Acco Brands Corporation

Hello, everyone, and welcome to the Atto Brands Third Quarter 2025 Earnings Conference Call. My name is Ezra, and I will be your coordinator today. If you would like to ask a question, press star followed by one on your telephone keypad. If you change your mind, press star followed by two. We will be taking questions at the end of the presentation. I will now hand over to Chris McGuinness, Director of Investor Relations, to begin. Please go ahead.

Chris McGuinness, Good morning and welcome to ECHO brands third quarter 2025 conference call this is Chris mcginnis senior director of investor relations. Chris McGuinness, Speaking on the call today is Tom Tedford President and Chief Executive Officer of ECHO brands corporation time will provide an overview of our third 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 third quarter results and our outlook for the full year. 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 and intangible asset impairment charges and other non-recurring items and unusual tax items and include adjustments to reflect the estimated annual tax rate on 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 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 Tafford.

Thank you, Chris. Good morning, everyone, and welcome to ACCO Brands' third quarter 2025 earnings call. Last night, we reported third quarter sales that were slightly below our third quarter outlook. However, our improved operating structure enabled us to meet our adjusted EPS outlook and improve gross margins by 50 basis points. Sales in the quarter were challenged by softer demand globally and trade down in some of our categories. The slower implementation of tariff-related price increases and the timing of forecasted revenue that moved out of the third quarter give us confidence we will see an improvement in the fourth quarter. We are making excellent progress on our $100 million multi-year cost reduction program. realizing an additional $10 million in savings in the third quarter. That brings the cumulative program total to approximately $50 million. We remain highly focused on managing all global spending to preserve profitability and cash flow. I am pleased with our team's work to mitigate the impact of incremental US tariffs on our business. We believe we are well positioned to support our customers with our balanced and cost-competitive supply chain. We have implemented most of our price increases. However, the timing of those increases has lagged, impacting our outlook sales in the third quarter. We will see greater benefits from our pricing strategies in the fourth quarter. We closely monitor evolving trade policies and will take appropriate action, if needed, to mitigate the impact on ACCO Brands. Moving to our third quarter results. In the Americas segment, sales for the back to school season in the US and Canada finished in line with our expectations, down mid single digits. The decline was partially due to purchasing decisions by customers in response to tariffs early in the back to school season. Retailers continue to tightly manage inventory, resulting in minimal replenishment for the season. Our leading student note-taking brands, Five Star and Mead, grew market share in the season, highlighting the strength of our brands and the value they offer the consumer. In Latin America, sales were weaker than expected due to a constrained consumer as trade-down was prevalent in the quarter. In Brazil, we began shipping the important stocking orders for their back-to-school season at the end of the third quarter. although softer than expected as customers delayed making purchasing decisions. We remain cautiously optimistic about our expanded product offering and the back to school season in Brazil. In Mexico, sales trends improved during the quarter across most categories. In the international segment, demand was mixed with Europe being soft, partially offset by increases in Australia and Asia. In our office categories, while sales declined, we maintained our market position across the segment. Transitioning to our global technology businesses, Kensington computer accessory sales declined modestly in the quarter, reflecting delayed business spending. In the fourth quarter, we expect a return to growth driven by new product launches and a more robust end-user pipeline. In gaming accessories, PowerA sales declined in the quarter due to a combination of reduced demand for legacy consoles and timing for Nintendo Switch 2 accessories. We expect solid growth in the fourth quarter for the gaming accessories category. We are well positioned for the important holiday season as PowerA is the first officially licensed Nintendo Switch 2 wireless controller in the market. Over the next 12 months, we have an impressive pipeline of innovative new products across multiple categories, many of which will have exclusive IP. Our product roadmap is strong and will give us momentum as we go into Q4 and next year. Turning to our office essentials and learning and creative categories, global demand continues to be challenged. We have good syndication of our product assortment, however, the lower rate of sales is due to reduced demand in our core categories. We continue to refine our new product development approach to enhance our category positions, expand our assortment, and enter faster growing adjacencies like ergonomics and hybrid work offerings. We are optimistic this will improve revenue trends in the future. Let me highlight some of our new products that have been recently introduced. In EMEA, we are actively broadening our portfolio of lights-branded ergonomic and hybrid work solutions. Our innovative offerings have received multiple design awards and represent an area of strong sales growth for our European business. We are now evaluating expansion beyond EMEA and have high expectations for our enhanced ergonomic product portfolio. In the U.S., we have introduced the West Village line by Mead. West Village offers premium products at accessible price points designed to appeal to today's value-conscious consumers. The product portfolio features a selection of notebooks, time management products, and more, all of which have been positively received by our retail partners through GAINS syndication. Finally, we have successfully integrated the Bureau seeding acquisition and are evaluating geographic expansion opportunities beyond Australia and New Zealand. This is an exciting category and serves as a platform to expand into new geographies, as well as new product categories such as gaming seeding. As I conclude my remarks, we continue to monitor the evolving external dynamics that impact demand for our products. We remain committed to pivoting our business to higher growth categories while streamlining operations, optimizing our cost structure, and inorganically enhancing our product portfolio. I am confident our team and our strategy will better position ACCO Brands for profitable, sustainable growth. Before I hand the call over to Deb, I would like to thank the employees of ACCO Brands for their tireless efforts in support of our strategy. I am proud of our team and the work we are doing to transform our company. I will come back to answer your questions. Deb?

Thank you, Tom, and good morning, everyone. As Tom mentioned, third quarter sales were below the outlook we provided in August, while cost rationalization and strong controls led to adjusted EPS that was in line with outlook. Reported sales in the third quarter decreased 9%, including favorable foreign exchange impact of almost 2%. Underlying demand continued to be constrained by global macroeconomic factors, including consumer and business spending uncertainty and fluctuating tariff policies. As Tom mentioned, the timing of some forecasted shipment and the slower implementation of price increases in the US also negatively impacted sales versus our outlook for the quarter. Gross profit for the third quarter was $127 million, a decrease of 8%, with the margin rate improving 50 basis points to 33%. While the dollar decline was driven by lower volumes, the improvement in the rate was due to the progress on our multi-year cost reduction program, as well as some favorable timing items. SG&A expense of $87 million was down versus the prior year due to cost reduction actions and lower incentive compensation expense. Adjusted operating income for the third quarter was $39 million versus $45 million a year ago. The adjusted operating income ratio to sales has been impacted by the lower volume deleveraging our SG&A costs. Now let's turn to our segment results for the third quarter. In the America segment, comparable sales declined 12%. The decline is indicative of lower demand as well as weakness in Brazil and timing for Nintendo Switch 2 accessory sales. The Americas adjusted operating income margin for the third quarter was 14.4% ahead of last year. The margin rate in the quarter was positively impacted by cost savings. Now let's turn to our international segment. For the third quarter, comparable sales declined 7%. Underlying demand continued to be down in Europe, especially in Germany, UK, and France, which are our largest markets. International adjusted operating income was down just over a million dollars. The adjusted operating margin for the third quarter decreased to 10.2%, as the lower volume more than offset the benefit of pricing and cost savings. Let's move to cash flow. As a reminder of the seasonal aspects of our business, we are a user of cash in the first half, while cash flow is positive in the second half of the year. Year-to-date adjusted free cash flow was $42 million. This includes $17 million in cash proceeds from the sale of two owned facilities we announced in the second quarter. In addition, we paid down our debt by repatriating cash from Brazil during the quarter. Cash flow this year is lower, reflecting the EBITDA decline, as well as the significant new tariff costs paid upon receipt of goods. Our supply chain teams have done an excellent job reducing inventories, which mitigates the impact of incremental tariffs. During the quarter, we returned $7 million to shareholders in the form of dividends. Though a balanced capital allocation remains important, our primary focus will be paying down debt. At quarter end, we had approximately $271 million available for borrowing under our revolver and finished the quarter with a consolidated leverage ratio of 4.1 times. Now turning to the outlook, we are reaffirming our sales and adjusted EPS guidance for the full year. We do expect sales trends to improve in the fourth quarter, led by positive foreign exchange and growth in the technology accessories categories. However, overall demand trends remain constrained due to the evolving tariff environment and cautious consumer and business spending. As Tom mentioned earlier, we expect to see greater price realization in the fourth quarter to cover the incremental U.S. tariff costs. For the full year, we expect reported sales to be down 7 to 8.5 percent and adjusted EPS to be within the range of 83 to 90 cents. We expect adjusted free cash flow to be within a range of approximately $90 to $100 million, which includes the $17 million from asset sales. We anticipate a net leverage ratio of approximately 3.9 times at year end. While the current environment poses challenges, we remain confident in the long-term future of our company and our ability to navigate this dynamic period. We have no debt maturities until 2029, and a long history of productivity savings and cost management. Our strategy continues to focus on repositioning the company to grow sales modestly from organic and inorganic initiatives and consistently generate solid cash flow. Now let's move on to Q&A, where Tom and I will be happy to answer your questions. Operator?

Thank you very much. We will now open the Q&A session. If you would like to ask a question, press star followed by one on your telephone keypad. When prepping to ask your question, please ensure your device is unmuted locally. If you change your mind or your question has already been answered, press star followed by two. Our first question comes from Joe Gomez with Noble Capital. Your line is now open. Please go ahead.

Good morning. Thanks for taking my questions. Good morning, Joe. Hi, Joe. Thomas, the first question I want to ask here is you mentioned that you're confident to see improvement in the fourth quarter. And just seeing what's going on here, you read the headlines. I just want to know what underpins your confidence for fourth quarter?

Yeah, Joe, that's a good question. So there are a number of data points that we've reviewed and are improving confidence is because of those. So let's start with first our technology accessories business. It represents roughly 20% of our total portfolio, and it has been modestly down in the quarter in aggregate, and we expect that to return to growth. driven by two things. First is the holiday season and our support of the Switch 2 launch from Nintendo. We're seeing really good momentum in that business as we transition from Q3 to Q4 and feel confident that it will grow in the quarter. Secondly, our end user pipeline and our new product development product launches from our Kensington business is far more robust in Q4 than it has been in Q3 and previous quarters this year. So those two pieces of business, again, represent roughly 20% of our total, and we feel confident that both will return to growth in the quarter. The second point I'd like to just make sure you understand is our pricing actions took longer to implement than we anticipated. And so whatever that we thought was going to happen in Q3 has simply just shift from a timing perspective. The quantification of that is a little difficult to nail down, but we do believe that there was significant shift into Q4 from Q3 from price. And then finally, we had some timing of orders that shifted from Q3 into Q4. Those aren't in material. And those three things give us confidence that we can improve the rate of decline in the quarter.

Okay, thanks for that. And you mentioned in your opening remarks about, you know, trade down in some categories. I wonder if you could give us a little more color on that. Are we seeing, you know, a heightened competitive environment or just consumers trading down because of the economy or, you know, kind of maybe a little more color there, please? Hello.

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