Acco Brands Corporation

Hello, everyone. Thank you for joining us and welcome to ECHO Brands' second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Chris McGinnis, Senior Director of Investor Relations. Chris, please go ahead.

Thank you. Good morning and welcome to the ACCO Brands conference call to review our second quarter results. Speaking on the call today is Tom Tedford, President, Chief Executive Officer of ACCO Brands, and Deb O'Connor, Executive Vice President and Chief Financial Officer. 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, bargain purchase gain, unusual tax items, and other non-recurring 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 financial measures. Four looking statements made during the call are based on the beliefs and assumptions of management based on the information we have at the time the statements are made. Our four 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 four 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 thank you for joining us today for ICO Brands second quarter earnings call. Last night, we reported second quarter results with sales and adjusted EPS exceeding our outlook. We are pleased with our first half performance, reflecting the results of our multi-year cost reduction program and our renewed focus on commercial excellence and strategic growth initiatives. including the recent acquisition of Epos. Our work integrating Epos is progressing as planned and we are pleased with the results in the quarter. Based on the first half performance, we are raising our full year outlook for both sales and adjusted EPS while maintaining a prudent view of the second half of the year. Our outlook reflects the seasonally adverse product and geographic mix in the back half of the year as well as an uncertain global operating environment. Deb will review the details of the drivers of our revised annual outlook. Second quarter consolidated sales grew 5%, ahead of our expectations, driven by strong performance in the Americas segment, solid contribution from the EPOS acquisition, and favorable foreign exchange. In the Americas segment, sales benefited from strong back to school placements in North America and solid growth in Mexico. This more than offset weak industry demand in technology peripherals, as well as soft demand in Brazil. North America back to school is an important season for ACCO Brands, and product sales and margins are recovering from the tariff disruption a year ago. Our focus on creative product solutions, strong supply chain support, and compelling value for our consumers has been well received by our channel partners. In Latin America, sales are mixed. were strong performance in Mexico, offset by weaker sales in Brazil due to a soft economy, which has created hesitancy in customer purchasing and an adverse product mix. Over the past several quarters, we've adjusted our product assortment, go-to-market strategies, sales incentive plans, and pricing where appropriate to better align with consumer needs. In the international segment, sales growth was driven by the EPOS acquisition and favorable foreign exchange. Demand in Australia and EMEA was weaker than expected due to geopolitical and economic conditions. EMEA sales were also negatively affected by a systems upgrade at our largest distribution center in Europe. That upgrade is now behind us with performance improving in June. Sales for technology peripherals were soft in the second quarter. The difficult demand environment for peripherals reflects cautious spending from end users due to elevated hardware costs, constrained memory chip availability, a soft console gaming market, and shifts in enterprise investments to AI. We expect these trends to continue in the second half of the year. In gaming accessories, second quarter comparisons were difficult due to last year's initial load-in of accessories for the Nintendo Switch 2 launch. We remain optimistic in our PowerA brand and believe we are well positioned to benefit when industry dynamics improve. We expect the fourth quarter release of Grand Theft Auto VI to drive positive sales momentum in gaming accessories categories. In computer accessories, industry trends worsened as global PC shipments declined. Our computer accessory categories were directly impacted by lower hardware demand. ePost integration remains on track. with second quarter sales ahead of our expectations. We continue to expect approximately 80 million in sales in 2026 and $15 million in cost synergies in 18 months from the closing date of the acquisition. While the near-term demand environment is challenging, the targeted technology peripheral categories in which we compete offer attractive long-term growth opportunities. We continue to execute our strategy to expand our global market shares and enhance our technology peripherals portfolio through organic and inorganic initiatives in these large and growing categories. Turning to cost optimization and productivity, we continue to manage costs well and expect to realize our targeted $100 million cost reductions this year. In summary, I am pleased with the second quarter results and the execution against our value enhancing initiatives. We are making meaningful progress on our strategy to transform ACCO Brands into a more focused, efficient, and growth-oriented company. I will return to answer your questions. Now let me turn the call over to Deb.

Thank you, Tom, and good morning, everyone. We were pleased to deliver second quarter sales and adjusted EPS above our outlook. Reported sales in the second quarter increased 5% and comparable sales were down 2%. Growth in the quarter was driven by the EPOS acquisition and favorable FX. Comparable sales reflect growth for back-to-school products in North America as well as strong performance in Mexico. This was partially offset by soft demand in Brazil and in technology peripherals. Our international segment experienced a weak quarter in most markets. Adjusted gross profit for the second quarter was $138 million, an increase of 6%, with the margin rate of 33.1%, which was up 20 basis points. The margin rate increase was mostly attributable to cost savings. Adjusted SG&A expense of $89 million is up compared to the prior year, but the increase is entirely due to the EPOS acquisition. We continue to have strong cost mitigation in place with savings more than offsetting cost inflation. Adjusted operating income for the second quarter was $48 million up versus the prior year, reflecting cost savings partially offset by fixed cost deleveraging due to organic volume declines. The integration of EPOS remains on track and our full year outlook includes $80 million of 2026 sales. As we previously mentioned, EPOS has a higher gross profit rate than our consolidated average, but we expect it to be neutral to adjust the EPS for the year. We remain on track to deliver the outlined $15 million in cost synergies within 18 months from the date of the acquisition. Before moving to the segment results, let me provide an update on the status of our tariff refunds. We recently submitted claims for $20 million of refunds related to phase two, which we expect to receive in 2026. We will submit an additional claim of $5 million expected to be received in 2027. Our actual results and our outlook does not assume any benefit from these two claims. We are accounting for this benefit as a gain contingency, which delays our recording of the refund until receipt is assured. Let's turn to our segment results for the second quarter. In the America segment, sales were up 6% with comparable sales up 2%. We had good growth in learning and creative in both North America and Mexico, which was partially offset by softer demand in Brazil and in our core office and technology peripheral products. We now expect sales of back to school products to be up mid single digits for the full season. The Americas adjusted operating income was $56 million in the second quarter, up approximately $13 million with the margin rate improving 380 basis points to 21.2%. The margin rate improvement was driven by stronger volume and cost savings. Remember that prior year results were impacted by tariff related disruption and the current year margin rate is comparable to the 2024 rate. In the international segment for the second quarter, sales were up 4%, with comparable sales down approximately 9%. Demand in EMEA in Australia was soft due to purchasing hesitancy related to geopolitical and economic factors. In addition, the planned EMEA distribution system upgrade disrupted our supply chain and customer deliveries, which also negatively impacted sales. This disruption is behind us and we saw improved performance in June. International adjusted operating income was $4 million with the margin rate at 2.4%, both down versus the prior year. The second quarter is seasonally our weakest margin quarter due to lower sales and volume. This was compounded by the softer demand. Historically, the second half has had stronger sales and improved margin rate. 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. Year to date free cash outflow was $39 million comparable to last year and in line with our plan. While inventory was up $14 million compared to last year, this was entirely due to the EPOS acquisition as underlying organic inventory was down. During the quarter, we returned $7 million to shareholders in the form of dividends. At quarter end, we had approximately $205 million available for borrowing under our revolver and finished the quarter with a consolidated leverage ratio of 4.3 times, which is well below our debt covenant. Just a reminder that the second quarter is our peak quarter for borrowing and we anticipate leverage to be within the range of 3.7 to 3.9 times at year end. Now let's move to the outlook. For 2026, we are raising our expectation for both full year reported sales and adjusted EPS. We expect reported sales to be up within a range of 2 to 5% and adjusted EPS to be within the range of 87 to 91 cents. This outlook reflects a prudent sales expectation in the back half of the year as we are forecasting weaker demand due to geopolitical and economic factors. In addition, the second half sales has a greater mix of lower growth traditional office products. We do anticipate a lower gross profit and operating income margin compared to prior year due to higher inflationary costs and the fact that our pricing efforts will lag cost increases. Free cash flow is expected to be within the range of $75 to $85 million with $24 million in restructuring payments and $15 million in CapEx. Lastly, as I previously said, We anticipate a consolidated leverage ratio within a range of 3.7 to 3.9 times. For the third quarter, we expect reported sales to be within a range of down one to up 2%. We expect adjusted EPS to be within a range of 17 to 21 cents. While the current environment remains dynamic, we are confident in the future of our company. We have no debt maturities until 2029, and a long history of productivity savings and cost management. Our strategy pivot is an exciting opportunity for Aqco Brands to accelerate growth and potential value creation for our shareholders. Now let's move on to Q&A where Tom and I will be happy to answer your questions. Operator.

We will now begin the question and answer session. If you would like to ask a question, press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question from the line of Greg Burns with Sedoti. Greg, your line is open. Please go ahead.

Morning. Could you just talk about, I guess, the performance you're seeing in the back-to-school channels, what you're seeing there, how the inventory levels look in the channel, and what your sense is for for how the retailers are approaching the back-to-school season. Thank you.

Greg, good morning. This is Tom. We're pleased with the early reads that we see in back-to-school. Our sell-in was strong. We see the sell-through or sell-out of our products again early in the season to be in line or better than our plan. And our brands are taking share in the first few weeks of back-to-school. Our inventory positions are in a good spot. Our supply chain teams work very closely with our customers to ensure that we set on time. Our sell-through targets are consistent to prior year and we came out of the season last year fairly clean across most retailers. So we're cautiously optimistic about the season and we'll see. This is an important few weeks of selling for our brands in retail.

All right, thanks. And with the ePost acquisition, I know you have a line of headsets through PowerA. I think it's Lucid Sound brand. Is that like something that you license? And what are the opportunities for you to leverage ePost through PowerA in gaming?

Good question. Lucid Sound is not a licensed brand. It's an own brand for Akko Brands. It's largely dedicated to retail and it's exclusively supporting gaming consumers. Epos has a bit of a different consumer set. It's predominantly focused on enterprise. It is a brand that has unified certification certificates across Most of the solutions that are in the market today, including things like Microsoft Teams, Google Meet. So it serves a different purpose. It serves a different consumer. It's typically higher quality sound and audio solutions. So there are opportunities for us to expand the EPOS brand to serve more customers, more consumers within our portfolio. We're early in the integration efforts. We have focused the initial integration efforts on ensuring that we're doing no damage to the company. So the IT infrastructure, getting the synergy conversations complete and behind us. We just now are starting to focus on the growth opportunities and growth synergies. So we're excited about what the potential is for the EPOS product portfolio and capabilities within our organic product portfolio. But we're early in identifying those growth opportunities. As we said in our prepared remarks, we're very pleased with EPOS in the first few months of ownership. They've overachieved our expectations. We've inherited a great team. really strong capabilities, a great product portfolio. So we're excited about the future.

Great. Thank you.

Your next question from the line of Kevin Steinke with Barrington. Kevin, your line is open. Please go ahead.

Great. Thank you. So, you know, you raised your four-year guidance. for sales and adjusted EPS, despite some cautious comments about the second half of the year. So is that just that raise being driven by the stronger back to school season or kind of any other factors that you would point to?

No, I think that's right, Kevin. I think, you know, we've had a strong first half and it flowed through to the full year. Our expectations for the back half are fairly consistent with what we've been saying all along, but I do think we've had a stronger first half than we had previously provided.

OK, makes sense. And you talked about the softer industry demand for technology peripherals. I think, you know, previously you had made some comments about a pretty good pipeline for computer accessories. And did you think that demand eventually comes back? Or I know you're putting a lot of emphasis on the technology peripherals strategically going forward. So maybe just, you know, what the pipeline looks like or what your view is longer term on that.

Those categories. Yeah, good question, Kevin. So we continue to be optimistic about the future growth opportunities within our technology peripheral categories. Long term, we see them as very attractive growth opportunities for the company. We think our brands have a strong position in the categories in which we compete in that we can leverage for growth. Our pipeline has been disrupted in the short term within our enterprise businesses. predominantly supported by our Kensington brand globally. Enterprise spend has slowed, particularly in the second quarter. The beginning of the year was consistent with our expectations in the planning process, but Q2 saw a significant slowdown in some of our end user demand and our pipeline, while still robust, our close rate is just slowing. We think those deals are just getting postponed as Enterprises are trying to absorb the additional hardware expenses that they're experiencing, and they're navigating a fairly dynamic AI environment that's taking up operating budgets that were probably initially focused on accessory spend. So there's a number of dynamics that in the short term are disrupting demand, but we do think long term these are very attractive categories for our company to compete in.

Great, that's helpful. You mentioned some better than expected performance in Mexico. Maybe any factors, what was driving that strength there?

Yeah, so last year we made some aggressive changes in how we went to market, including some aggressive price increases. We have really looked at that business very strategically. looked at how we go to market, our pricing in our core categories, our sales incentive plans, our product assortment, and I think it's just a combination of a number of changes that we've made strategically in the market. Our team there is doing a great job of executing against our strategies, and you can see it in the results.

Okay, thanks for taking the questions. I'll turn it back over. Thank you, Kevin.

Your next question from the line of Hale Holden with Barclays. Hale, your line is open. Please go ahead.

Good morning. I had just two questions. The first one is you guys are doing really well with the integration of the EPOS acquisition. And I was wondering where that kind of leaves you in terms of future M&A pipeline or ability to integrate another acquisition that size soon, or would you need more time?

Yeah, it's a good question, Hale. So we certainly want to be careful about our pipeline. We're excited about opportunities we see in the market. We are getting close to the completion of the internal integration of EPOS and starting to shift our efforts towards growth initiatives and growth synergies. but we do think the pipeline is attractive. We think in the near term, there may be opportunities for us, but we obviously can't comment on any specifics, but we're close to the end of the integration efforts for EPOS and should be in a position to do something again relatively shortly. Great.

And I just wanted to kind of pull the thread on the, I guess Kevin's question before me. So just the thought pattern there is that So you may have seen or you may start seeing hardware really being impacted by these shifts and these cost increases and disruptions.

Accessories, particularly our accessories, tend to flow along with hardware deployments. And so with PC sales being down, it's impacting our accessories attach rates.

Great.

Thank you very much. Thank you.

Your final question from the line of William Reuter with Bank of America. William, you are now unmuted. You may go ahead.

Good morning. So, Deb, you mentioned some incremental inflationary impacts. How has that cost increased this year? And I guess how much greater cost do you expect versus your expectations at the beginning of the year?

Yeah, so we started seeing some in the second quarter that were a little bit greater. You know, I think as we look to the back half, There's a lot of factors that weigh into how much inflation will actually come through, how long the conflicts continue, and how long fuel is questionable. So we've, again, as I said, kind of programmed the back half very comparably to what we've done in the past. Our price increases generally lag when you're thinking of an international segment and some of the global entities around the world. So we're kind of comparable to where we were, except for we're a little more hesitant as we see these conflicts going longer.

Got it. I guess you mentioned the timing of price increases. Are you having to meaningfully raise your prices as a result of these higher input costs?

So our pricing strategy is different by market and geography and product category. So we're looking at each one of our categories, each one of our geographies, assessing the ability to pass through price. We don't want to harm demand in an environment that's already got a cautious consumer and business spending dynamic that we're trying to navigate through. But we do anticipate having to push through additional cost increases globally, and those will differ by market and differ by product category.

Got it. I'll leave it at that. Thank you.

Okay. Thank you.

There are no further questions at this time. I will now turn the call back to Tom Tedford for closing remarks.

Thank you everyone for joining us. We are pleased with our second quarter results and expect the combination of the EPOS acquisition, momentum from our growth initiatives, and positive foreign exchange to drive revenue improvement in 2026. Our commitment to operational excellence through continued cost management and productivity programs position us to deliver improved profits and cash flow. With our optimized operational structure and momentum with leading brands, we have a strong platform to generate consistent free cash flow while strategically repositioning ACCO Brands towards faster growing technology peripheral categories. I want to thank our ACCO Brands team for their dedication and good work this quarter. We appreciate your interest in ECO Brands and I look forward to talking with you when we report our third quarter results in October.

This concludes today's call. Thank you for attending. You may now disconnect.