Acco Brands Corporation

fourth quarter and full year 2023 earnings conference call. My name is Brika and I will be your moderator for today. All lines are on mute for the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question during this time, please press star followed by one on your touch phone keypad. I would now like to turn the conference over to your host. Chris McGinnis, Senior Director of Investor Relations to begin. So Chris, please go ahead.

Good morning and welcome to the AcroBrands fourth quarter and full year 2023 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Thetford, President and Chief Executive Officer of AcroBrands Corporation. Tom will provide an overview of our fourth quarter and full year results in our 2024 priorities. Also speaking today is Deb O'Connor, Executive Vice President and Chief Financial Officer. We'll provide greater detail on our fourth quarter and four-year results and our 2024 and first quarter outlook. We will then 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 amortization and restructuring costs, non-cash goodwill impairment charges, the change in fair value of the contingent consideration related to the Power A 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 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 assumption of management based on the 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. Now, I will turn the call over to Tom Tedford.

Thank you, Chris. Good morning, everyone, and welcome to our fourth quarter and full year 2023 call. Last night, we reported fourth quarter and full year results with reported sales as well as adjusted EPS and free cash flow exceeding our full-year outlook. The stronger finish allowed us to end the year with a lower consolidated net leverage ratio of 3.4 times, an improvement of 0.8 times compared to last year. These results reflect our team's strong execution against the priorities we laid out at the beginning of 2023. Our top priority in 2023 was to restore our gross margin rates. which were challenged throughout 2022 due to the extreme levels of inflation. Through the cumulative effect of our pricing and cost actions, we successfully restored our gross margins to pre-pandemic levels, ending the year at a rate of 32.6%, a 420 basis point improvement compared to 2022. Additionally, as the demand environment remained challenging, We accelerated our efforts to rationalize our global footprint, announcing the closure of four facilities over the course of the year. We delivered $29 million in cost savings from our restructuring and productivity actions slightly ahead of the target we set at the start of 2023. Our broad assortment of value to premium offerings allowed us to win in back to school, especially in a price conscious environment. In addition, we gained market share during the U.S. back to school season in both dollars and units. We continued to invest in growth by supporting our key brands and brought new and refreshed products to market. As I mentioned on our third quarter call, we are sharpening our focus on innovation and new product development. As a part of our restructuring, I have put leaders with the best track records in charge of these initiatives. Lastly, we managed our SG&A expenses and inventory well, as we remained laser focused on controlling costs and prudently managing headcount. For the year, we reduced inventory by 17%, or almost $68 million, versus the prior year. Before touching on our 2024 priorities, let me discuss our comparable sales results for the full year, which were down 6.5% from the prior year. reflecting soft demand in many of our categories. Our two global technology businesses, Kensington and PowerA, were also challenged by category-specific factors. Globally, lower IT spend and PC purchasing continued to impact sales of our Kensington-branded computer accessories in the fourth quarter and was a significant headwind for the full year. One of our largest product categories is universal docking stations. Over the last year, the docking station market has changed considerably. Two consecutive years of disruption in the PC market led to an oversupply of product, as well as significant competitive discounting. While PC sales are expected to rebound late in 2024, we anticipate that demand for third-party docking stations will remain soft, with partial recovery beginning late in 2024 and full recovery in 2025. Regarding our PowerA branded gaming accessories category, the recovery in third-party gaming accessories was uneven throughout 2023 due to lower consumer demand and industry-specific competitive dynamics. Earlier this week, we announced the licensing agreement with Epic Games, the maker of Fortnite, one of the most popular video game franchises, and we are excited about this opportunity. In addition, in 2023, we made considerable progress on our international expansion efforts. We recently announced licensing agreements to sell PowerA accessories in Japan with both Nintendo and Sony. The Japanese market represents a significant gamer base for consoles and a growth opportunity for PowerA. Near term, the agreements will be small on a revenue basis, but we expect, as we strengthen these partnerships, that will provide revenue growth long term. On a segment basis, we finished the year strong in our international segment, with revenue up 5% in 2023 on a comparable basis, led by the recovery of back-to-school sales in Latin America. In EMEA, the demand environment remained muted, reflecting the economic and inflationary pressures. North America was also affected by the macroeconomic environment as retailers continue to manage inventory tightly and to POS, which was down. Our commercial channel sales were lower than anticipated because of the lack of white-collar workers returning to in-office work. Office occupancy rates have stabilized at 40 to 50 percent of pre-pandemic levels in the U.S. We do not expect tailwinds from a material improvement in office occupancy rates going forward. Now I'd like to highlight the actions we are taking in 2024 as we reposition the company for long-term, sustainable, profitable growth. I have been in the CEO role for four months, and we are acting quickly to implement changes to reset our cost structure and expand our growth prospects. In late January, we announced a multi-year cost restructuring program targeting at least $60 million. The program will simplify and delay the company's operating structure while reducing costs. We also accelerated work on our global footprint rationalization program, announcing the closure of our Sydney, New York manufacturing facility. In 2023, we announced a total of four facility closures and continue to review our footprint with the goal of improving our profitability and asset utilization. Given our global scale, we are also identifying ways to better leverage our sourcing capabilities. We recently consolidated our supply chain to operate globally under one leader. This will reduce supply chain complexity, leverage best practices, deliver cost savings, and better meet our customers' needs. As a result of our restructuring program, key business leaders will be closer to commercial activities. This will allow them to engage with our customers more frequently and focus on opportunities to gain informal market share, drive innovation, ideation, and execution of new and refreshed products and channel expansion while supporting our category-leading brands. Additionally, our cost actions will provide important resources to invest and grow. We are looking to improve the cadence of new and refreshed product introductions. We see opportunities across our portfolio to bring new products to market, which will help reinvigorate our growth profile. There is a pipeline of projects to bring products to market that we are excited about. Before I turn the call over to Deb, I want to close by emphasizing how excited I am about the opportunity we have at Akko Brands as we reposition the company for long-term, sustainable, profitable growth. I am confident our actions will improve our potential for sales growth and strengthen our future profits and cash flows. Our portfolio is geographically diverse with iconic brands that resonate with local consumers. We deliver unmatched customer service and sell our products in over 100 countries. Our products range from value to premium price points, which appeal to the vast needs of today's consumers. This broad assortment allows our retail customers to win in key seasonal sets, which has strengthened these important relationships and made ACCO Brands a trusted supplier. Over the years, we have also reduced our dependence on commercial channels in mature markets and have repositioned the company around key retailers. While we have expanded our portfolio beyond traditional commercial products, They remain an important part of the portfolio, generating significant cash flow to reinvest for future growth. We have always been a consistent generator of strong free cash flow and will continue to prioritize dividend payments and reduce debt. Our balance sheet is strong with no debt maturities until 2026 and low fixed interest rates on over half of our outstanding debt. Lastly, we have an experienced leadership team with a deep knowledge of the categories we compete in and strong customer relationships. They have the experience to execute on the actions we are taking, and I am confident we will successfully position ACCO Brands to deliver long-term, sustainable, profitable growth. I will now hand it over to Deb, and we'll come back to answer your questions. Deb?