Acco Brands Corporation

Good morning and welcome to the ACCO Brands first quarter 2025 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Tedford, President and Chief Executive Officer of ACCO Brands Corporation. Tom will provide an overview of our first quarter results and provide an update on our 2025 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 second quarter outlook. We will then open the lines 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 and intangible asset impairment charges, and other non-recurring items and unusual tax items, and include adjustments to reflect estimated annual tax rate on a quarterly earnings. 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 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 in material. 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 ACCO Brands' first quarter 2025 earnings call. Last night, we reported first quarter sales in line with our outlook and adjusted EPS above our outlook. A combination of favorable sales mix and our proactive approach to managing costs enable us to expand our gross margin by 60 basis points. Overall, demand trims were largely consistent with our expectations across most categories and geographies. highlighted by growth in computer accessories and a return to growth in Brazil. We made progress on our $100 million multi-year cost reduction program, realizing $7 million of additional savings in the first quarter. During the quarter, we repurchased $15 million in stock and closed on a small acquisition. We ended the quarter with a leverage ratio of 3.65 times which is well below our covenant of 4.5 times. Before I review in more detail our first quarter results, let me give you an update on the actions the company is taking in response to the recently announced U.S. tariffs. Over the last five years, we have lessened our dependency on China. We have had a China plus one approach that today enables us to react quickly to the changing tariff landscape. This strategy has diversified our supplier base by establishing outsourced manufacturing in other countries besides China. However, we are similar to other companies and continue to purchase a meaningful amount of goods globally from China, as it has been the cheapest source of high-quality manufactured products. Our relationships with these manufacturing partners are strong. and we have collaborated with them to accelerate U.S. production into other countries and out of China. We are confident in our ability to move most of these purchases in the next few months. We are also evaluating our manufacturing network to utilize existing capacity where it makes economic sense. We are temporarily investing in inventory, utilizing the 90-day pause on reciprocal tariffs outside of China to mitigate current year financial impacts in the US. In addition to our work to optimize the supply chain supporting the US, we are implementing price increases in North America. We have communicated two increases with customers, and depending on the ultimate tariff resolution, we will adjust price as appropriate. It is difficult to gauge the demand impact from these pricing actions, due to the uncertainties related to inflation, consumer confidence, and business spending. I do want to remind everyone that about 60% of our business is outside the United States, which is much less impacted by the current tariff situation. Through the strength of our brands and management team, we are confident in our ability to navigate through these uncertainties. Our teams are focused on mitigating the cost due to the global trade dynamics and positioning our brands to better serve our customers and take share in this disruptive time. Now let me highlight our first quarter results. As a reminder, the first quarter is seasonally our smallest in terms of sales and profitability. First quarter comparable sales were down 8%. The demand environment was challenging throughout the quarter, but consistent with our planning assumptions, impacted by soft consumer and business demand. In the Americas, sales were favorably impacted by early purchases of back-to-school products in the US and growth in Brazil, but were more than offset by weakness in all other categories. Forecasting for this year's upcoming back-to-school season in North America is challenging due to the uncertainty surrounding tariffs. Our prior expectation was for the categories we compete in to be down low single digits. Following the tariff announcements by the US government, our customers have slowed purchases and there remains a lot of uncertainty about how the tariffs will impact the consumer. Retailers are responding by being more cautious with inventories, but we are in close contact with them as we prepare for this important time of year. Going into this season, our team won several new placements with retailers, and as we have previously mentioned, have expanded distribution with alternative channels. Brazil did return to volume growth as it ended its back-to-school season in Q1 due to the strength of its premium notebooks and products with popular licenses. We were encouraged by the start of the year in Brazil and are pleased with the work our team is doing to enhance the value we offer in our product portfolio. In the international segment, the bright spot was computer and gaming accessories. which grew mid single digits in the quarter driven by a large B2B computer accessory sale and our international expansion in gaming. Sales of office products remained sluggish in the segment across most markets. Our share is stable and we continue to be leaders in bringing innovative solutions to our customers. In 2025, we are introducing several exciting new products that support the hybrid work environment and our ergonomics product line. We also made a small acquisition in the Australia and New Zealand markets that expands our product portfolio and gives us greater scale in that region. Now let me touch on our global technology accessories businesses, Kensington and PowerA. Kensington had a strong quarter with mid single digit growth. As expected, sales for our PowerA brand were down in the first quarter due to aging consoles and low consumer spending trends, as well as the overall gaming accessories category being down almost 20%. We are excited to support the Nintendo Switch 2 launch, which is expected to be in June, with several new licensed products. We expect gaming accessories sales to be down in the first half before rebounding later in the year as our new products gain traction in the market. Now let me touch on the progress we are making to improve our revenue trends. We continue to be energized by the response from our channel partners on our initiatives. I previously mentioned we are expanding our ergonomics line in the international segment, which has been a highly successful endeavor for us in some of our EMEA markets. We are evaluating other countries and channels to introduce these innovative new products. In Brazil, We have repositioned key products with features and prices to meet a more constrained consumer as we aim to maintain our category-leading position in student note-taking. We are looking for additional opportunities to expand our share with existing and new channel partners through new product introductions and category-leading service. We continue our strategic focus on optimizing our cost structure, realizing more than $7 million in savings in the quarter. building upon the $25 million of savings achieved in 2024. In response to the increased uncertainties, we are deferring most discretionary spending and pausing CapEx spend except for new product development and certain IT projects until we have a firm understanding of the impact of tariffs on consumer and business spending. I am confident that we are taking the right actions to protect and reposition our business as we navigate this dynamic period. 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. As Tom mentioned, first quarter sales were in line with our outlook, and EPS was better than our outlook. In the first quarter, the overall demand environment remained soft, as discretionary spending by both consumer and business remained constrained due to the heightened uncertainty in the markets. Reported sales in the first quarter decreased approximately 12%. Comparable sales, excluding foreign exchange, were down 8% versus the prior year. The sales decline was due to lower volumes globally. Gross profit for the first quarter was $100 million, a decrease of 10%, with the margin rate expanding 60 basis points. This improvement reflected a favorable mix of sales as well as cost savings from our footprint rationalization program. SG&A expense of $93 million was down versus the prior year as cost reduction actions were partially offset by higher inflation and merit. Adjusted operating income for the first quarter was $7 million versus $16 million a year ago. Now let's turn to our segment results for the first quarter. In the America segment, sales declined 12% and comparable sales declined 8%. This decline was due to lower sales of technology accessories and office products. Early back to school shipments were higher as certain customers took delivery earlier than last year. This shift will reduce second quarter sales. The Americas adjusted operating income margin for the first quarter decreased 40 basis points to 5.8% compared to the prior year, as our higher growth margins and cost savings were more than offset by fixed costly leveraging from lower volume. Now let's turn to our international segment. For the first quarter, comparable sales declined 8% as the demand environment remained soft for our business essential categories. This was somewhat offset by growth in technology accessories, driven by the large B2B sale that Tom mentioned. International adjusted operating income margin for the first quarter decreased to 6.7% due to volume declines and fixed costly leveraging, as well as higher foreign exchange and inflation. In the quarter, we generated free cash flow of $3 million, which was in line with our expectations, but as anticipated, down to the prior year due to the timing and performance of our sales in Brazil for their back to school season. At quarter end, we had almost $236 million available for borrowing under our revolver, which is more than adequate for our needs. We finished the quarter with a consolidated leverage ratio of 3.65 times well below our four and a half times covenant ratio. During the quarter, we returned $15 million to shareholders in the form of share repurchases, while also using $7 million to support our dividend. While we continue to believe a balanced capital allocation is appropriate, in the near term, we will be focused on paying down debt. The dynamics of the changing tariff landscape have caused the current economic environment to be uncertain. Given this uncertainty, we are not providing full-year guidance until we gain more clarity. Customer demand, price elasticity, and various tariff scenarios, as well as the outcome of changing or sourcing locations, makes it difficult to predict our sales volume beyond the second quarter. In certain circumstances, we are seeing customers limit purchases as they lower inventory levels and, in some cases, are pausing purchases until there is greater clarity on tariffs and consumer demand. As Tom said, we are uniquely positioned to accelerate our sourcing to lower cost countries due to the initiatives put in place prior to the tariff announcement. By the end of 2025, there will remain an insignificant amount of high tariff China sourced products, which will represent slow moving, low volume, and secular declining categories. Given our broad and diverse product portfolio, we will take advantage of this opportunity to rationalize our skews and offer item substitutions for high cost products. In addition, the teams have passed price and anticipate more pricing actions may be needed. We are providing an outlook for the second quarter based on what we currently know. We have assumed that sales will be impacted by muted consumer and business demand. The second quarter will be impacted by changes in buying patterns for back to school. There were significant back to school purchases in the first quarter, which were pulled forward in anticipation of the tariffs. We are also anticipating that orders may be delayed or canceled as customers wait to gain additional clarity on demand. For the second quarter, we expect reported sales to be down eight to 12% with a lessening foreign exchange impact from the weakening of the US dollar. We anticipate adjusted EPS to be in the range of 28 to 32 cents. Even though the current year poses challenges We remain confident in the long term future of our company and our ability to navigate this dynamic period. We have a strong balance sheet with no debt maturities until 2029 and a long history of productivity gains and cost management. We continue to anticipate longer term that we can grow sales modestly from organic and inorganic initiatives with a target growth margin rate of 33 to 34% and consistent cash flow generation. Now let's move on to Q&A, where Tom and I will be happy to take your questions. Operator?