Acco Brands Corporation

quarter 2024 conference call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. I'd now like to hand over to Chris McGinnis, Senior Director of Investor Relations. The floor is yours. Please go ahead.

Good morning and welcome to the Aqua Brands first quarter 2024 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Tepper, President and Chief Executive Officer of Acro Brands Corporation. Tom will provide an overview of our first quarter results and update you on our 2024 priorities. Also speaking today is Deb O'Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our first quarter results and update you on our outlook for the full year of 2024 and the second quarter. We will then open the line for questions. Slides that accompany 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 amortization and restructuring costs, non-cash goodwill impairment charges, and other non-recurring items and unusual tax items, and adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedule 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 this call are based on the belief and assumption 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. Now I will turn the call over to Tom Thetford.

Thank you, Chris. Good morning, everyone, and welcome to today's call. Last night we reported first quarter 2024 results with adjusted EPS of 3 cents within our outlook range. While we anticipated that 2024 would be a reset year with sales being below 2023, Q1 was modestly weaker than planned as demand for our categories remains muted. Our proactive, disciplined cost management combined with recent strategic pricing in several regions enabled us to expand our gross margin rate by 120 basis points. We effectively controlled our costs and managed our working capital as inventory was down considerably versus Q1 of the prior year. These actions translated into a healthy free cash flow of $26 million in the quarter, a $51 million improvement over last year, and enabled us to end the quarter with a leverage ratio of 3.5 times. well below the 4.3 times ratio at the end of Q1 last year and our debt covenant. As a reminder, the first quarter is seasonally our smallest in terms of sales and profitability. We continue to expect relative improvement in both as we progress through the balance of the year. We are encouraged by the trends in our technology accessories categories and believe, along with improving sales trends within our learning and creative and office product businesses, that the rate of sales decline will moderate in the second half of the year. First quarter comparable sales were down 11% with approximately 2% from the planned exit of lower margin business and another 3% relating to softer sales at the end of the back to school season in Brazil. The remaining decline represents the persistent global headwinds from softer consumer and business demand. On a segment basis, sales declined the most in the Americas. Sales of our office products in the US and Canada were pressured in the quarter as market demand for our categories was weaker than anticipated. Structural shifts in how and where people work have created headwinds for the office products industry since the pandemic. We expect these sales declines to moderate and are now exploring innovative new product solutions that solve the challenges of the future of work. For the important back to school season in the U.S., industry experts continue to forecast sales for the season to be down modestly compared to prior year. We expect our year over year declines to be greater than the broader market as we exited lower margin private label products within the back to school category. we have initiatives underway to gain market share with our category-leading five-star Mead brands for the upcoming back-to-school season and expect another year of strong performance. The value our leading brands offer consumers transcends economic conditions, as evidenced by our market share gains pre- and post-pandemic. While declines in the U.S. and Canada were expected due to the softer demand environment, In the season, sales for back-to-school products in Brazil were weaker than anticipated in the quarter. Despite this weakness, for the full back-to-school season, we had good sales growth in Brazil. As a reminder, Brazil's back-to-school season sell-in occurs later in the year and concludes in the first quarter. Based on customer feedback this year, sell-through was good and customer inventory levels are healthy in the region. As a result, we expect sales trends to improve as we move throughout the year. We are also working closely with our valued retail partners to ensure we are well positioned to capitalize on all sales opportunities in Brazil and the rest of Latin America. Our international segment also faced top line pressures with sales down year over year. The demand environment remained challenging across the segment due to weaker economic activity. The sales declines highlight the impact of the current macroeconomic environment on consumer and business spending globally. We introduced new products within the segment in Q1, with several product launches exceeding our initial expectations. Our market shares in key categories in the segment are stable, with the support of leading brands like Lights, Rapide, Kensington, and PowerA. Our teams operating in this segment maintain price discipline and tight cost controls, allowing us to expand the operating margin 40 basis points. While we face top-line pressures across our core office products, we are seeing improved sales trends in our two global technology businesses, Kensington and PowerA. Q1 was encouraging as sales declines for Kensington, our computer accessories business, moderated significantly. Our channel partners continue to work through excess inventory and docking stations, and as their inventory positions improve, we anticipate our sales trends will as well. The combination of improving market conditions as we move through 2024 and our pipeline of innovative new product launches give us confidence that the year-over-year declines we experienced in 2023 are largely behind us and that Kensington, will return to growth in 2024. PowerA, our leading gaming accessories brand, saw solid sales growth of 14% in the quarter, driven by a greater supply of wireless gaming controllers and our international expansion. We still anticipate sales trends will remain choppy as we navigate quarterly programs and uncertain market dynamics in the video gaming category. We remain excited about the growth opportunities for PowerA with our global licensing agreement with Epic Games, the maker of Fortnite, and licensing agreements with both Nintendo and Sony in Japan. While still in the early days of commercialization, we are receiving positive feedback from our partners. Now let me transition to an update on the progress we are making against our multi-year cost restructuring initiative as we reposition the company for long-term profitable growth. As a reminder, we are targeting at least $60 million in cost savings from this multi-year program. In the first quarter, our team successfully implemented a series of cost savings initiatives, and we are on track to deliver more than $20 million in expected savings in 2024. We realized $4 million of savings in the quarter and expect more substantial savings throughout the year as these actions gain traction. As part of the restructuring, we have streamlined our management structure, moving from three business segments to two. This combination has brought our leadership teams closer to our customers, enabling greater engagement and collaboration. We are encouraged by the conversations we are having with our valued customers which point to opportunities for ACCO brands to become an even larger, more strategic supplier as we position our brands to assist them in achieving their business objectives. An additional area of focus within the restructuring program is to better leverage our global scale to improve our profitability. As an initial step, we are reviewing opportunities to harmonize processes and to better use technology tools to assist in productivity. Our supply chain optimization work is on track and is delivering cost savings, improving our customer service, and enabling better inventory management. Importantly, we remain committed to investing in incremental growth opportunities. Our global platform and diverse product portfolio provide ACCO Brands multiple areas to bring innovative, new, and refreshed products to market. While still early, I'm excited about the pipeline of new products. In closing, the actions we are taking to reset our cost structure, improve our revenue management execution, and enhance our focus on innovation and new product development are the right strategic moves to reposition the company for long-term profitable growth. We have a solid foundation with a global portfolio of leading brands and consistent free cash flow generation. Our strong balance sheet with no debt maturities until 2026 and low fixed interest rates on more than half of our debt provide financial flexibility to invest in growth initiatives, as well as support our dividend and reduced debt near term. We have an experienced leadership team that will successfully execute our repositioning strategy. While challenges remain in the near term, I am confident in the actions we are taking in 2024. I will now hand it over to Deb and we'll come back to answer your questions. Deb,