ACCO Brands Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Everyone and welcome to the ACCO Brands Second Quarter 2023 Earnings Conference Call. My name is Emily and I'll be coordinating your call today. After the prepared remarks, there will be the opportunity for any questions, which you can ask by pressing star followed by the number 1 on your telephone keypad. I will now turn the call over to our host, Chris McGinnis, Senior Director of Investor Relations at ACCO Brands Corporation. Please go ahead.

Speaker 1

Good morning, and welcome to ACCO Brands' Q2 2023 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today are Boris Elisman, Chairman and Chief Executive Officer of Aqual Brands Corporation, who will provide an overview of our 2nd quarter results And an update on our 2023 priorities. Tom Petford, President and Chief Operating Officer, will discuss the back to school season, New product innovations and provide an update on cost savings initiatives and our soon to be released 2022 ESG report. Following Tom, Deb O'Connor, Executive Vice President and Chief Financial Officer, will provide greater detail on our 2nd quarter results And the outlook for the Q3 and full year.

Speaker 1

We will then open up the line for questions. Slides that accompany this call I've been posted to the Investor Relations section of acclbrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude transactions, integration, amortization and restructuring costs, a non cash goodwill impairment charge, The change in fair value of the contingent consideration related to the PowerA earn out and other non recurring items and reflects an adjusted tax rate. 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.

Speaker 1

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. Actual results could differ materially. Please refer to our earnings release and SEC filings for explanation of certain risk factors and assumptions.

Speaker 1

Our forward looking statements are made as of today, and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q and A session. Now, I will turn the call over to Boris Elisman.

Speaker 2

Thank you, Chris, and good morning, everyone. Thank you for joining us. Before we discuss the quarter, I'd like to begin with the announcement we made last night regarding Tom Catford becoming ACCO Brands' next Chief Executive Officer on October 1. He will also be joining the Board of Directors at that time. I could not be more pleased to announce Tom as my successor.

Speaker 2

Having had the pleasure of working with Tom over the past 13 years, I have utmost confidence in his ability to lead this company. To ensure a seamless transition, I will continue to serve ACCO Brands And all its stakeholders as Executive Chairman of the Board with my planned retirement in the first half of twenty twenty four. This announced transition follows an orderly multiyear succession plan that the Board and I put in place And it's exciting to finally share the news with all of you. Tom is exceptionally well qualified and prepared to lead HEICO brand I just entered a new phase of electricity transformation centered on driving sustainable organic revenue growth. Tom has demonstrated success in every position held during his career at Apple Brands, most recently serving as President Chief Operating Officer, he plays an integral part in executing on our transformational strategies and growth initiatives.

Speaker 2

I'm confident that under Tom's leadership, Apple Brands will continue to drive growth Thank you, Tom. Congratulations, Tom. Now let me discuss our 2nd quarter results. We are pleased with our results for the 2nd quarter With sales above the midpoint of our outlook and adjusted EPS significantly above our outlook. These results reflect the strength of our brands and solid execution by our team As well as the actions we have taken to transform our business, expanding our product categories, We're working on our geographically, bringing new innovative consumer sense of products to market And streamlining our cost structure.

Speaker 2

We made significant progress in our margin recovery efforts in the 2nd quarter With gross margins increasing at 4 50 basis points and adjusted operating margins improving by 220 basis points year on year. Our pricing, productivity and restructuring actions I've gained greater traction throughout the first half of twenty twenty three. While we're pleased with our strong start to the year, We are more cautious on the second half demand environment due to higher interest rates and prolonged economic uncertainty. We expect consumers, businesses and our channel partners to remain prudent with a discretionary spending and inventory In the second half, we will continue to prioritize margin recovery and improve free cash flow As we manage through this uncertain economy, 2nd quarter comparable global sales It's down 5% versus last year. In Latin America, they were down due to difficult comparisons, A weaker macroeconomic environment and a more normalized supply chain in 2023.

Speaker 2

Last year, retailers were buying ahead of the season in greater quantities because of COVID induced supply chain issues. In this year's Q2, net of full sales were lower, as better than expected. We also saw a return on growth The current economic backdrop of higher inflation and interest rates Continued to lead to softer consumer and retailer demand. And we're now lapping the benefit I'll return to work trends as office occupancy rates have stabilized at about 50% in the U. S.

Speaker 2

Lastly, sales of our computer accessories category continues to be negatively impacted by weaker IT spending. North America operating margin improved 200 basis points due to our cumulative pricing and cost actions. In EMEA, the weak macroeconomic environment in the region continues to challenge demand From both our consumer and business customers. Despite this decline, the combination of our pricing and cost initiatives It helped to significantly restore our profitability as our adjusted operating margin expanded 610 basis points And adjusted operating income more than tripled. Last year, EMEA was better at very high inflation We've depressed our margins.

Speaker 2

I'm very pleased with our margin recovery in that segment. Within our international segment, sales were down a bit in what is a seasonally small quarter And impacted by lower demand in Asia and Australia due to a softer macroeconomic environment. Latin America continues to perform well, And we expect sales growth in the segment to resume in the second half of the year on strong demand for our Latin America back to school offering. Due to seasonality, our adjusted operating margin was down very slightly in the Q2, but up a healthy 2 45 basis points for the 1st 6 months. We remain confident in our outlook for stronger margins in the second half.

Speaker 2

Before touching on our 2023 key priorities, I want to update you on our global technology accessory sales, This consists of our computer and gaming accessories products. Gaming accessories posted growth in the 2nd quarter, Aided by a combination of the greater supply of chips for wireless gaming controllers, new product launches In a stronger slate of AAA game releases, we expect wireless chips to be readily available for the remainder Our supply chain challenges have been delineated. We remain focused on our international expansion of BME accessories, But I'm experiencing a slower rollout than expected. We are making progress and remain confident in the long term growth opportunity we've been doing successfully In both our EMEA and international segment, we expect VIN and traffic to grow in the second half. Computer accessories sales were weaker than expected.

Speaker 2

The slowdown we experienced in the Q1 did not show any improvement in the Q2. The business has continued to be positive about the high risk spending in the current macroeconomic environment. We expect computer accessories to show sequential improvements throughout the remainder of 2023, given new product rollouts At a lower level than we previously anticipated. As a result, we no longer expect the category to grow for the year. At the start of the year, I shared with you our 4 key priorities for 2023 and they are Restoration of our gross margins, profitable management of our top line, Continued investments in our brands and new products, the tight management of our expenses and inventory.

Speaker 2

We continue to make progress on all 4 in the Q2. The recovery of our gross margins has been our top priority, And the combination of cumulative global price increases and cost savings actions has allowed us to recover much of the lost profitability The high levels of inflation we have experienced over the last few years. As I said earlier, we're seeing great attraction From our absence through the first half of twenty twenty three, which gives us confidence that these gains are sustainable over the longer term. We continue to manage our top line well in a challenging global economic environment. This is a testament to the strength of our brands, Our broad assortment of consumer design products and our superior customer service capabilities.

Speaker 2

On the expense line, we did a good job managing headcount and continue to closely monitor our discretionary spending. We also reduced our inventory by 16% or about $75,000,000 versus the prior year, This is driving improvement in our operating cash flow. Before I turn it over to Tom, I want to say I'm encouraged Our results in the first half of twenty twenty three. We're executing well on our plan, remain confident in our ability to drive long term Sustainable and profitable organic revenue growth as global economies improve. We have the right team in place to weather difficult economic environment We are well capitalized with no debt maturities until 2026 and low fixed interest rate for over half of our outstanding debt.

Speaker 2

We expect to continue to generate consistent strong cash flow and will prioritize dividend payments and debt reduction in 2023. Now I will turn the call over to Tom to discuss back to school, new product innovations and update you on our restructuring initiatives And the upcoming ASP report. Tom?

Speaker 1

Thank you, Boris, and good morning, everyone. I am honored and excited to lead this standing organization and our talented and dedicated senior professionals. Following a great leader like Boris is a privilege And I thank Boris and our Board of Directors for their support in preparing me for this role. I'd like to thank Boris for its mentorship and on behalf of all of our employees recognized is outstanding leadership of ACCO Brands as our CEO. Forrest has been a transformational leader, keeping our people, Brands and customers at the forefront, while expanding ACCO Brands' geographic reach and product offering.

Speaker 1

As CEO, I am excited about the opportunity to work with our leadership team, the Board of Directors and all of the talented employees around the world At Afro Brands, as we enhance shareowner value by delivering against our key initiatives, I believe that our commitment to superior service to our valued customers, our innovative product offerings Supported by iconic category leading brands and our loyal consumers provide great opportunity We also have significant opportunities to simplify our operations and our cost structure. As we progress along our multiyear asset rationalization project, these efforts will be at the forefront of our leadership team's focus To drive value for our investors. 4th, congratulations on your upcoming retirement And we look forward to your continued support as Executive Chairman. Now let me transition to a few comments about the 2023 Back to school season. In North America, back to school had a good start as the timing of back to school shipments was earlier than anticipated.

Speaker 1

Our expectation is these sales are a shift from Q3 and not incremental Through our North America back to school season. While we believe our channel partners will rely more on replenishment this back to school season, We now expect them to manage their inventory more tightly. This is changing our sales expectations for the North America back to school season From approximately flat to modestly lower. If channel sales are better than anticipated, We are uniquely positioned to support our retail partners because of our domestic production capability. In our international segment, we have seen strong growth for our back to school offering in Mexico, which also falls into the 2nd and third quarters.

Speaker 1

Early indications for back to school demand in Brazil, which is in the 4th and third quarters is also strong And suggest another year of solid growth from our Latin America active school business. Moving to product innovation and new product introductions, we continue to build on our momentum and believe our investments in innovation and new product development We'll be key to delivering organic growth. In our technology accessories business, the Kensington We've recently awarded 3 Red Dot Design Awards, which recognize the innovative design solutions in our new computer accessories offering. In EMEA, we have introduced an exciting line of life ergonomic product solutions that support work from home environment. This sales have exceeded our expectations.

Speaker 1

The lines further diversifies our product portfolio to more consumer focused products. This is an example of key pivots our product teams are making as hybrid work is here to stay. In gaming accessories, we recently introduced new products in the controller and cases categories in conjunction with Nintendo's successful release The Legend of Zelda video games, which are contributing to positive sales growth in gaming accessories. Moving to our restructuring initiatives, we continue to see benefits from our 2022 Q4 restructuring actions And are on track to deliver the expected $13,000,000 in annual cost savings. Year to date, we have recognized $6,500,000 in savings.

Speaker 1

In EMEA, the facility closure We announced in the Q3 is expected to be finished by the end of the Q3 with the savings to come in 2024. Last month, we announced the closure of a small assembly operation in North America. We continue to analyze our global footprint for opportunities for We also remain on track to deliver another $15,000,000 of incremental savings From our ongoing productivity initiative. Finally, we remain committed to our ESP initiatives and goals. We will soon release our 2022 ESG report.

Speaker 1

In it, we detail our progress towards a better tomorrow, Highlighting the focus on our people, our products and the planet. I encourage you to read it when it is released. Today, I want to highlight our employee safety record as we have been recently recognized as one of America's safest companies By DAS Today, a leading environmental, health and safety publication. In addition to this well deserved award, Our City, New York factory and distribution facility just celebrated a 1000000 hours worked safely. I'm very proud of our team's commitment to a safe work environment and the recognition that ACCO Brands has received I will now hand it over to Deb, and we'll come back to answer your questions.

Speaker 1

Deb?

Speaker 3

Thank you, Tom, and good morning, everyone. I just want to take a moment on behalf of the executive leadership team To thank Boris and to congratulate Tom on being our next CEO. When we last spoke in May, We highlighted a slow demand environment due to the current macroeconomic backdrop. Despite this environment continuing in the second quarter, We were able to deliver our expected level of sales. We also continue to make progress in recovering our lost margins From the extreme inflation that challenged the company's margin profile over the last 2 years.

Speaker 3

Our margin profile significantly improved in the second quarter, Which allowed us to deliver adjusted EPS above our outlook. In the Q2 of 2023, Reported sales decreased 5% versus the prior year. Comparable sales, excluding foreign exchange, were also down 5% First of the strong prior year when comparable sales grew 5%. The sales decline was due to lower volumes across all three of our operating segments, more than offsetting global price increases. Gross profit The Q2 was $164,000,000 an increase of 10% despite lower sales as gross margin improved 4.50 basis On the cumulative effect of our Pricing and Cost Reduction Act, adjusted SG and A expense of $98,000,000 Was up from $92,000,000 in 2022.

Speaker 3

Adjusted SG and A as a percent of sales increased 2 30 basis points 19.9 percent as strong cost controls were more than offset by increases in incentive compensation expense And deleveraging from the lower level of sales. Adjusted operating income was $66,000,000 up 14% Compared with the $58,000,000 last year. Adjusted EPS was $0.38 versus $0.37 in 2022, As our growth in adjusted operating income was largely offset by increases in interest and non operating pension expenses. Now let's turn to our segment results. North America reported sales declined 5% and comparable sales were down 4%, As volume declined more than offset our cumulative pricing actions.

Speaker 3

Sales in the second quarter were impacted by lower business Retailer demand due to the weak economic environment as well as declines in our computer accessories category due to softer IT spending. North America adjusted operating income margin increased 200 basis points to 20.7% From the prior year's Q2, driven by pricing, improved mix and cost savings actions. The Q2 is typically the highest revenue quarter in North America and benefits from the economies of scale. Now let's turn to EMEA. Both reported and comparable sales for the quarter were down about 9% to $126,000,000 mainly due to volume declines.

Speaker 3

Demand continues to be impacted by the overall environment in the region, challenging both consumer and business customers. Sales of technology accessories declined in EMEA as well, reflecting industry wide trends. Market shares in the region remain stable, But we have seen some trade downs to our lower priced offering. In the Q2, EMEA posted adjusted operating income of $9,500,000 a significant increase from the $2,000,000 a year ago. The operating margin rate improved 6 10 basis points from the prior year to 7.6%.

Speaker 3

The improvement in adjusted operating income was due to our pricing and cost reduction actions. Moving to the International segment, Reported and comparable sales in the 2nd quarter decreased 2%. The decline was due to lower volumes in Asia and Australia Due to a weaker economic environment and lower sales of technology accessories, which more than offset price increases and growth in Latin America. The International segment posted adjusted operating income of $8,000,000 essentially flat to the prior year. Listen to cash flow and balance sheet items.

Speaker 3

Due to the 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, adjusted free cash flow was a use of $45,000,000 versus a use of $96,000,000 a year ago. The improvement was driven by improved working capital management As we lowered inventory levels by 16% versus the prior year and had lower prior year incentive payout. We ended the quarter with a consolidated leverage ratio of 4.3 times, well below our 5 times covenant ratio And now expect to end the year with a range of 3.3 times to 3.5 times lower than previous expectations. Longer term, we are still targeting 2 to 2.5 times.

Speaker 3

At quarter end, we had 4 $4,000,000 of remaining availability on our $600,000,000 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 total gross debt of $1,085,000,000 over $100,000,000 lower than the prior year period, And our cash balance was $82,000,000 Turning to our outlook. We are providing a 3rd quarter outlook and updating our full year guidance for 2023. For the Q3 of 2023, We expect reported net sales to be flat to down 3%, which includes a positive 4% benefit from foreign exchange.

Speaker 3

We expect adjusted EPS of $0.21 to $0.24 To To provide context on our quarterly margin profile, historically gross margins in the Q3 has sequentially decreased from the 2nd quarter To the changes in customer and product mix, this Q3, we expect our gross margins to follow that similar trend With an expectation of a year over year improvement in the gross margin rate. Additionally, in 3rd quarter, SG and A costs are expected to be higher than the prior year due to higher marketing costs to support back to school and increased incentive compensation. 3rd quarter interest and non operating pension expenses are also expected to negatively impact adjusted EPS by $0.03 compared to last year. For the full year, we are updating our expectations for reported net sales to be within a range of down 1% Down 3%, which includes a positive 1.5% benefit from foreign exchange. We are lowering our expectations for comparable sales growth for the year to be down 2.5% to 4.5% Due to the prolonged economic uncertainty and lower sales of computer accessories.

Speaker 3

As Boris and Tom mentioned earlier, We are seeing cautious consumer and business sentiment and greater conservatism from our channel partners. This is creating greater uncertainty regarding demand in the second half, and we think it is prudent to take a more cautious approach with our sales outlook in this environment. Interest expense has increased since our last forecast due to more rate hikes by the Fed and ECB. Our expected mix of profitability by country has also slightly changed and modestly increased our expected tax rate. This is being partially mitigated by a more favorable impact from foreign exchange translation.

Speaker 3

Our gross margins are tracking ahead of our expectations, and we now expect full year gross margins in the range of 31% to 32%. We continue to target a long term range of 32% to 33%. In 2023, we We expect higher SG and A costs to be increases in incentive compensation versus the prior year. For the full year, we expect adjusted EPS Increased 4% to 8% to $1.08 to $1.12 Adjusted operating income is expected to grow at mid teen levels, Partially offset by higher net interest costs of about $14,000,000 and higher non cash non operating pension expenses $5,000,000 On Slide 15 of the earnings presentation, we highlight the improved operational performance And foreign exchange expectations, which are being offset by higher interest expense and taxes. The adjusted tax rate is expected to be approximately 30%.

Speaker 3

Intangible amortization for the full year Is expected to be $44,000,000 which equates to approximately $0.32 of adjusted EPS. We are now expecting our free cash flow to be at least $102,000,000 after CapEx of $20,000,000 And to end the year with a consolidated leverage ratio within a range of 3.3 times to 3.5 times. Looking at cash uses in 2023, we expect to continue to prioritize dividends and debt reduction. Now let's move on to Q and A where Boris, Tom and I will be happy to take your questions. Operator?

Operator

Thank Our first question today comes from the line of Greg Burns with Sidoti. Greg, please go ahead. Your line is now open.

Speaker 4

Good morning. I just wanted to get maybe a little bit more color on the state of channel inventories, Where they stand? Why do you think, it sounds like you're a little bit more cautious in terms of The outlook there, but I just wanted to get a sense of channel inventories, your view for maybe the potential for follow through orders. Is there potential upside in your guidance if maybe sell through is a little bit stronger than expected? Thanks.

Speaker 5

Okay, Greg. Hi, this is Tom. Let me take this opportunity to respond to that. So Channel inventories are down modestly versus prior year across most of our product categories. As it relates to back to school specifically, we're really early in the season, Greg, so it's hard for us to give great clarity as to how The season will finish.

Speaker 5

As I said in my comments, we're uniquely positioned to support demand if The customers' demand forecasts are greater than they're currently forecasting. Our customers are aware of that and we're always in a great position to chase Late season demand. Right now, it's just too early for BTS to comment on whether that demand will ultimately materialize or not. So we wait patiently and we're prepared in response prepared to respond if demand is better than forecasted.

Speaker 4

Okay. Thanks. And how far from peak From the prior peak or technology sales?

Speaker 6

Technology sales are down in the order of 20% or so from the prior peak. We expected things to recover throughout the year. We haven't seen that yet in the first half. So we've reduced our expectations for the full year. Now we believe that the sales For technology accessories will be down overall for the year, even though we do expect some sequential improvement due to Refresh cycles and upgrade cycles, but as I mentioned, they're just down too much to recover the full decline in the 1st year.

Speaker 3

Specifically for Kensington, right, Morris?

Speaker 6

Correct. Specifically for Kensington, yes.

Speaker 4

Okay. So when you view the outlook for that business, when you look at kind of the new product launches you're bringing to market, typical refresh cycles, do you feel like That business has kind of troughed to reach the low and you can build off of here or is there potential More downside if the macro worsens?

Speaker 6

No, absolutely. We think the worst is behind us. We think that Things will improve throughout the year. What's been happening on the IT side specifically is there's been a lot of Forward buying in the last couple of years, so people have bought a lot of PCs and accessories. So now We're all digesting what we bought.

Speaker 6

Now that's going to get annualized Really should analyze in the second half of this year and certainly in 2024. So we do expect an improvement in the remainder of the year.

Speaker 4

Okay. And you mentioned a slower global rollout for PowerA. What's driving that? Can you just maybe give us an update on your plans there?

Speaker 6

Yes. Greg, those are really what I call Kind of transitional issues when we notified our distribution partners of our intention to start selling direct, They basically stopped selling. So we have a little bit of a gap between them stopping their activities and our Global teams, own teams picking them up. So we're not as far along as we expected to be, but we're You're making up ground. I expect us to catch up real soon.

Speaker 6

So that's why we mentioned the international expansion a little bit slower than we previously anticipated.

Speaker 4

Okay. And has that dynamic I know you said PowerA revenues were up, but Has that impacted the top line for PowerAI that maybe you get an added boost to 2020?

Speaker 6

It impacted the international top line. So our growth would have been even higher. Growth in Q2 was driven by North America for PowerA, But certainly, as the international kicks in, in the second half of the year, we expect them to be a greater contributor to growth.

Speaker 4

Great. Thank you.

Speaker 1

Thanks, Greg.

Operator

Our next question comes from Joe Gomez with Noble Capital Markets. Joe, please go ahead. Your line is open.

Speaker 7

Good morning, guys. This is Josh Ozilber filling in JOGOMS.

Speaker 2

Good morning.

Speaker 7

Hi. So I just had a quick question on the SKU reduction. I just want to kind of get a progress on that. How much have you guys Reduce your SKUs and how much more are you guys willing to go on those?

Speaker 5

Yes. So we speak about this fairly frequently In our public statements, it's an ongoing process for us. We've accelerated that over the last As we've started to face the realities of the uncertain economic environment and changes in consumer preferences As the impacts of the prolonged work from home environment really are here to stay. So We I would say we are going to continue the work that we're doing. We feel like we're in a really good spot in terms of our SKU reduction We're not in a position to talk about the specific numbers, but we feel like we're making progress against our internal objectives With the primary focus being in 2 segments, North America and EMEA.

Speaker 7

Okay, perfect. And so forgive me if I missed this, but I saw that SG and A expenses Increased both really sequentially and year over year. Is that really all like incentive compensation or was there more or was it pushing that?

Speaker 3

No, that's right. It's pretty much the incentive compensation. Last year, We were relieving some of the incentive comp in the back half and second quarter. So you'll continue to see that

Speaker 2

into the back half.

Speaker 7

Okay. Great. And last thing for me, I guess. So I did you I saw that you said that you guys are obviously a little bit into the back to school years, but what has been the impression to the So far now, obviously it's still early, but is there anything that you guys noticed so far in the season?

Speaker 5

Yes. I think the first thing that I would say is, we've executed very well Early, right? The first step in back to school, a successful back to school is ensuring our channel partners have inventory At the right time. So our supply chain teams and our sales teams have done a great job of preparing our retail partners to have a successful back to school season. I will tell you that we have seen a bit of a mix shift on shelf.

Speaker 5

So we're seeing a little more offerings across The lower price point spectrums, we'll see how that translates throughout the season. As I mentioned in my prepared remarks And to the first question, we're really early, so it's dangerous to draw conclusions at this point in the season, but we watch it closely every single week.

Speaker 7

Okay, great. Yes, thank you guys for that.

Speaker 2

Thank you, Joshua.

Operator

The next question comes from Kevin Steinke with Barrington Research. Kevin, please go ahead. Your line is open.

Speaker 8

Thank you. Good morning. Just wondering if you could discuss the comparable sales Percentage change outlook by your 3 geographic regions as you think about it for the full year?

Speaker 6

Sure, Kevin. So for the full year, From a comparable sales standpoint, for total company, we expect sales to be down 2.5% to 4.5% at a comparable level. And then, in international, we expect growth, low double digit growth in international. And for both North America and EMEA, we expect mid single digit declines.

Speaker 8

Okay, perfect. Thank you. Could you talk about the factors that enabled you to Increase your free cash flow outlook a bit for full year 2023 as well as Be able to favorably revise your year end leverage ratio target?

Speaker 3

Yes. We have seen as you saw in the Q2 what we reported strong working capital management which has Allowed us to significantly improve over the prior year. I talked about it last time where we ended 2021 with high inventory that got paid for in 2022. And then in 2022, we ended up with lower inventory that we're not Leading to pay for in 2023. So we've seen some significant improvement in cash flows that should not go away.

Speaker 3

We've also got about $17,000,000 of incentive comp that didn't pay out this year, that paid out last year, all of those factors carry through to the full year. The improvement I would say in the cash flow is really from our continued expectation of that working capital management. We've done a nice job on receivables On payables and so we're anticipating at least $110,000,000 of free cash flow at this point. And our leverage ratio reflects that as well as slightly higher EBITDA as we look to that.

Speaker 8

Okay, great. Thank you. And also gross margin is trending Better than your original expectations. I believe you had talked about getting to 2021 levels in 2023, which a bit would have been 30.5% roughly, and now you're talking about 31% to 32% for the full year 2023. So can you talk about maybe what's Brendan, more favorably there than the original expectations on the gross margin front?

Speaker 6

It's all of the cumulative impact from the pricing efforts that we've done over the last 2 years and all of the Cost reduction and restructuring efforts that would have put in place, we're still seeing some inflation in goods Both in the quarter in Q2 and year to date, and we expect some inflation to continue for the remainder of the year. But the impact of the offsetting impact of all of the cost reduction efforts is driving better gross margins. We now Expect them to be in the 31% to 32% range for the year. So very nice job in just executing And recovering, it's really all recovering what we've lost over the last 2 years.

Speaker 8

Okay, great. And then lastly, you feel like you're fully caught up on inflation and Have you seen any moderation there? And what's the outlook for price increases?

Speaker 6

We think we have caught up with inflation in 2023. We don't expect, Certainly not in U. S. And Europe, additional price increases in 2023. We may do some tweaking in Our other regions, that's just driven by currency exchange rates, but not in our major geographies.

Speaker 6

Inflation It's down, but it's there. And today it's really being driven by labor inflation and that's permeating into pretty much every Of the P and L, and we expect labor inflation to continue into next year. So I do anticipate price increases next year, Because we do have to offset that inflation, but nothing in 2023.

Speaker 8

Okay, perfect. Thank you for taking the questions.

Speaker 6

Thanks, Kevin.

Operator

The next question comes from Hamed Khorsand with BWS Financial. Hamed, please go ahead. Your line is now open.

Speaker 9

Good morning. So first off, just about your comments about volume decline. Where does that go? Has the consumer moved away from buying your products or has completely moved away from the categories?

Speaker 6

There's a couple of things to that, Hamed. A big part of volume decline is driven by Our computer accessories business, we mentioned that's down substantially. There was no price increases in computer accessories. So all of the decline in revenue is decline in volume and that's just shifting. We grew the computer accessory business 38% from 2019 through 2022.

Speaker 6

So some of that was a shift in purchases from 2023 into 2022 into 2021. And that's going away. All of that will come back. We feel very, very confident about that. And the other part of the volume shift Is lower usage due to less people working in offices?

Speaker 6

A significant percentage of our portfolio It's still driven by office products usage. It's especially so in our EMEA segment. And given that we are at, call it, roughly 50% office capacity in one time, There is less usage of our types of product and that's something that we need to adjust to. And this is what Tom mentioned in his prepared remarks in terms of optimization, footprint optimization, Passive utilization optimization initiatives that we have to make sure that we are adjusting both our footprint to that reality As well as our product innovation program to really focus on more hybrid work and shifting more to consumer and hybrid as opposed to in office types of environment.

Speaker 9

Okay. And then as far as the implied Q4 Guidance as it goes, it's suggesting you're going to be up sequentially from Q3 Quite a bit. It's never been up that much. I think you're implying something around $60,000,000 in sales. It's usually been $20,000,000 or 30,000,000 What's the clarity that you have and your expectation that Q4 could be as solid as you're suggesting your full year guidance?

Speaker 2

Well,

Speaker 6

obviously, we've given it some thought. That's our best estimate of what it would be, But it is 6 months away or 5 months away, so there's always uncertainty in some of that guidance. I would say the compares that you alluded to It's more of Q3 being a little bit lower than typical rather than Q4 being higher than typical. We are more cautious on Q3 And it's even indicated by our Q3 revenue guidance, comparable guidance of minus 4 to minus 7 that Deb alluded to. So from a sequential standpoint, we don't look at Q4 As being that abnormal.

Speaker 6

And then versus prior year, the comparison because there's also a strong improvement versus prior year, That's more of a last year issue where we had very big inventory, channel inventory reduction last year On the revenue side, and we had very high inflation costs In our COGS last year, which are all behind us. So that's the reason for the Q4 outlook.

Speaker 2

And Deb, I don't know if

Speaker 6

you have any additional questions.

Speaker 2

No, I'll

Speaker 3

check something. The last part was exactly right.

Speaker 9

Thank you. Boris, congratulations, Omotari.

Speaker 6

Thank you. Thank you, Amit.

Operator

Our next question comes from Hale Holden with Barclays. Hale, please go ahead. Your line is now open.

Speaker 10

Hi, good morning. Congratulations Boris and Tom. I had two questions. The first one is on the softer economic outlook Macro outlook that you have in the second half. I understand the Kensington piece, but I was curious in North America specifically if you could sort of talk about if there were You have greater weakness on the business side or the retail side or away from Kensington if there were other products or categories That we're driving it or if it was more equal weighted?

Speaker 6

It's more on the both Consumer business side less so on technology accessories, some of it is the things that all of you Read about in terms of Fed increasing rates and things being a little bit slower And some of it is the commentary we're hearing from our channel partners, both on the retail and business side that given this uncertainty, they Plan to be a little bit more conservative in their inventory carrying and purchasing policies. So with all of that Feedback, we thought it was prudent to be more conservative in our sales guidance.

Speaker 2

Okay.

Speaker 10

And then historically, you guys have done a pretty good job versus some of the private label offerings. But In this kind of environment, it wouldn't be abnormal to see private label take more share. I just wanted to confirm that, that wasn't the case here in the outlook.

Speaker 6

No, I mean, you're absolutely right. Historically, our brands have done really well In a difficult environment, last year Q3 was already we're already talking recession, Talking about recession and channel was reducing inventory and yet 5 Star gained A couple of points of share during the back to school season. So we have performed well, but as Tom said, Retailers are featuring more private label and giving them more of a presence on the shelf. So we'll have to just see how that all plays out. We do expect our brands to do well, but There probably will be some trade down to lower price point products either from us or from private label.

Speaker 10

Great. Thank you. Appreciate it.

Speaker 6

Thanks, Eyal.

Operator

At this time, we have no further questions. So I'll turn the call back to the management team for any closing remarks.

Speaker 6

Thank you, Emily, and thank you everybody for your interest in ACCO Brands. We're encouraged about our first half results And about the remainder of 2023, as we stay focused on executing against our priorities, keeping margin improvement at the forefront. We've managed well in difficult environments and are confident in our ability to navigate the current economic challenges. We have the right strategy And we believe we're well positioned to continue to deliver organic sales growth, compelling market performance and improved financial results as global economies recover. We look forward to talking to you in a couple of months to report on our Q3.

Speaker 6

Thank you.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your line.

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Earnings Conference Call
ACCO Brands Q2 2023
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