a stronger slate of AAA game releases. We expect wireless chips to be readily available for the remainder of the supply chain challenges that have been alleviated. We remain focused on our international expansion of gaming accessories, but are experiencing a slower rollout than expected. We are making progress and remain confident in the long-term growth opportunity for gaming accessories in both our India and international markets. We expect gaming accessories to grow in the second half. Computer accessories sales were weaker than expected. The slowdown we experienced in the first quarter did not show any improvements in the second quarter, as businesses continued to be cautious about their ID spending in the current macroeconomic environment. We expect computer accessories will show sequential improvements throughout the remainder of 2023, given new product rollouts, at a lower level than was previously anticipated. As a result, we no longer expect the category to grow for the year. At the start of the year, I share with you our four key priorities for 2023, and they are restoration of our gross margins, profitable management of our top line, continued investment in our brands and new products, and tight management of our expenses and inventory. We continue to make progress on all four in the second quarter. The recovery of our growth margins has been our top priority, and the combination of cumulative global price increases and cost savings absence has allowed us to recover much of the lost profitability from the high levels of inflation we have experienced over the last few years. As I said earlier, we're seeing great attraction from our absence from the first half of 2023, which gives us confidence that these gains are sustainable over the longer term. We continue to manage our top line well in a challenging global economic environment. This is a testament to the strength of our brand, our broad assortment of consumer-desired products, and our superior customer service capabilities. On the expense line, we did a good job managing headcount and continue to closely monitor our discretionary spending. We also reduced our inventory by 16% for about $75 million per year. which is driving improvement in our operating cash flow. Before I turn it over to Tom, I want to say I'm encouraged by our results in the first half of 2023. We're executing well in our plan and remain confident in our ability to drive long-term, sustainable, and profitable organic revenue growth as global economies improve. We have the right team in place to live in a difficult economic environment and are well capitalized with no debt maturities until 2026 and low fixed interest rates for over half of our outstanding debt. We expect to continue to generate consistent strong tax flow and will prioritize dividend payments and debt reduction in 2023. Now, I will turn the call over to Tom to discuss back to school, new product innovation, and not based on our restructuring initiatives and the upcoming ASD report. Tom?