Acco Brands Corporation

McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Tedford, President and Chief Executive Officer of Akko Brands Corporation. Tom will provide an overview of our second 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 second quarter results and update you on our outlook for the full year 2024 and the third quarter. We will then open the line for questions. Flags 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 and intangible asset impairment charges, and other non-recurring items and unusual tax items and adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedules of adjusted results and other non-GAAP financial measures and 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 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. Now I'll turn the call over to Tom Thetford. TOM THETFORD.

Thank you, Chris. Good morning, everyone, and welcome to today's call. last night we reported second quarter 2024 results with adjusted eps above our outlook range improved cash flow lower inventory balances gross margin expansion and a lower leverage ratio versus the prior year i am pleased with the company's performance as we continue to navigate a challenging business and consumer spending environment we have good momentum on the cost side of our business and the decisive actions we have taken are resulting in improved financial performance. We've made substantial progress in our cost reduction efforts and are on track to realize over $20 million in savings this year. Our team remains laser focused on improving profitability, which resulted in gross margins expanding 150 basis points and a reduction in SG&A of 10% for the quarter. We are strategically investing in new product development, strengthening our partnerships across all our sales channels, and implementing targeted initiatives to gain market share. While we are encouraged with the progress we are making on our cost structure and operational footprint, we are actively evaluating additional cost reduction opportunities. Building upon our financial achievements, I'd like to highlight another area where we've made significant strides, our supply chain. The key focus of our global supply chain team has been inventory management. Through a combination of improved business planning, the use of technology tools, and a focus on strategic skew rationalization, we've successfully reduced our inventory levels by 17% versus the prior year. The improvement in cash flow and our commitment to debt reduction are contributing to an improved balance sheet. We ended the second quarter with a net debt position 13% lower compared to last year and a consolidated net leverage ratio of 3.7 times, well below last year. We expect to end 2024 at a leverage ratio of about three times as we move into our stronger cash generation cycle of the year. This is a level we have not achieved since 2019, and this improvement provides us more financial flexibility with our capital allocation priorities, which I will expand upon later. Now, let me share a few insights on our second quarter revenue performance. The year over year decline in certain categories has been greater than we projected. Recently, the rate of sales decline is moderating in many categories, and our Kensington branded computer accessories category returned to growth. The sales decline and gross margin improvement was partially driven by the exit of lower margin business in North America, which had a significant impact in the quarter as a large portion of the exits related to back to school, which falls heavily in the second quarter. We anticipate less of an impact to revenue from these exits in both the third and the fourth quarters. On a segment basis, the America segment was down more than the international segment. However, when backing out the business exits, trends were similar for both. Globally, demand for our office product categories remains below our expectations. We continue to work closely with our value channel partners to maximize incremental revenue opportunities with our category-leading brands and high-quality products. Our market shares are stable, and our selling teams are actively pursuing incremental revenue opportunities with an improving sales pipeline and better engagement with our key customers. Within our technology accessories categories, gaming accessories was down as the prior year benefited from a stronger lineup of new game releases. Our computer accessories category returned to growth, driven by new products and improving demand environments. We remain positive about the continued recovery in both of these categories in the second half of the year. Touching on back to school for North America, industry experts are still forecasting sales for the season to be down compared to prior year. It is too early to draw conclusions on the 2024 back to school season, but we are seeing good sell through results for both our Five Star and Mead brands. Akko Brands has a long history of leading our categories with innovative product solutions that help our customers work, learn, and play. Our innovation efforts are pivoting from a strong focus on our traditional core categories as our consumer preferences have changed as work has moved to hybrid environments. We are mining consumer insights for product solutions that solve new consumer pain points. While still early, I am encouraged by the work we are doing to launch new products that meet the needs of our consumers. Our team's good work has been recently recognized as the Kensington brand was awarded three prestigious red dot awards for design and innovation. I am proud of our commitment to bring innovative new product solutions to market and confident that our work will help improving revenue trends in the near term. Before turning it over to Deb, let me share a few comments on our capital allocation priorities. Over the last two years, our focus has been supporting our quarterly dividend and reducing debt. This disciplined approach has served us well, allowing us to strengthen our balance sheet significantly. Given this strong foundation, we are now able to contemplate a more balanced capital allocation strategy. We have the ability to opportunistically buy our shares in the market, which will help offset share dilution from our employee equity grants. With our improved balance sheet and consistent cash flow, we will consider M&A as a part of our capital allocation moving forward. We have a strong position in our existing categories and a history of successful M&A integrations. We will target tuck-in acquisitions that provide a quick return on our investment and have realizable synergies. We will remain committed to keeping a low leverage ratio. In closing, I am confident in the actions we are taking to reset our cost structure and improve future revenue trends. We have a solid foundation with our global portfolio of leading brands and consistent free cash flow generation. as well as an experienced leadership team our strong balance sheet with no debt maturities until 2026 and low fixed interest rates on more than half of our debt put us in sound financial condition i will now hand it over to deb and we'll come back to answer your questions deb thank you tom and good morning everyone when we last spoke in may we highlighted softer consumer and business demand

especially related to our office product categories. The challenging market conditions we've identified previously persisted throughout the second quarter and were a significant factor contributing to our sales shortfall versus outlook. Offsetting the lower top line, we continue to make progress in improving our operational efficiency. Our gross margin rate expanded by 150 basis points year over year. and we lowered our SG&A costs by 10% compared to the same period last year. These improvements came from a combination of moderating product costs, improved product mix, and our cost actions. This allowed us to deliver adjusted EPS above our outlook range, underscoring our ability to drive bottom line performance even in a challenging sales environment. In the second quarter, we took a non-cash impairment charge of $165 million related to goodwill and intangible assets. The triggering event for the impairment charges included declines in our market capitalization since the start of 2024, as well as reduced volumes in certain product categories. Overall, we remain confident in our portfolio of leading brands and our ability to generate strong cash flow going forward. Now turning to sales. Reported sales in the second quarter of 2024 decreased 11% versus the prior year. Comparable sales excluding foreign exchange were down 10%. The planned exits of lower margin business negatively impacted sales by approximately 4%. We continue to see overall soft global demand for our categories, which was in line with industry trends. Growth profit for the second quarter was $153 million, a decrease of 7% due to the lower sales. SG&A expense of $88 million was down 10% versus the prior year due to our cost reduction actions, timing of certain spends, and lower incentive compensation expense in the quarter. Adjusted operating income for the second quarter was $65 million, a similar level to last year. The sales decline was offset by 130 basis points of adjusted operating margin improvement. Now let's turn to our segment results. In the America segment, comparable sales declined 13%. The exit of lower margin business, primarily related to back to school, accounted for a little more than 5% of the decline. The remaining decline is attributable to lower business and consumer spending for our traditional office products categories and difficult compares for our gaming accessories. This was partially offset by growth in computer accessories. The Americas adjusted operating income margin for the second quarter improved 170 basis points to 21.6% compared to the prior year. With the improvement in the margin rate due to moderating product costs, improved product mix from our planned exits of lower margin business, and our SG&A cost reduction efforts. Now let's turn to our international segment. For the second quarter, comparable sales declined 5%. due to volume decline as the demand environment remains soft for our traditional categories. We saw double-digit growth in the computer accessories category driven by improving demand trends. International adjusted operating income margin for the second quarter increased 60 basis points to 8% with adjusted operating income flat. The improvement in adjusted operating income margin rate was due to moderating product costs and the cumulative effect of our pricing and cost reduction actions. Switching to cash flow and balance sheet items, historically, due to our seasonality, we generally use cash in the first half of the year and generate significant cash flow in the second half of the year. Through the first six months of 2024, we have improved our free cash flow by $43 million versus the prior year. This reflects the timing of certain customer collections and vendor payments. The free cash outflow of $2 million through June 30th positions as well to achieve our free cash flow outlook of approximately $130 million for the year. We ended the quarter with total gross debt of $986 million, $100 million lower than the same time last year. Our cash balance was $113 million, which is higher than a year ago due to timing of cash flows in Brazil. At the end of the quarter, we had $501 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 a consolidated leverage ratio of 3.7 times, down from the 4.3 times leverage ratio in Q2 of last year and well below our 4.5 times covenant ratio. Longer term, we are still targeting a ratio of two to two and a half times. The company consistently generates strong free cash flow, and as our leverage improves, this will allow us to deploy capital in multiple ways that create value for our shareholders. Our capital allocation priorities are as follows. First, we will continue to invest in our strong brands and product innovation to ensure long-term success. Second, we will support our quarterly dividend program. Third, our focus on debt reduction will remain until we achieve our long-term targeted ratio of two to two and a half times. Next, by achieving meaningful debt and leverage reduction over the last two years, we believe our strong cash flow gives us the flexibility to repurchase shares. We will do this opportunistically and to help offset dilution from our employee equity grant. Finally, another potential use of our cash flow will be M&A. Akko Brands has a long history of successfully integrating acquisitions to expand brand presence, to extend their geographic reach, and to complement our product lines. We have been prudent with purchase prices, and we will remain committed to a low debt leverage. Now let's move to outlook for 2024 and the third quarter. We are updating our full-year outlook, which calls for reported sales to be within a range of down 8 to 9%. For the full year, we expect adjusted EPS to be in a range of $1.04 to $1.09 per share. We continue to expect full-year gross margins to be improved compared to 2023. SG&A costs will be down to the prior year as savings from our cost actions help to offset inflationary pressures related to labor and other costs. The adjusted tax rate is expected to be approximately 30%. Intangible amortization for the full year is estimated to be $45 million, which equates to approximately 32 cents of adjusted EPS. We are updating our free cash flow expectations for the full year. We now believe it will be approximately $130 million and expect to end 2024 with a consolidated leverage ratio of approximately 3 to 3.2 times, a level not reached since 2019. For the third quarter, we expect reported sales to be down 5 to 7%. Important to note that the impact from the exit of lower margin business will be significantly less in the second half of the year. Our third quarter outlook is for adjusted EPS to be in a range of 21 cents to 24 cents per share. Now let's move on to Q&A, where Tom and I will be happy to take your questions. Operator?