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spk01: 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.
spk09: 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.
spk05: 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?
spk11: Thank you, Boris, and good morning, everyone. I am honored and excited to lead this outstanding organization and our talented and dedicated team of professionals. Following a great leader like Boris is a privilege, and I thank Boris and our board of directors for their support in preparing me for this role. I'd like to thank Boris for his mentorship and on behalf of all of our employees, recognize his outstanding leadership of Akko Brands as our CEO. Boris has been a transformational leader, keeping our people, brands, and customers at the forefront while expanding Echo Brands' geographic reach and product offering. As CEO, I am excited about the opportunity to work with our leadership team, supportive directors, and all of the talented employees around the world at Echo Brands as we enhance shareholder value by delivering against our key initiatives. I believe that our commitment to superior service to our valued customers, our innovative product offerings supported by iconic category-leading brands, and our loyal consumers provide great opportunities for sustainable organic growth. We also have significant opportunities to simplify our operations and our cost structure as we progress along our multi-year asset rationalization project. These efforts will be at the forefront of our leadership team's focus to drive value for our investors. Boris, congratulations on your upcoming retirement, and we look forward to your continued support as executive chairman. Now let me transition to a few comments about the 2023 back-to-school season. In North America, back-to-school had a good start. as the timing of back to school shipments was earlier than anticipated. Our expectation is these sales are a shift from Q3 and not incremental to our North America back to school season. While we believe our channel partners will rely more on replenishment this back to school season, we now expect them to manage their inventory more tightly. This is changing our sales expectations for the North American back-to-school season from approximately flat to modestly lower. If channel sales are better than anticipated, we are uniquely positioned to support our retail partners because of our domestic production capability. In our international segment, we have seen strong growth for our back-to-school offering in Mexico, which also falls into the second and third quarters. Early indication for back-to-school demand in Brazil, which is in the fourth and third quarters, is also strong and suggests another year of solid growth from our Latin America back-to-school business. Moving to product innovation and new product introductions, we continue to build on our momentum and believe our investments in innovation and new product development will be key to delivering organic growth. In our technology accessories business, the Kensington team was recently awarded three Red Dot Design Awards, which recognized the innovative design solutions in our new computer accessories offering. In EMEA, we have introduced an exciting line of light ergonomic product solutions that support work-from-home environments. These sales have exceeded our expectations. The line further diversifies our product portfolio to more consumer-focused products. This is an example of key pivots our product teams are making as hybrid work is here to stay. In gaming accessories, we recently introduced new products in the controller and cases categories in conjunction with Nintendo's successful release of The Legend of Zelda video games, which are contributing to positive sales growth in gaming accessories. Moving to our restructuring initiative, we continue to see benefits from our 2022 fourth quarter restructuring actions and are on track to deliver the expected $13 million in annual cost savings. Year to date, we have recognized $6.5 million in savings. In EMEA, the facility closer that we announced in the first quarter is expected to be finished by the end of the third quarter with the savings to come in 2024. Last month, we announced the closure of a small assembly operation in North America. We continue to analyze our global footprint for opportunities for further cost optimization and consolidation. We also remain on track to deliver another $15 million in incremental savings from our ongoing productivity initiative. Finally, we remain committed to our ESG initiatives and goals. we will soon release our 2022 ESG report. In it, we detail our progress towards a better tomorrow, highlighting the focus on our people, our products, and the planet. I encourage you to read it when it is released. Today, I want to highlight our employee safety record, as we have been recently recognized as one of America's safest companies by EHF today. a leading environmental, health, and safety publication. In addition to this well-deserved award, our Sydney, New York factory and distribution facility just celebrated a million hours worked safely. I am very proud of our team's commitment to a safe work environment and the recognition that ACCO Brands has received over the past year. I will now hand it over to Deb, and we'll come back to answer your questions.
spk00: Thank you, Tom, and good morning, everyone. I just want to take a moment on behalf of the executive leadership team to thank Boris and to congratulate Tom on being our next CEO. When we last spoke in May, we highlighted a slow demand environment due to the current macroeconomic backdrop. Despite this environment continuing in the second quarter, we were able to deliver our expected level of sales. We also continue to make progress in recovering our lost margin from the extreme inflation that challenged the company's margin profile over the last few years. Our margin profile significantly improved in the second quarter, which allowed us to deliver adjusted ETFs above our outlook. In the second quarter of 2023, reported sales decreased 5% versus the prior year. Comparable sales, excluding foreign exchange, were also down 5% versus a strong prior year when comparable sales grew 5%. The sales decline was due to lower volumes across all three of our operating segments, more than offsetting global price increases. Growth profit for the second quarter was $164 million, an increase of 10% despite lower sales as growth margin improved 450 basis points on the cumulative effect of our pricing and cost reduction act. Adjusted SD&A expense of $98 million was up from $92 million in 2022. Adjusted SD&A as a percent of sales increased 230 basis points to 19.9% as strong cost controls were more than offset by increases in incentive compensation expense and deleveraging from the lower level of sales. Adjusted operating income was $66 million, up 14%, compared with the $58 million last year. Adjusted ETF was $0.38 versus $0.37 in 2022, as our growth in adjusted operating income was largely offset by increases in interest and non-operating pension expenses. Now let's turn to our segment results. North America reported sales declined 5% and comparable sales were down 4%. As volume declined more than offset our cumulative pricing actions. Sales in the second quarter were impacted by lower business and retailer demand due to the weak economic environment, as well as declines in our computer accessories category due to softer IT spending. North America adjusted operating income margin increased 200 basis points to 20.7% from the prior year's second quarter, driven by pricing, improved mix, and cost savings actions. The second quarter is typically the highest revenue quarter in North America and benefits from the economies of scale. Now let's turn to EMEA. Both reported and comparable sales for the quarter were down about 9% to $126 million. mainly due to volume decline. Demand continues to be impacted by the overall environment in the region, challenging both consumer and business customers. Sales of technology accessories declined in EMEA as well, reflecting industry-wide trends. Market shares in the region remain stable, but we have seen some trade downs to our lower-priced offerings. In the second quarter, EMEA posted adjusted operating income of $9.5 million, a significant increase from the $2 million a year ago. The operating margin rate improved 610 basis points from the prior year to 7.6%. The improvement in adjusted operating income was due to our pricing and cost reduction actions. Moving to the international segment, reported and comparable sales in the second quarter decreased 2%. The decline was due to lower volumes in Asia and Australia due to a weaker economic environment and lower sales of technology accessories, which more than offset price increases and growth in Latin America. The international segment posted adjusted operating income of $8 million, essentially flat to the prior year. Switching to cash flow and balance sheet items, due to the seasonality, we generally use cash in the first half of the year and generate significant cash flow in the second half of the year. Year-to-date adjusted free cash flow was a use of $45 million versus a use of $96 million a year ago. The improvement was driven by improved working capital management as we lowered inventory levels by 16% versus the prior year and had lower prior year incentive payouts. We ended the quarter with a consolidated leverage ratio of 4.3 times, well below our five times covenant ratio and now expect to end the year with a range of 3.3 to 3.5 times lower than previous expectations. Longer term, we are still targeting 2 to 2.5 times. At quarter end, we had $424 million of remaining availability on our $600 million revolving credit facility. As shown on our earnings slide, more than half of our debt is at a fixed interest rate of 4.25%. and does not mature until 2029. We ended the quarter with total growth debt of $1,085,000,000, over a hundred million lower than the prior year period. And our cash balance was $82 million. Turning to our outlook, we are providing a third quarter outlet and updating our full year guidance for 2023. For the third quarter of 2023, We expect reported net sales to be flat to down 3%, which includes a positive 4% benefit from foreign exchange. We expect adjusted EPS of 21 to 24 cents. Provide context on our quarterly margin profile. Historically, gross margins in the first quarter have decointly decreased from the second quarter due to changes in customer and product mix. This third quarter, we expect our growth margins to follow that similar trend with an expectation of a year-over-year improvement in the growth margin rate. Additionally, in third quarter, SD&A costs are expected to be higher than the prior year due to higher marketing costs to support back-to-school and increased incentive compensation. Third quarter interest and non-operating pension expenses are also expected to negatively impact adjusted EPS by 3 cents compared to last year. For the full year, we are updating our expectations for reported net sales to be within a range of down 1% to down 3%, which includes a positive 1.5% benefit from foreign exchange. We are lowering our expectations for comparable sales growth for the year to be down 2.5% to 4.5% due to the prolonged economic uncertainty and lower sales of computer accessories. As Boris and Tom mentioned earlier, we are seeing cautious consumer and business sentiment and greater conservatism from our channel partners. This is creating greater uncertainty regarding demand in the second half, and we think it is prudent to take a more cautious approach with our sales outlook in this environment. Interest expense has increased since our last forecast, due to more rate hikes by the Fed and ECD. Our expected mix of profitability by country has also slightly changed and modestly increased our expected tax rate. This is being partially mitigated by a more favorable impact from foreign exchange cancellations. Our growth margins are tracking ahead of our expectations, and we now expect full-year growth margins in the range of 31 to 32%. we continue to target a long-term range of 32% to 33%. In 2023, we expect higher SD&A costs and increases in incentive compensation versus the prior year. For the full year, we expect adjusted EPS to increase 4% to 8% to $1.08 to $1.12. Adjusted operating income is expected to grow at mid-teen levels, partially offset by higher net interest costs of about $14 million, and higher non-cast, non-operating pension expenses of $5 million. On slide 15 of the earnings presentation, we highlight the improved operational performance and foreign exchange expectations, which are being offset by higher interest expense and taxes. The adjusted tax rate is expected to be approximately 30% Intangible amortization for the full year is expected to be $44 million, which equates to approximately 32 cents of adjusted EPS. We are now expecting our free cash flow to be at least $160 million after capex of $20 million, and to end the year with a consolidated leverage ratio within a range of 3.3 to 3.5 times. Looking at cash uses in 2023, We expect to continue to prioritize dividends and debt reduction. Now, let's move on to Q&A, where Boris, Tom, and I will be happy to take your questions. Operator?
spk01: Thank you. If you would like to ask a question today, please do so now by pressing Start, followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, please press Start and then 2. When preparing to ask your question, we ask that you please ensure your microphone is unmuted locally. Our first question today comes from the line of Greg Burns with Sidoti. Greg, please go ahead. Your line is now open.
spk03: Good morning. I just wanted to get maybe a little bit more color on the state of channel inventories, where they stand. Why do you think, you know, it sounds like you're a little bit more cautious in terms of the outlook there, but I just wanted to get a sense of channel inventories, your view for maybe the potential for follow-through orders. Is there a potential upside in your guidance if maybe sell-through is a little bit stronger than expected? Thanks.
spk02: Okay, Greg. Hi, this is Tom. Let me take an opportunity to respond to that. So, Channel inventories are down modestly versus prior year across most of our product categories. As it relates to back to school specifically, we're really early in the season, Greg, so it's hard for us to give great clarity as to how the season will finish. As I said in my comments, we're uniquely positioned to support demand if the customer's demand forecasts are greater than they're currently forecasting. Our customers are aware of that, and we're always in a great position to chase late-season demand. Right now, it's just too early for BTS to comment on whether that demand will ultimately materialize or not. So we wait patiently, and we're prepared to respond if demand's better than forecasted.
spk03: Okay, thanks. And how far from the prior peak are technology sales?
spk06: Technology sales are down in the order of 20% or so from the prior peak. We expected things to recover throughout the year. We haven't seen that yet in the first half, so we've reduced our expectations for the full year. Now we believe that the sales for technology accessories will be down overall for the year, even though we do expect some sequential improvement due to refresh cycles and upgrade cycles. But as I mentioned, they're just down too much to recover the full decline in the first year.
spk00: Specifically for Kensington, right, Boris? Correct.
spk06: Specifically for Kensington, yeah.
spk03: Okay. So, so when you, you view the outlook for that business, when you, when you look at kind of the new product launches you're bringing to market, typical refresh cycles, do you feel like that business has kind of trough to reach the low and you can build off of here or, you know, is there a potential more downside if the macro worsens?
spk06: No, absolutely. We think, you know, we think the worst is behind us. We think that things will improve throughout the year. What's been happening on the IT side specifically is there's been a lot of forward buying in the last couple of years, so people have bought a lot of PCs and accessories, so now we're all digesting what we bought. Now, that's going to get annualized, really should annualize in the second half of this year and certainly in 2024, so we do expect an improvement in the remainder of the year.
spk03: Okay, and you mentioned a slower global rollout for PowerA. What's driving that? Can you just maybe give us an update on your plans there?
spk06: Yeah, Greg, those are really what I call kind of transitional issues. When we notified our distribution partners of our intention to start selling direct, they basically stopped selling. So we have a little bit of a gap between them stopping their activities and our global teams, own teams, picking them up. So we're not as far along as we expected to be, but we're certainly making up ground. I expect us to catch up real soon. So that's why we mentioned the international expansion a little bit slower than we previously anticipated.
spk03: Okay. And has that dynamic, I know you said PowerA revenues were up, but has that impacted the top line for PowerA that maybe you get a,
spk06: It impacted the international top line, so growth would have been even higher. Growth in Q2 was driven by North America for PowerA, but certainly as the international kicks in in the second half of the year, we expect them to be a greater contributor to growth.
spk03: Great. Thank you.
spk06: Thanks, Greg.
spk01: Our next question comes from Joe Gomez with Noble Capital Markets. Joe, please go ahead. Your line is open.
spk08: Morning, guys. This is Joshua Zolper filling in from Joe Gomez. Good morning. So I just had a quick question on the SKU reduction. I just want to kind of get a progress on that. How much have you guys reduced your SKUs and how much more are you guys willing to go on those?
spk02: Yeah, so we speak about this fairly frequently in our public statements. It's an ongoing process for us. We've accelerated that over the last year as we've started to face the realities of the uncertain economic environment and changes in consumer preferences as the impacts of the prolonged work-from-home environment really are here to stay. So I would say we are going to continue the work that we're doing We feel like we're in a really good spot in terms of our ski reduction process. We're not in a position to talk about the specific numbers, but we feel like we're making progress against our internal objectives with the primary focus being in two segments, North America and EMEA.
spk08: Okay, perfect. And so forgive me if I missed this, but I saw that SG&A expenses just increased both really sequentially and year over year. Is that really all like incentive compensation or was there more, a little bit pushing that?
spk00: No, that's right. It's pretty much the incentive compensation. You know, last year we were relieving some of the incentive comp in the back half and second quarter. So you'll continue to see that into the back half.
spk08: Okay, great. And last thing for me, I guess, so I saw that you said that you guys are obviously a little bit into the back-to-school years, but, you know, what has been the impression of the season so far now? You know, obviously it's still early, but is there anything that you guys have noticed so far in the season?
spk02: Yeah, I think the first thing that I would say is, We've executed very well early, right? The first step in back to school, a successful back to school, is ensuring our channel partners have inventory at the right time. So our supply chain teams and our sales teams have done a great job of preparing our retail partners to have a successful back to school season. I will tell you that we have seen a bit of a mixed shift on shelf. So we're seeing a little more offerings across the lower price point spectrums. We'll see how that translates throughout the season. As I mentioned in my prepared remarks and to the first question, we're really early, so it's dangerous to draw conclusions at this point in the season, but we watch it closely every single week.
spk08: Okay, great. Yeah, thank you guys for that.
spk05: Thank you, Joshua.
spk01: The next question comes from Kevin Stenke with Barrington Research. Kevin, please go ahead. Your line is open.
spk10: Thank you. Good morning. I'm just wondering if you could discuss the comparable sales percentage change outlook by your three geographic regions as you think about it for the full year.
spk06: sure Kevin so for the full year from a comparable sales standpoint for total company we expect sales to be down two and a half to four and a half percent at a comparable level and then in international we expect growth low double-digit growth in international and for both North America and India we expect mid-single-digit decline.
spk10: Okay, perfect. Thank you. Did you talk about the factors that enabled you to increase your pre-cash flow outlook a bit for full year 2023 as well as be able to favorably revise your year-end leverage ratio target?
spk00: Yeah, we have seen, as you saw in the second quarter, what we reported strong working capital management, which has allowed us to significantly improve over the prior year. I talked about it last time where, you know, we ended 21 with high inventory that got paid for in 22. And then in 22, we ended up with lower inventory that we're not needing to pay for in 23. So we've seen some significant improvement in cash flows that should not go away. We've also got about $17 million of incentive comp that didn't pay out this year, that paid out last year, and all of those factors carry through to the full year. The improvement, I would say, in the cash flow is really from our continued expectation of that working capital management. We've done a nice job on receivables and payables, and so we're anticipating at least $110 million of free cash flow at this point. And our leverage ratio reflects that as well as slightly higher EBITDA as we look to that.
spk10: Okay, great. Thank you. And also, gross margin is trending better than your original expectations. I believe you had talked about getting to 2021 levels in 2023, which a bit would have been 30.5% roughly. And now you're talking about 31 to 32% for the full year 2023. So can you talk about maybe what's trended more favorably there than the original expectations on the gross margin front?
spk06: You know, it's all of the cumulative impact from the pricing efforts that we've done over the last two years and all of the cost reduction and restructuring efforts that would have put in place. We're still seeing some inflation in goods, both in the quarter, in Q2, and a year to date, and we expect some inflation to continue for the remainder of the year. But the offsetting impact of all of the cost reduction efforts is driving better gross margins. We now expect them to be in the 31 to 32 range for the year. So, you know, very nice job in just executing and recovering. It's really all recovering what we've lost over the last two years.
spk10: Okay, great. And then lastly, you feel like you're fully caught up on inflation. And have you seen any moderation there? And what's the outlook for price increases?
spk06: We think we have caught up with inflation in 2023. We don't expect, certainly not in US and Europe, additional price increases in 2023. We may do some tweaking in our other regions that's just driven by currency exchange rates, but not in our major geographies. Inflation is down, but it's there. And today it's really being driven by labor inflation, and that's permeating into pretty much every aspect of the P&L. And we expect labor inflation to continue into next year. So I do anticipate price increases next year because we do have to offset that inflation, but nothing in 2023. Okay, perfect.
spk10: Thank you for taking the questions.
spk06: Thanks, Kevin.
spk01: The next question comes from Hamed Korshand with BWS Financial. Hamed, please go ahead. Your line is now open.
spk07: Good morning. First off, just about your comments about volume decline. Where does that go? Has the consumer moved away from buying your products or has it completely moved away from the categories?
spk06: There's A couple of things to that, Hamid. A big part of volume decline is driven by our computer accessories business. We mentioned that's down substantially. There was no price increases in computer accessories. So all of the decline in revenue is decline in volume. And that's just shifting. We grew the computer accessory business 38% from 2019 through 2022. So some of that was a shift in purchases from 23 into 22 into 21. And that's going away. All of that will come back. We feel very, very confident about that. And the other part of the volume shift is lower usage due to less people working in offices. A significant percentage of our portfolio is still driven by office products usage. It's especially so in our EMEA segment. And given that we are at, call it roughly 50% office capacity at any one time, there is less usage of our types of product. And that's something that we need to adjust to. And this is what Tom mentioned in his prepared remarks in terms of optimization, footprint optimization, asset utilization optimization initiatives that we have to make sure that we are adjusting both our footprint to that reality as well as our product innovation program to really focus on more hybrid work and shifting more to consumer hybrid as opposed to in-office types of environment.
spk07: Okay. And then as far as the implied Q4, um, guidance goes. It's suggesting you're going to be up sequentially, um, from Q3 quite a bit. It's never been up that much. I think you're implying something around $60 million in sales. It's usually been 20 or 30 million. What's the clarity that you have and your expectation that Q4 could be as solid as, as you're suggesting your full year guidance?
spk06: Well, um, Obviously, we give it some thought. That's our best estimate of what it would be, but it is six months away or five months away, so there's always uncertainty in some of that guidance. I would say the compares that you alluded to is more of Q3 being a little bit lower than typical rather than Q4 being higher than typical. We are more cautious on Q3, and it's even indicated by our Q3 revenue guidance, comparable guidance of minus four to minus seven that Deb alluded to. So from a sequential standpoint, we don't look at Q4 as being that abnormal. And then versus prior year, the comparison, because there's also a strong improvement versus prior year, that's more of a last year issue where we had very big inventory, channel inventory reduction last year on the, on the revenue side, and we had very high inflation costs in our COGS last year, which are all behind us. So that's the reason for the Q4 outlook. And Deb, I don't know if you have any additional questions.
spk00: No, actually, I was going to say that last part was exactly right.
spk07: All right. Thank you. Boris, congratulations on retiring.
spk06: Thank you. Thank you, Hamid.
spk01: Our next question comes from Hale Holden with Barclays. Hale, please go ahead. Your line is now open.
spk04: Good morning. Congratulations, Boris and Tom. I had two questions. The first one is on the software economic outlook or macro outlook that you have in the second half. I understand the Kensington piece, but was curious in North America specifically if you could sort of talk about if there were, you know, greater weakness on the business side or the retail side or away from Kensington if there were other products or categories that were driving it or if it was more equal weighted?
spk06: You know, it's more on the both consumer and business side, less so on technology accessories. You know, some of it is the things that all of you read about in terms of Fed. increasing rates and things being a little bit slower. And some of it is the commentary we're hearing from our channel partners, both on the retail and business side, that given this uncertainty, they plan to be a little bit more conservative in their inventory carrying and purchasing policies. So with all of that feedback, we thought it was prudent to be more conservative in our sales guidance. Okay.
spk04: And then historically, you guys have done a pretty good job versus some of the private label offerings. But in this kind of environment, it wouldn't be abnormal to see private label take more share. I just wanted to confirm that that wasn't the case here in the outlook.
spk06: No, I mean, you're absolutely right. Historically, our brands have done really well in a difficult environment. Last year, Q3 was already, you know, we're already talking recession, talking up recession, and channel was reducing inventory, and yet Five Star gained a couple of points of share during the back-to-school season. So we have performed well. But as Tom said, retailers are featuring more private label and giving them more of a presence on the shelf. So we'll have to just see how that all plays out. We do expect our brands to do well, but there probably will be some trade down to lower price point products, either from us or from private label.
spk04: Great. Thank you. I appreciate it. Thanks, Hale.
spk01: At this time, we have no further questions, so I'll turn the call back to the management team for any closing remarks.
spk06: Thank you, Emily, and thank you, everybody, for your interest in ACCO Brands. We're encouraged about our first half results and about the remainder of 2023 as we stay focused on executing against our priorities, keeping margin improvement at the forefront. We've managed well in difficult environments and are confident in our ability to navigate the current economic challenges. We have the right strategy, and we believe we're well positioned to continue to deliver organic sales growth, compelling market performance, and improve financial results as global economies recover. We look forward to talking to you in a couple of months to report on our third quarter. Thank you.
spk01: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
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