ACCO BRANDS Corp Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 ACCO Brands Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please refer to our earnings release and SEC filings for an explanation of certain risk factors and assumptions. Following our prepared remarks, we will hold a Q&A session. Now I will turn the call over to your speaker today, Christine Hanneman, Senior Director of Investor Relations. Thank you. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands first quarter 2021 earnings conference call. Speaking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation; and Neal Fenwick, 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 transaction, integration, amortization and restructuring costs and other nonrecurring items and reflect 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. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP measures. Beginning with the first quarter, we changed the way we calculate and report adjusted non-GAAP results by excluding non-cash amortization of intangible assets. Please see our press release for further explanation of this change. Forward-looking statements made during the call, including statements concerning the impacts of the COVID-19 pandemic on the company, 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. 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 Boris Elisman.

Good morning, everyone. Thank you for joining us. I will spend the next few minutes highlighting key elements of our first-quarter performance. Neal will follow me with more details on the quarter and provide additional comments on our bond and bank debt refinancing. Then, we'll take your questions. Overall, I'm very pleased with our first-quarter results and in particular, the performance of PowerA and the continued strength in EMEA. The 7% total company sales growth we achieved performed better than we expected, despite comparing a COVID-19 affected quarter against a mostly pre-COVID-19 quarter last year. Even more impressive, our sales were 4% above our sales in the first quarter of 2019. First-quarter profits were also better than our expectations. We have been seeing a recovery in EMEA for the past three quarters, as offices have been reopening and many schools never fully closed. Our team did a great job servicing customers, investing in growth initiatives, reorienting towards at-home products, and taking market share. In the first quarter, comparable sales in EMEA were up 7% with good organic growth from TruSens air purifiers, do-it-yourself tools, Kensington computer accessories, the Cosy ranges of organizational products, Leitz shredders, and Derwent art supplies. We're proud to say that three of our Leitz products won Red Dot Design Awards. Several products from the Cosy line of home-office items, our premium shredders, which are stylish and quiet and designed for home use, and our functional, recycle line of office products, in which every product is made with recycled materials, also performed well. EMEA's sales to e-tailers were up over 80%, and we also saw good sales growth with many independents and tech specialists. North America also had a good quarter driven by PowerA. Excluding PowerA, sales declined due to the impact of COVID-19, but we began to see improvement in March, as sales grew with many retail and e-commerce customers. This is a good sign that there is more demand now for school supplies as close to 60% of K-12 schools in the U.S. have returned to fully in-person education, and another 30% are using a hybrid approach. Many schools have also indicated they will have an earlier start to the fall semester. This change should bode well for the second half as our customers work through their inventory overhang from 2020. We have adequate inventory on hand to rapidly replenish stock as needed. Turning to the International segment, Australia, New Zealand, and Asia have been performing better, but it will take a while for the entire segment to improve, given continuing school and office closures and a slow vaccination rollout in Latin America. We hope to see the beginning of a recovery in Latin America, later in the second half and into 2022. We're confident in our strategy. We will continue to focus on improving sales growth and profitability by shifting our business toward more consumer-centric products. Our growth will come from acquisitions such as PowerA, which I will comment on in a few minutes, and from organic sales generation. Our products that focus on consumers, technology, or home usage saw strong demand throughout 2020 and in the first quarter. TruSens air purifiers, do-it-yourself tools, organization and storage products for home-office use, Kensington computer accessories, Derwent art supplies, and manual home shredders all sold well as people outfitted their home offices, entertained themselves at home, and remained concerned about wellness. We expect this will remain true in 2021 and believe solid performance from these product lines will continue. For example, our TruSens product line has grown from its introduction in 2019 to a $25 million business currently. Late last year, we introduced smart air purifiers and have some additional product introductions planned for later this year and into 2022. While competition has increased, over time we think the wellness category will be one in which we can establish a significant position. Last year, our Kensington computer accessories business received the largest order we've ever had, which means a difficult comparison this year in some quarters. However, excluding that order, the core business is expected to grow strongly as we will continue to introduce new, innovative products. As an example, in the first quarter, Kensington introduced the StudioDock for the Apple iPad Pro and iPad Air. iPad tablets can be magnetically attached to the docking station in either portrait or landscape mode, and through the dock, connect to a host of peripherals and charging options. A strong testament to our efforts is that the Kensington StudioDock won a CES Innovation Award, as well as a Red Dot Design Award during the first quarter. Turning now to PowerA. For those of you who may not know, PowerA is a leading player in video gaming accessories such as controllers, power charging stations, and headphones, which we acquired in late December 2020. I am very pleased with PowerA's results and how smoothly the integration is going. There seems to be a particularly good fit on the people side, with everyone meshing in terms of culture, and with everyone focused on supporting the transition and PowerA's growth. The gaming market continues to exhibit strong growth trends. Market Intelligence Report forecasts that between 2021 and 2026, the gaming console industry is expected to grow approximately 18% per year. The amount of time spent by consumers on gaming is increasing, with the global average now over seven hours a week. Morgan Stanley estimates that mobile gaming users grew 20% in 2020, adding approximately four years worth of new gamers during the pandemic. Most analysts believe this is a permanent shift. Moreover, in the fourth quarter of last year, Sony and Microsoft launched new generation console products, which are still popular but have been having difficulty keeping up with demand for controllers. So PowerA is filling that void. PowerA's first-quarter performance was exceptionally strong, with an increase of more than 100% on its pro forma 2020 sales. While we don't expect that rate of growth to continue, we expect strong sales for the rest of the year. In fact, we now think PowerA's sales will grow 25% this year rather than the 15% we initially projected. Another element of our overall strategy is to continue to shift our product sales through our growing channels such as E-tail, mass merchants, and direct-to-consumer platforms while maintaining our presence with successful independents and tech specialists. This shift has resulted in more growth of customers such as Walmart, Target, and Amazon, which are among our top five customers and performed well throughout the pandemic. Also aligned with the shift, consumer school and technology categories now represent 59% of our sales and are the fastest-growing parts of our portfolio. Moving on, our productivity program is back to normal levels after the accelerated cost reduction initiatives taken last year due to the pandemic. We have reinstated merit increases and bonus opportunities, so our SG&A expenses will normalize this year. Still, I expect our full-year productivity savings to be over $30 million. Our free cash flow for this year is expected to be at least $135 million. We plan to use this cash to pay out dividends and to reduce our debt. I will comment further on this a bit later. In summary, our business benefits from the breadth and balance of our geographic and product portfolio. We're not dependent on any one area for success and have done a good job partially offsetting channel, customer, and product line declines with growth elsewhere. I'm proud of the way we have adapted quickly to take advantage of the changing environment. We're assuming a shift in consumer behavior post-pandemic and a change in our product and channel investments as a result. This includes making larger investments in growth areas such as video gaming accessories, wellness products, work, learn, or play-from-home products, and computer accessories while reducing our investments in some commercial office products that we expect will remain weak longer-term, such as wide-format laminators and large whiteboards, although we expect some post-pandemic recovery. We will emerge from the pandemic as a strong, growing, financially sound company that is ready to aggressively pursue the opportunities ahead. Now, I will turn the call over to Neal for a review of the segments, our outlook, and other financial commentary, and then I'll join him in answering your questions.

Thank you, Boris. Good morning, everyone. As Boris mentioned, we saw the initial impact of COVID-19 hit our EMEA business minimally only in late March last year. So, this is the last quarter of comparing a COVID-impacted quarter against one that wasn't impacted very much. Our first-quarter sales rose 7% as a result of the PowerA acquisition. Comparable sales declined approximately 13%. PowerA's sales were much stronger than we expected, coming in at $63 million, mostly in the North American segment, and this compared with pre-acquisition sales last year of approximately $31 million. We also continued to see strong sales growth in product lines that focus on work and play-from-home, such as our Kensington computer accessories, TruSens air purifiers, do-it-yourself supplies. Sales to commercial channels remained weak, driving most of the comparable sales decline. Compared to 2020 and excluding PowerA, sales to commercial and B2B customers declined 18%, and retail and mass sales were down 7%. On the other hand, e-commerce sales rose 28%, while sales through tech-specialist channels rose 6%. First-quarter adjusted net income was $10 million or $0.10 per share versus $13 million or $0.14 per share last year. The year-over-year decline was mainly the result of lower volume in North America and International, higher incentive accruals and logistics expense, and higher interest expense associated with the acquisition, that is benefiting EPS for our cost reduction efforts and better profits in EMEA. Our reported profit was also negatively impacted by $14 million of other expense related to the bond and bank debt refinancing, and $7 million due to the earn-out portion of the PowerA purchase price. In addition, we had $4 million in restructuring charges, $1 million of pension curtailment charges, and $4 million increase in amortization charges, and $2 million inventory step-up that are acquisition-related. You may recall, though the PowerA earn-out is payable in two equal installments over the next two years if certain sales and profit targets are met. As such, every quarter we must reflect the fair value of the earn-out and recognize any change as an expense in our income statement. We expect that this will result in charges throughout the two-year earn-out period as we forecast strong results for PowerA. This quarter we booked a $7 million expense, which along with the higher charges previously noted, resulted in a small reported operating loss for the total company. Our gross margin was approximately 28% compared with 29% in 2020. The adjusted gross margin was down 50 basis points versus last year, much less than the margin pressure we experienced in the fourth quarter. The main driver was the cost increases impacting our logistics expense, ocean freight and domestic freight, and some inflation in our input and purchase costs. On the positive side, low-cost savings, lower obsolete inventory charges, foreign exchange rates, and PowerA's accretive margins contributed positively. SG&A expenses were $94 million compared with $86 million last year, primarily due to $8 million of higher incentive accruals and $5 million of PowerA expense, which were partially offset by cost reduction efforts. You may recall that last year we eliminated almost all incentive accruals in the first quarter due to the pandemic. SG&A as a percent of sales was approximately 23%, roughly flat with last year because we were able to leverage PowerA against our core business expenses and largely offset the lower sales in the rest of our business. Adjusted operating income was approximately $25 million compared with $26 million last year, primarily due to PowerA's contribution largely offsetting the declines in the rest of the business. The adjusted operating margin was 6% versus 7% last year. Our adjusted tax rate for the quarter was 29.1%. Now, let's turn to some details of our segment results. Comparable net sales in North America decreased 19% to $136 million. Some of the decline is because the first quarter of 2020 benefited from almost $6 million of pre-buying in advance of our IT system conversion go-live last April, as well as some channel inventory build because of COVID concerns. Lower commercial channel sales continue to impact North America as many offices remain closed or had limited openings. As Boris mentioned, we are encouraged to see more schools reopening for in-person learning. This is helping to absorb some of our customers' inventory overhang from last season. We're likely to see less than our usual amount of back-to-school sell-in during the second quarter as last year's sell-in was strong. We expect our major customers will continue to work through the inventory they purchased last year but did not sell because of school closures. We are well prepared to service them with our branded products in the second half as they may need replenishment. For the overall North America business, we anticipate a sales increase in the second quarter. First-quarter adjusted operating income was $11 million, up slightly from last year. Adjusted operating margin was 6% compared with 6.5% last year. The margin decline primarily was a result of lower sales in our business, excluding PowerA. Also, as previously mentioned, we experienced higher costs, particularly related to logistics that impacted the margin, even with a partial offset from cost reductions. Now, let's turn to EMEA. For the quarter, EMEA comparable net sales increased 7% to $136 million. Reductions in commercial sales were partially offset by growth in TruSens air purifiers, do-it-yourself tools, Kensington computer accessories, our new line of work-from-home storage and organization products, and Leitz's personal shredders together with Derwent art supplies. PowerA contributed $9 million to EMEA sales. This is the third consecutive quarter that we are seeing sequential improvement in EMEA, and this quarter showed strong year-over-year growth, even though last year's first quarter had just two weeks of COVID impact. EMEA posted an adjusted operating profit of $21 million versus $15 million in 2020, primarily due to higher sales which offset some gross margin pressure from increased logistics expense and also higher incentive costs. Adjusted operating margin was approximately 14% versus 12% last year. We expect EMEA to continue to perform well during the second quarter. Moving to the International segment. Comparable sales declined significantly because of lower demand from the impact of COVID-19. While all markets declined, Australia and Asia sales trends continue to improve, sequentially, both down only 5%. However, Brazil and Mexico continue to be severely impacted by COVID-19 with sales down more than 50% as many schools and offices in both countries remain closed. The current expectation is that this situation will continue for the next several months. International adjusted operating income was $3 million compared with $8 million last year, primarily as a result of the lower sales, which also reduced fixed cost absorption due to low volume. Bad debt reserves in Latin America remained high, but in total, only increased by $700,000 versus last year. Collections improved in Brazil but were worse in Mexico. Let's move now to our balance sheet and cash flow. In the first quarter, we had $42 million of cash outflow from operations and the use of free cash flow of $46 million, which includes $4 million of CapEx. As expected, $28 million was utilized by PowerA for rebuilding working capital after the acquisition closed, since we did not purchase their receivables or payables in the transaction, and the business has also grown organically. If you exclude PowerA, our cash use was lower this year than last year by $14 million. CapEx in the first quarter was $4 million and we paid $6 million in dividends. Our CapEx outlook for 2021 is approximately $30 million, including $5 million related to PowerA. As we noted when we acquired PowerA and increased our debt, in the near term, we plan to use our cash to fund our dividend and to reduce debt. Longer-term, we plan to use our free cash flow to fund our dividend, reduce debt, repurchase shares, and make acquisitions. During the quarter, we refinanced our bond and bank debt. The company issued $575 million of eight-year bonds at 4.25%. We also amended our bank agreement to lock in more favorable pricing and extend our maturity to March 2026. The refinancing will save $5 million in interest expense for the balance of this year. It also appropriately funds the PowerA acquisition with a better balance of long and short-term debt. At the end of the quarter, we had $219 million outstanding on our $600 million revolving credit facility and had $75 million cash on hand. Our bank pro forma net leverage ratio was 4.5 times, which is in line with where we expected it to be after the purchase of PowerA. Even with seasonal borrowings in the second quarter, we anticipate our leverage ratio to be approximately the same. We will use the majority of our free cash flow this year to reduce debt, and with continued improvement in EBITDA as we saw this quarter, and lower debt, we should reduce our year-end leverage ratio to approximately 3.5 times, which is where it was prior to purchasing PowerA. Given our financial strength and the proactive steps we've taken to reduce costs, we expect to be able to maintain good liquidity as we manage through the current environment. Now, let's turn to our outlook. It continues to be difficult to forecast longer-term in this environment because there is still much uncertainty due to COVID-19. We are hopeful that as mass vaccinations continue to roll out, we will see reduced impacts from COVID, particularly in the second half of this year and continuing through 2022. For the second quarter, we anticipate another strong performance by PowerA and expect the rest of our business will have easier comparisons. We are looking for organic growth in all three segments as we expect the recovery to continue. Our second quarter outlook for the entire company is sales to be between $460 million to $490 million, with PowerA contributing between $50 million to $60 million. Second-quarter adjusted earnings per share, excluding amortization, are expected to be in the range of $0.25 to $0.30. The outlook includes a favorable foreign exchange impact of 5% on sales and $0.01 to $0.02 on adjusted EPS. We anticipate approximately $12 million of pre-tax intangible amortization will be excluded in the second quarter, based on our new definition of adjusted earnings, which represents approximately $0.09 on our adjusted EPS basis. We have reinstated the compensation and benefit reductions we took in 2020. We are also planning to invest more in growth initiatives to support anticipated stronger second-half demand. As such, our SG&A spending will increase in 2021 in all quarters compared with 2020. We expect our productivity programs will deliver a more normal level of approximately $30 million-plus in savings for the full year. With respect to our cash flow outlook, we feel confident that we can generate at least $165 million of operating cash flow for the full year, and with CapEx expected to be approximately $30 million, we expect to generate at least $135 million of free cash flow. As I mentioned earlier, PowerA will not contribute a normal level of free cash flow in 2021 due to the structure of the acquisition agreement. In late December, we acquired PowerA without normal levels of accounts receivable and payable. We received an $18 million purchase price adjustment from the seller to account for the absence of working capital delivered at closing. But we also need to fund PowerA through both its seasonal peak in December and its substantial growth this year. Thus, we anticipate minimal, if any, free cash flow impact from PowerA in 2021. PowerA's working capital will be normalized in 2022 when we expect an incremental $25 million to $30 million in free cash flow contribution. Now, let's move on to Q&A, where Boris and I will be happy to take your questions.

Hey. Good morning, Boris, Neal, Christine. Thanks for taking my questions and congrats on a good quarter. Can we just start with the strength of PowerA? Obviously up 100%. Can you just talk about, is that really just driven from the new consoles, and then maybe, can you break down the growth between North America and EMEA, and how is the EMEA integration going? Thanks.

Thanks, Chris, thanks for the question. PowerA's growth is driven by multiple factors. There is the overall growth in gaming, and that's been accelerated by the introduction of new consoles released last year from Microsoft and Sony. So, that's part of it. The second part of it is just supply availability, chip availability. PowerA has done a great job managing their supply chain, so we have decent product availability and are able to deliver to our customers when some of our competitors, including first-tier suppliers such as Sony and Microsoft, can't deliver to all of the demand. And rather, the third primary reason, the team at PowerA has done a great job servicing customers and increasing their market share. So, for all those reasons, we saw tremendous growth of slightly over 100% during the quarter. The integration of PowerA is going well. We are in the midst of it right now. The plan is to transition from the service agreement with the seller by the end of the third quarter and be completely on our systems, and then we could get exclusively focused on further growth. Did I answer all your questions, Chris?

Yes. I guess, just one more on that, just the growth in North America and EMEA, were they both 100% or can you just maybe break that down?

I don't have that detail with me. PowerA's business is 80% in North America. So, North America's definitely driven the majority of the growth. Although, EMEA has done well, it's a relatively small number.

Good morning, Boris and Neal. Congratulations on the quarter, and again, thanks for taking my question.

Good morning, Joe.

So, I kind of wanted to follow up a little bit on PowerA. You gave some guidance of increasing the expectation from 15% growth to 25% growth, but if we look at what you projected, Neal, you said for the fourth quarter of $50 million to $60 million, if you hit the top end of that, then you really are already at that 25% growth level, and 65% of PowerA sales are in the second half of the year. Are we just taking a more conservative stance here on PowerA growth or is there something else that would prevent you from putting out an even greater expectation for PowerA revenues for this year? Thank you.

Thanks, Joe. There is nothing artificial in that number. We certainly will strive to exceed it, obviously. The only thing you have to keep in mind is a couple of factors. The compares will get much more difficult in the second half because there was significant growth last year due to people staying at home and gaming more. So that's one factor to consider. The other factor is supply. There may be a lot more demand out there, but that just can't be fulfilled because of the long lead times associated with supply. So, I think your math is largely correct. I think we are assuming some kind of supply constraints for the second half and there is a lot of uncertainty with what's going to happen in the second half. But if we are optimistic, then maybe we'll do a little better.

Good morning.

Good morning, Kevin.

Yes. So, obviously, you talked about commercial office sales in North America continuing to be weak, but also, 60% of US schools are now fully reopened. And I think in the past, you've tied kind of reopening of schools to maybe some eventual return to the office. So, I'm just wondering if there are any glimmers of recovery or hope in the commercial office sales in North America?

There certainly are glimmers of recovery. We are definitely hearing a lot more companies scheduling dates for returns back to offices. We think a lot of companies will go back in the summer and early fall timeframe. This will be enabled by schools being fully in-person as well. We think there is recovery ahead of us. We're optimistic that there will be sales upside as trends continue. But based on everything we're seeing in the marketplace and hearing from our customers, we believe that North America, especially the U.S., is poised to return to the office more than it currently is. Well, we do anticipate it to be a hybrid kind of arrangement. But certainly, we do expect more offices to be in-person than they are today.

Good morning. I had two quick ones. Neal, I was wondering, given the growth in PowerA, if you are where you need to be for working capital or if there is further investment in the current quarter expected?

The quick answer to that one, Hale, is: it's a seasonal business and so its strongest sales are in Q4. Therefore, as it seasonally grows in the year, we're going to see an increase in working capital. We were also doing our best to bring up our inventory levels of some of their products because of the chip issues that we're seeing in the supply chain. For both reasons, we are quite happy to invest in PowerA's working capital.

And that actually is my second question, is that you alluded to the chip issues that maybe some of your competitors were having, and I was wondering if there is any risk to your sourcing there?

It's why we've been modest about projecting too much growth in the second half for PowerA because of our end supply questions. We expect to improve, but our forecast will improve.

Good morning. My questions are kind of a two-part question on raw material inflation, as well as shipping inflation. So, I guess, do you have an estimate of the aggregate dollar impact of inflation across input costs as well as shipping? And then, how much of that'll impact this year versus maybe some of it being delayed due to some hedging or purchases contracting, switching, etc? Thanks.

Yes. So, we're seeing live shipping impacts. We saw that in Q1. From a purchasing point of view, I think that's going to be a much bigger story from the rising costs we're seeing for raw materials. Contracts have allowed for time delays, and we have inventory build in recognition delays. As a result, we're going to see an increasing impact of those costs on our business as the year progresses. And it's necessary for us to raise prices in the market to offset this.

I guess, do you expect that the second quarter is going to see much of that or really will we see the impacts of those in the third quarter and beyond?

No, we're going to start to see cost impacts hit the P&L in the second quarter, and then, much more so in the third quarter and beyond.

And just to follow up on that a bit, Bill. As Neal mentioned, we've raised prices in April in the U.S. to offset that increased inflation. We'll be doing some of that in other countries as well. As we go into the second half, we'll also look for raising prices again if inflation continues to be high.

Hi. Good morning, Neal and Boris. I got on a little bit late, so I apologize if you covered some of this, but I first want to touch on back-to-school and see if you could give a little bit more color on how you were thinking about the split between Q2 and Q3, and how you're thinking about that unfolding in the US this year?

Sure. We're very optimistic about back-to-school, being 100% in-person in the U.S. There was some uncertainty earlier in the year about how this would break down, but consensus is emerging, and we're seeing that today with 60% of the schools already being fully in-person. We feel very good that come August, July, when some schools start to return, they will be at 100% in-person. With that said, back-to-school buy orders are made pretty early in the season just given the supply chain length and the situation last year with poor back-to-school sales. Retailers were conservative in their upfront purchases. We think there will be some shift from Q2 to Q3 as we see more replenishment in Q3. We expect sales to be significantly up, and industry estimates are anywhere from 5% to 25% higher than last year. Also, as Neal mentioned, despite some shifts, we do expect growth in North American sales in Q2 versus the prior year.

That's very helpful, Boris. Thank you. And if I could add a follow-up on PowerA, certainly, a very exciting new product in your business. Could you just give us your latest thoughts on how you're thinking about the medium-term, perhaps two-year to three-year revenue opportunity from PowerA? And how you think about its long-term opportunity?

This year, we expect roughly 25% growth from PowerA. If you look at the forecast from industry analysts, they project an 18% sales growth over the next few years for the gaming industry. So, I don't think it's unreasonable for us to expect that we will grow in the medium term at least with the market. In terms of inorganic growth opportunities, we also see PowerA giving us a new leg for that as well. So, we think it's an exciting and important segment for us. We're happy to invest in it and looking to continue growing at the rates we've been seeing.

We do see geographic expansion as a significant piece that we can add to that on top of the industry growth.

Good morning. Just following up on that. In terms of the new leg to invest in, where are you comfortable on your leverage? Or do you have to get back down to that 3.5 by year-end to fund the investments, or how are you thinking about that?

To do something major, Karru, we would have to get down to that 3.5 times, at least, or lower. But we are comfortable doing small tuck-in acquisitions at the current level, as long as they are strategically aligned and financially very prudent.

You referenced funding some growth initiatives for the second half, I was wondering if there is more color in terms of the size of those investments and what they're going behind, other than the PowerA supply issue concerns?

Most of them will be in our new product development and demand generation to support our growth. The product development effort will be in work-from-home, video gaming, computer accessories, art supplies, wellness, all of the areas that we see strong demand in. The demand generation will be in the near term to support those, but also support back-to-school in North America. So that's where the investments are going to go in.

Hey, good morning. I wanted to ask about back-to-school. Are you seeing any changes in the purchasing habits on the regional side as these schools are going back into session? And what are your expectations on gross margin as you start to scale up and go back to normalcy with back-to-school purchasing?

It's difficult for us to say because right now, the increased demand from end-users will be primarily serviced by the inventory that the customers have. So, we haven't seen a significant replenishment cycle yet. That's still to come. Overall, we are seeing sell-through up for pretty much all of our customers in the U.S. As for your second question, it is also tough to comment on because with scale, we would expect an expansion in gross margins, plus we think some of the accruals will be released as volume goes up. However, we are also seeing increased inflation in raw materials and continuing logistics and freight costs. So, how those factors offset each other remains difficult to assess until we see a bit more progress in the quarter.

I'm wondering on the M&A front if you're seeing any more opportunities out there as we come out of the pandemic? And has your success with PowerA changed your view on the M&A front in terms of focusing more on tech versus traditional businesses?

There certainly is no shortage of M&A opportunities out there. As we've mentioned over the last few earnings calls, there are many options available, both because the pandemic has squeezed some players strategically, and because the valuations are relatively high right now. Our strategy hasn't changed. It has to make strategic sense for the company, in terms of distribution, brands, value add, etc. Additionally, it must make financial sense from an accretion standpoint for our shareholders. We have plenty of work on our hands this year to drive organic growth in the business, but we are open to other acquisitions if strategic and financial criteria are met. We have the balance sheet to do it.

Thanks for taking the follow-up. Boris, maybe you can give us a little bit more insight into some of the new product introductions that you're considering here or looking at? I know you previously talked about humidifiers as a potential area of interest. Could you expand a bit more on that?

In the wellness area, we're definitely looking to expand our line. You mentioned the humidifier space, that's something we're looking at. We're also looking at more commercial air purifiers. Today, our products are largely focused on the consumer and home space, but we think there's a sustained need for air purification in office environments as well, especially considering the pandemic and the sensitivity surrounding these topics. That's one significant area of investment. Work-from-home products is another big area for us. We believe that the world will not revert back to the pre-pandemic work style. As people return, they will likely participate in a hybrid model where they work in offices some days and from home others. We see the sustained need for work-at-home products. This includes investments in additional docking solutions, both for traditional PCs and for Apple's ecosystem, including iPads. Additionally, we plan to continue investing in PowerA and video gaming, with expansion into mobile gaming and headsets to support other console introductions. Another major area for work-from-home will be manual shredders. We believe there is a significant opportunity there to introduce valuable products that work reliably and do not break after a few months. We also see potential in a line of storage products and organizational products for home use. We mentioned earlier the success of the Cosy range we introduced in EMEA, which we think can be expanded to a global basis. So, there's a great array of ideas for us to invest in product development. We're excited to bring more to our customers. Thanks, Natalia. Thank you for your interest in ACCO Brands. To summarize, we're optimistic about our continued recovery throughout the rest of 2021. We're also very pleased with the performance of PowerA and EMEA and expect growth in both to continue. We remain confident about our future and our ability to position the Company for growth, improving returns for our shareholders. Have a great day and we'll talk to you next time. Thanks.

This concludes the first quarter 2021 ACCO Brands earnings call. Thank you for your participation. You may now disconnect.