Ladies and gentlemen, hello and welcome to the ACCO Brands Q3, 2022 Earnings Conference Call. My name is Maxine and I will be coordinating today's call. I will now hand over to Chris McGinnis, Senior Director of Investor Relations to begin. Chris, please go ahead when you are ready.

Good morning, and welcome to ACCO Brands third quarter 2022 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today are Boris Elisman, Chairman and Chief Executive Officer at ACCO Brands Corporation; 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 transaction, integration, amortization and restructuring costs and non-cash, goodwill impairment charge and change in fair value of the contingent consideration related to the PowerA earn-out and other non-recurring items and reflect in 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 the slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP measures. Forward-looking statements made during the call are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties and our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain of these risk factors and assumptions. 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&A session. Now, I will turn the call over to Boris Elisman.

Good morning, everyone. Thank you for joining us. In mid-October, we issued a press release updating our third quarter and full year outlook, highlighting the fact that the third quarter proved to be more challenging given the economic environment, especially in Europe, and more cautious inventory replenishment by retailers. Last night, we issued our third quarter results, reflecting sales at the midpoint and adjusted EPS at the high end of our guidance with our full year outlook unchanged. Let me start by saying the solid fundamentals of our business are intact. And we believe we have the right strategy and team to weather the economic challenges and deliver sustainable organic revenue growth once the economy improves. The transformative actions we've taken over the past few years to be more consumer-centric and geographically diverse have helped us maintain a global market share in 2022. There were many positives in the quarter. We had a solid back-to-school season in North America. Our five-star brands grew sales and market share in the back-to-school season and outperformed the overall market in dollars and units. Sales of our commercial products have benefited from the return-to-office trend, especially in North America, where office occupancy rates continue to improve and have recently reached a post-pandemic high. Our Kensington brands and computer accessories category grew double digits globally in the third quarter and year-to-date. Our international segment grew comparable sales over 30% and almost doubled adjusted operating income in the third quarter as in-person education returned in Brazil and Mexico. These successes were more than offset by a more cautious stance than anticipated from retailers at inventory replenishment and reduced sales of gaming accessories in North America as well as reduced demand from a challenging environment in Europe. In EMEA, significant high inflation, the Ukraine conflict, and the stronger U.S. dollar have weighed on consumer sentiment leading to sales and profit shortfalls. In addition, lower sales volume has resulted in stranded fixed costs in our manufacturing facilities. To counter the high rate of inflation in the region, we will be implementing our fourth round of price increases over the last 18 months on January 1, 2023. In addition, we have reduced variable labor costs and discretionary spending in response to lower demand and are looking at structural cost reduction initiatives to be implemented in 2023. While the third quarter sales environment was challenging in EMEA, both computer accessories and gaming accessories continued strong comparable sales growth trajectories in that market and combined were up low double digits percent in the quarter and year-to-date. As we look out to 2023, we're still on track to expand our gaming accessories initiatives to strengthen EMEA growth profile. In North America, with continued strength in back-to-school and return-to-office trends will more than offset retailers' more cautious inventory replenishment and lower sales of gaming accessories. The North American margin rate in the third quarter was negatively impacted by expense deleveraging from the volume declines and higher inflation related to finished goods, inbound freight, and outbound transportation. These costs are currently elevated but are beginning to moderate. We expect higher commodities and freight costs to flow through the P&L in the fourth quarter. While we believe that the overall product inflation in North America has peaked, there are certain commodities that will stay at higher levels in the near and medium term. Regarding our video game and accessories category, we continue to believe in its long-term growth opportunities, which will increase our organic growth rate as we expand our product assortment and accelerate growth in our EMEA and international segments. Third quarter sales sequentially improved but are still down from the pandemic high of the prior year. We continue to hold a leading market share position in the third-party gaming accessories controller market and have increased our market share position in 2022, highlighting the strength of the product assortment, placements, and the PowerA brand. The gaming market is in the midst of normalization from the high demand related to the pandemic. The market continues to be challenged by the lack of semiconductor chips, which inhibit new console production and the availability of some gaming accessories. We now expect gaming accessories to be down approximately 15% for the full year, which is at the lower end of our previous expectations. Our longer-term expectation is for sales in this category to return to prior industry growth trends, which historically were at low double-digit growth rates. While ACCO Brands is not immune to the current economic environment, we have the right strategy and an experienced management team to navigate these challenges. We've been aggressive with our pricing and cost actions while continuing to invest in our product development and go-to-market initiatives. We expect the environment to remain challenging and are currently evaluating other cost reduction initiatives, including our geographic footprint and facility rationalization projects. We hope to share more details with you on these initiatives on our fourth quarter call in February. Additionally, we remain confident in our transformation to drive sustainable organic revenue growth and are well capitalized with no debt maturities until 2026, fixed interest rates for half of our outstanding debt and low annual interest costs. We have taken actions to protect profitability and free cash flow by curtailing hiring, reducing inventory, and limiting discretionary spending and capital expenditures. Importantly, our third quarter cash flow generation was significant and we prioritize dividend payments and debt reduction. We've also amended our bank debt covenants to provide greater flexibility, which combined with the company's strong cash flow generation, allows ACCO Brands to successfully navigate the current economic environment. I will now hand it over to Deb, and we'll come back to answer your questions.

Thank you, Boris. And good morning, everyone. Our third quarter 2022 reported sales decreased almost 8% as foreign currency was a 6% headwind in the quarter. Comparable sales were down 2%. The decline was due to lower volumes in our EMEA and North America segments offsetting strong growth in our international segments. Adjusted operating income was $43 million compared with $57 million last year. Adjusted net income was $24 million compared to $32 million in 2021, and adjusted EPS was $0.25 versus $0.33 in 2021. In the third quarter, we took a non-cash goodwill impairment charge of $99 million. We had a significant amount of goodwill on our balance sheet from previous acquisitions, such as Need, GDC, and other transactions. This charge represents less than 15% of the overall goodwill balance. Given our stock price, the company's market capitalization is low, which triggered a review of our goodwill. The charges reflected in our North America segment, which carries a significant portion of our total goodwill. Inflation was more of a headwind than we had previously anticipated, which is why our gross margin and operating income declined more significantly than our sales decline. Given lower sales overall, we are experiencing fixed cost deleveraging in our facilities, while inflationary costs are beginning to come down. Their landing effects on our P&L will continue to impact gross profit until the end of the year, but should improve as we progress through 2023. Third quarter adjusted SG&A expenses were $95 million, compared with $101 million in 2021, primarily as a result of cost savings and lower incentive compensation accruals and the positive benefit of FX partially offset by continued investment in our go-to-market program. Adjusted SG&A expense as a percent of sales was 19.5%, above last year's 19.1% due to lower sales. However, year-to-date adjusted SG&A as a percentage of sales was down 40 basis points. Our near-term SG&A target remains at 19.5%. Now let's turn to our segment results for the quarter. Tangible net sales in North America decreased 10% to $259 million. The decrease was due to lower inventory replenishment by retailers and volume declines in gaming accessories. As previously discussed, retailers purchased earlier in the year than typical to ensure product availability. Beginning in the third quarter, retailers' inventory replenishment was significantly less than anticipated. We performed well in the U.S. back-to-school season with approximately 10% comparable sales growth. Back-to-school sell-through was up 4%, outpacing market growth of 1%. North America adjusted operating income margin decreased due to higher costs of finished goods and specific commodity materials, and higher inbound freight and outbound transportation costs that were not adequately offset by price increases. Just like EMEA, North America will be implementing another round of price increases on January 1 of 2023. Now let's turn to EMEA. Net sales were down 19% to $130 million, primarily reflecting adverse effects. Comparable sales were down 4% to $154 million, mainly due to volume declines offsetting our price increases. In Europe, the current energy crisis and significant inflation have created a more challenging demand environment. The energy crisis is expected to worsen this winter, and we expect consumer sentiment to remain low through the end of this year and into 2023. EMEA posted lower operating income and margin from the lower sales volume, which led to underutilization of our manufacturing facilities and therefore deleveraging of fixed costs. Boris referred to a review of our manufacturing footprint, which we are undertaking now. Price increases have not been large enough to offset accelerated inflation generally, especially for locally sourced raw materials. However, we are making sequential progress on the price-cost differentials, and we expect our January price increases to meaningfully mitigate the overall impact of these inflationary cost increases. In addition, to allow for more frequent price changes, we are renegotiating several customer contracts. Moving to the international segment, net sales increased 26%, and comparable sales rose 31%. We were encouraged to see volume contributing more than price to the increase. This growth was driven by improved demand in Latin America, especially in note-taking products as schools and businesses continue to return to in-person education and work. The international segment posted high adjusted operating income and adjusted operating margin as a result of higher sales and improved expense leverage. These improvements were driven by the rebound in Mexico and Brazil. Switching to cash flow and balance sheet items, in the quarter, we generated $84 million in adjusted free cash flow. Year-to-date, we had a $12 million use of adjusted free cash flow, which reflects our seasonality. Sequentially, inventory was down $40 million from the second quarter, but remained high due to inflation and lower than expected third quarter sales volume. Our accounts payable balances are relatively low, as much of our inventory was purchased earlier in the year, and payments for those goods are made by quarter-end. As we bring inventory down, we should shift into a more normal payables balance. We announced an amendment to our bank credit agreement, which increases the maximum consolidated leverage ratio beginning with the fourth quarter of 2022. This is favorable along with several other items. The increase in the consolidated leverage covenant up to five times allows for greater financial flexibility and headroom for the company during these challenging economic times. The amendment is matching our interest rate pricing grid. We ended the quarter with a consolidated leverage ratio of 3.9 times. We expect that ratio to be approximately 3.8 to 3.9 times at year-end. Longer term, we are still targeting 2 to 2.5 times. CapEx year-to-date was $12 million. We also paid dividends of $22 million year-to-date and repurchased 2.7 million shares of stock in the second quarter for $90 million. At quarter-end, we had $417 million of remaining availability on our $600 million revolving credit facility. As shown on our earnings slides, more than half of our debt is fixed and not impacted by interest rate increases, and we have no maturity until 2026. Turning to our outlook, we are reaffirming our guidance presented in October for sales, adjusted earnings per share, and adjusted free cash flow. For the full year, our outlook is for comparable sales to be flat to up 2%. I think this demonstrates the progress of the transformation and portfolio shift and resilience of the company in a really tough economic period. We also expect foreign currency impacts to remain a headwind with a 4% to 5% negative impact on sales, and a $0.05 negative impact on adjusted EPS. Full year adjusted EPS is expected to be in the range of $1.05 to $1.10. The adjusted tax rate is expected to be approximately 29%. Intangibles amortization for the full year is estimated to be $42 million, which equates to approximately $0.31 of adjusted EPS. We expect our adjusted free cash flow to be within a range of $90 million to $100 million after CapEx of $15 million. Looking at cash uses for the remainder of 2022, we expect to continue to prioritize dividends and debt reduction. We have been chasing inflation for the last 18 months. We expect sequential adjusted gross margin improvement in the fourth quarter, but gross margins will be down versus the prior year. The additional price increases in January, along with our cost savings initiatives, will get us further to our long-term adjusted gross margin target of 33%. This is an ongoing challenge due to the magnitude and persistence of inflation. Sales in October continued to reflect significant inventories backing retailers with their cautious approach to replenishment. Given this trend, and the likelihood that it continues, we will be tracking to the midpoint of our 2022 sales and adjusted EPS outlook. Even now we expect certain areas of our business to achieve growth in 2023, and many of our brands to maintain or increase market share. If the macro environment continues in the current state, we expect our overall volumes will decline. However, this decline is expected to be fully or partially offset by price. 2023 should look differently than 2022 from a cadence perspective and more similar to 2021 when resellers were conservative with their inventory. In fact, we expect the first half of 2023 comparable sales to be approximately at 2021 levels less the negative impact of adverse effects of around $30 million a quarter. We expect adjusted gross margins to expand and for SG&A to remain at our 19.5% rate in 2023. We expect full year free cash flow to grow compared to 2022 driven by improved profitability and a more normal working capital cycle. We will provide additional details in February when we report our annual results. Now, let's move on to Q&A. Boris and I will be happy to take your questions.

Thank you. Our first question comes from Joe Gomes from Noble Capital. Please go ahead, Joe. Your line is now open.

Good morning. Thanks for taking the questions.

Good morning, Joe.

So just wanted to get maybe a little deeper dive into the outperformance of the international segment. Is this all just related to the rebound in Mexico and Brazil? Or how are these other parts of the international segment performing?

It's being led by very strong performance in Brazil and Mexico as both of those countries have rebounded from a couple of years of COVID. Schools are open, offices are open, and we're seeing very strong business for back-to-school in Mexico and in preparation for back-to-school and office business in Brazil. If we look outside of those two countries, Chile has done well, it has grown mid to high single digits in the quarter. And then Australia is recovering. They had a very tough first half of the year with a lot of COVID cases in Australia, but still showed small growth in Q3. In Asia, it is still difficult. It's a small part of our business, but we are seeing some sales decline in Asia just driven by weaknesses due to zero COVID policies in many of those countries and just the weak macro in Japan.

And the international segment has done very well in passing on price to offset the inflation mix as well.

Okay. Thanks for that. And on inventories. You guys talked a little bit about how you've built it in anticipation. They came down somewhat in the third quarter. How much more do you think you've got to come down there to be where you'd like to be in terms of the inventory levels?

We still have a ways to go. We are pleased with the progress that we've made through the year. We built a lot of inventory last year in the second half driven by supply chain difficulties, and we started picking it down earlier this year. We wish we could have done more but slower sales and low volumes in Q3 left us with inventory that was still a little high. So my anticipation is we'll still make significant progress in the fourth quarter, and by the end of this year and early next year, we'll be in the normal working capital cycle as the supply chain issues are pretty much behind us. So there's no reason to hold more inventory than we need by the end of this year. Once we normalize, we'll be able to go with a normal working capital cycle in 2023.

Yes, that's right, Joe. Don't forget high inflation at 10%, 11% is also on those inventory balances if you just think about the level.

Right, right. Okay. And one more if I may. A lot of companies have talked about the difficulty in the hiring and retention environment. Just wondering how you guys are finding your ability to hire people and/or retain people that you want to retain?

We haven't had any issues. We saw a little bit of a pickup in attrition last year, in the summer of '21. This year has been running pretty flat. It’s still a very competitive market, but we're not having difficulties even with attrition or with hiring people.

Great. I'll get back into queue. Thank you.

Thank you, Joe.

Thank you. Our next question comes from Greg Burns from Sidoti. Please go ahead. Your line is now open.

Good morning. With the EBITDA covenant flexibility with the new amendment going to five times, what do you foresee as the peak leverage looking forward? Do you feel like you're going to rise to that level and work down from there? Or how should we think about leverage going forward?

Yes. So, Greg, as I talked about fourth quarter this year, we're going to be in that 3.8, 3.9 under the new ratio. That means we won’t reach the full 5 times. We really got to get more headroom for next year as we go into this uncertainty but not worse than kind of a 50 basis point spread. If that's what you're looking to.

So we don't expect to get to five. The flexibility and headroom given the uncertainty and the environment. Typically, our leverage peaks in Q2 as we build inventory for back-to-school. So as Deb said, we expect to be at least 50 to 60 points below that 5x.

And, Greg, the one nice thing too is the banks were really supportive on that seasonality and so going forward, we'll have that higher ratio in the first and second quarters for that seasonality that Boris spoke to.

Okay, great. And then in North America, with the retail side of business. Where do inventories, channel inventories currently stand? Can you just talk about how that impacts, you gave a little color on how it's going to impact the first half of next year. But do you see stronger selling in the early part of the year next year to replenish those inventories? How does that historically play out?

Yes, the inventories right now are pretty low in the channel. It doesn't mean that they'll be able to go lower. It all depends on how sell-through is, and retailers will have a certain number of weeks on hand depending on what the sell-through is. But we expect retailers to be conservative with inventory throughout the first half of next year. So this year, as Deb mentioned in the prepared remarks, they bought inventory early because of the supply chain issues to prepare for back to school. We think that will not happen next year. We believe that given both the economic challenges and easing of the supply chain, they will be more chasing inventory. They will bring in only what’s necessary, and then try to chase sales with additional purchases in Q3. We think, and we saw this happen in 2021. So we think it’s likely that retailers will be conservative with inventory in the first half. And then as they sell through in Q3, they will bring in more inventory.

Okay. And then on the commercial side of North America, how far below pre-pandemic levels is that business still? And do you think you'd get back to pre-pandemic levels there?

Yes, we're about. So if you look at during the pandemic, we lost, let's call it 15% or so on the commercial side. We made up about two-thirds of that. So we're down about 5%. And yes, we are clawing our way back, and people are going back to offices, and that's driving POS. We think that we will be able to make it up in 2023.

Okay, and then just lastly, on PowerA. Do you think that business has fully reset from the pandemic bubble? Or is there additional normalization that needs to happen in North America? And what's the status on your strategy to expand that business globally? The other footprint pulling in place to do that? Or is there more investments that need to be made?

Sure. So globally, it's going very well. The business has been growing internationally in 2022, both in EMEA and internationally. We will continue to invest and expand that footprint in sales growth. But we feel very, very comfortable in our day-to-day operations. In North America, it's still normalizing and my expectation is that we'll continue to do that through Q4, driven partially by supply chain issues. There are still semiconductor chip shortages that affect people's ability to buy both Xbox Series X as well as PlayStation 5, and also the lack of chips on some of the wire accessories. So that's impacting availability as well as normalization of demand; people were staying home and playing games. Now they're traveling and going out and playing less games. I think that's going to be still the case in Q4, but we do expect recovery and rebound in 2023, and we expect growth in the PowerA business in 2023.

Great. Just kind of drilling on that growth outlook, is that mostly going to be coming from the rest of the world or North America? Do you think North America can grow too, or is that mostly going to be coming from Europe and Asia?

We do expect North America to grow. But growth rates will be much higher in Europe and internationally than they will be in North America, but we do expect growth in North America.

Okay, all right. Thank you.

Thanks, Greg.

Thank you. Our next question comes from Kevin Steinke from Barrington Research. Please go ahead. Your line is now open.

Good morning.

Good morning.

Good morning, Boris. Just wanted to start off by asking about gross margin, and you noted that you expect some improvement in 2023 in light of the price increases you're implementing on January 1, and maybe some cost reductions. But I would assume we should think of gross margin progression fairly gradually and still maybe meaningfully below that 33% target, just trying to get a sense of how much you think can be accomplished. I know inflation is kind of still the wild card. But any thoughts on gross margin progression?

Yes. I think you're exactly right. It's going to be a gradual improvement and expansion in gross margin. And we are still fighting to keep up. We still haven't gotten to the price-cost differential as we sit here in the third quarter. So we've got 10%, 11% inflation with 8%, 9% price. We are still lagging, and we've got to catch up on that. That's going to take the January price increase to do it. It will be gradual and it will be throughout the year. I think the 33% target is a little bit away.

Yes. I agree that we're going to be making progress. I'm expecting progress in Q4 and certainly throughout 2023. However, I don't think we're going to get fully to that 33% target until after 2023. We will still be catching up in 2023.

Right. Okay. Yes. Makes sense. You mentioned in your prepared comments modifying some contracts to allow for more price increases. It sounded like that was fairly isolated to a few customers that are in this area. I'm trying to get a sense as to how broad of an initiative that is and how meaningful that can be in terms of your ability to catch up to inflation maybe a little more quickly.

That's specific to EMEA. We really couldn't implement price increases more than twice a year. In a normal environment, that's acceptable. However, when you have inflation at 14% a year, that's not frequent enough. Our teams are working with customers to modify the contracts to allow us to implement more frequent price increases so we can keep up with inflation. By the way, it works both ways. It's both increases and decreases. I'm sure nobody will complain about more frequent price decreases, but nevertheless, the interaction allows us to develop.

Okay, great. Well, thank you for taking the questions.

Thanks, Kevin.

Thank you. Our next question comes from Hamid Khorsand from BWS Financial. Please go ahead. Your line is now open.

Hi, good morning. So the first question was, is the lower stocking levels resulting in shorter order intervals from retailers?

Meaning more frequent and smaller orders, Hamid, is that what you mean?

Yes.

Yes, it is resulting that. That is correct.

Are you able to be efficient in that kind of operating structure?

We do have minimum order quantities. So we charge above a certain amount. The outbound freight is included in the price and it’s free below a certain amount. They have to pay for outbound freight. So there is a built-in financial incentive to keep orders at a certain level. What happens in reality is we can go to wholesalers for really small orders because it’s not economical for them to get it from us. Even though there's a shift to more frequent lower dollar orders, there is an economic incentive built in not to make it inefficient for us.

Okay, and how has the product mix changed greatly from four years ago to what retailers want to stock, and how does that relate to the inventory you have in your warehouses?

It really hasn't changed. Retailers typically stock A and B items and see the items they offer on an as-needed basis. That continued to develop. If I look over the last 5, 10 years, certainly the mix has changed with computer accessories and learning products away from organization supplies. However, if I look at individual SKUs within this year, it’s still and these SKUs being soft, they are being brought in just in time. What’s really driving this break on replenishment is just the economic outlook and retailers becoming very, very conservative with how much inventory they want to stock, given that they are forecasting an economic recession.

Okay, great. Thank you.

Thanks, Hamid.

Thank you. This concludes our Q&A session for today. So I'll hand the call back to Boris Elisman for closing remarks.

Thanks, Maxine, and thank you everybody for your interest in ACCO Brands. Previously, we have managed well in difficult environments and are confident in our ability to navigate current economic challenges. We're also confident we have the right strategy and believe we're well-positioned to continue to deliver organic sales growth, compelling market performance, and improved financial results as the global economy recovers. We'll look forward to talking to you in a couple of months to report on our fourth quarter results. Thank you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.