Operator
Hello everyone and welcome to the ACCO Brands second quarter 2025 conference call. My name is Ezra and I will be your coordinator today. If you would like to ask a question, please press star followed by one on your telephone keypad. And if you change your mind, please press star followed by two. We will be taking questions after the prepared remarks. I will now hand over to Chris McGinnis, Head of Investor Relations, to begin. Please go ahead.
Good morning, and welcome to the ACCO Brands second quarter 2025 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today is Tom Tedford, President and Chief Executive Officer of ACCO Brands Corporation. Tom will provide an overview of our second quarter results and provide an update on our 2025 priorities. Also speaking today is Deb O'Connor, Executive Vice President and Chief Financial Officer, We will provide greater detail on our second quarter results and our outlook for the third quarter and full year. We will then open the line for questions. Slides that accompany this call have been posted to the Investor Relations section of ACCOBrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude amortization and restructuring costs, non-cash, goodwill, and intangible asset impairment charges, and other non-recurring items and unusual tax items and include adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP measures are in the earnings release and slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP measures. Forward-looking statements made during the call are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties and our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain risk factors and assumptions. Our forward-looking statements are made as of today and we assume no obligation to update them going forward. Now, I will turn the call over to Tom Tadford.
Thank you, Chris. Good morning, everyone, and welcome to ACCO Brand's second quarter 2025 earnings call. Last night, we reported second quarter sales and adjusted EPS in line with our outlook. Sales in the quarter improved sequentially as customers and consumers digested the evolving global trade environment. We continue to make excellent progress on our $100 million multi-year cost reduction program, realizing additional savings in the second quarter that brought the cumulative program total to over $40 million. We are also making great progress on our tariff mitigation actions. As a multinational company, approximately 60% of sales are outside the U.S., which are not impacted by U.S. tariffs. For those markets, our current supply chain provides excellent value. As we mentioned last quarter, our proactive China Plus One approach in the U.S. has positioned us well to navigate the evolving trade landscape. To date, we have announced two strategic price increases while maintaining our competitive position, secured improved terms with third-party manufacturing partners, and accelerated production shifts to cost-competitive countries for U.S.-bound products. These efforts are critical to protect profitability and to ensure ACCO Brands has a balanced supply chain optimized for cost, quality, and service. Now turning to our second quarter performance. Consolidated second quarter comparable sales were down 10.5% and within our guidance range. As expected, sales in the Americas segment were disrupted due to the tariff announcements in the U.S., particularly early in the quarter as our customers adjusted their purchasing plans and monitored the impact to the consumer. Gaming accessories glue modestly in the segment, driven by our leading third-party accessory product assortment, supporting the release of Nintendo's Switch 2 console. Sales for back-to-school products were down in the quarter as U.S. retailers were cautious with their early season orders. We forecast our U.S. and Canada back-to-school season to be down mid-to-high single digits. but it is still early in the season and stronger consumer demand could improve the forecasted results. We have sufficient inventory to support potential upside from replenishment orders and our teams are working closely with customers to support their back-to-school demand. In Latin America, sales were weaker than expected, particularly in Mexico, due to a constrained consumer and competition at lower price points. However, we were encouraged by the recent performance with trends improving in June. In Brazil, sales were down modestly in what is a seasonally low sales quarter. Back-to-school sales occur later in the year in Brazil, and we are closely watching order input and remain positive about our expanded product offering for the upcoming season. We are also paying close attention to an increase in low price product entering Latin America from China, and we will react accordingly with price and assortment. In the international segment, sales declined, but at an improved rate compared to the first quarter. Gaming accessories grew mid-single digits, driven by the Nintendo Switch 2 launch and our continued international expansion. While sales of office products remain soft in certain European markets like Germany, the UK, and France, we maintained or grew share in most categories across the region. Looking at our global technology businesses, Kensington computer accessory sales declined modestly in the quarter. We expect improving trends in the second half of the year, led by a stabilized market dynamic, a growing pipeline, and revenue from new product introductions. In gaming accessories, Powerade delivered modest growth across both segments this quarter, highlighted by our role as a Nintendo-licensed third-party manufacturer of accessories for the Switch 2 console, which launched globally on June 5th. Our comprehensive product assortment at launch included a wide range of controllers, cases, and other accessories. Many of these products have exclusive IP related to Nintendo games. While Switch 2-related sales were modest in the second quarter given the timing of the June release, we expect more meaningful sales in the coming quarters as adoption increases and as our product portfolio expands. Global sales of office products were soft in the quarter. We have good syndication of our product assortment and the lower rate of sales is from our core offerings and due to lower demand. We continue to refine our new product development approach to enhance our category positions and enter faster-growing adjacencies. Now let me highlight the progress we're making on our revenue growth initiatives. Within Computer Accessories, we've improved our innovation pipeline, with the number of new product introductions set to double in 2025 compared to 2024. One key product I would like to highlight is our new Thunderbolt 5 docking station supporting Apple users. This feature-rich docking station expands our reach into the premium Apple ecosystem. We are focused on strategically expanding our assortment into higher growth categories through organic and inorganic efforts. The Rapid Tools product line in Europe has entered the Work Lights category, offering professional-grade solutions for do-it-yourself enthusiasts and small business owners. These products leverage our highly trusted Rapid brand while maintaining competitive price points. Additionally, in Europe, we're expanding our successful ergonomics product portfolio with the innovative new compact sit-stand desktop series, specifically designed for the hybrid work environment, along with other complimentary ergonomic accessories. Our recent acquisition of bureau seating has been fully integrated, strengthening our position in Australia and New Zealand. Given this success, we are evaluating expansion opportunities in additional markets where we see potential for the brand and the product category. Now let me update you on our multi-year cost reduction program in the quarter we realized eight million dollars in cost savings and since the program's inception have achieved annualized cost savings totaling more than 40 million dollars savings have primarily come from optimizing our manufacturing footprint headcount reductions and de-layering the organizational structure as a part of these planned efforts we have recently announced changes to our leadership team with key appointments. Jed Peters and Rubens Passos assumed leadership positions for North America and Latin America, respectively, effective in July, and AJ Spikervet will lead our international segment beginning in 2026. They bring a vast amount of commercial experience, deep product knowledge, and a strong customer relationship that will help accelerate our transformation. These important initiatives, combined with improving demand trends and favorable FX tailwinds, position us for sequential improvement in the third quarter, with sales declines moderating from current levels. The foundational work we're doing today, streamlining our operations, investing in higher growth categories, and optimizing our cost structure, is building a platform for sustainable, profitable growth. it. While we remain focused on navigating the current market dynamics with discipline and agility, I'm confident we're making the right strategic decisions to enhance our competitive position and improve our revenue performance. Before I hand the call over to Deb, I would like to thank the employees of AcoBrands for their tireless efforts in support of our strategy. I am proud of our team and the work we are doing to transform our company. I will come back to answer your questions. Deb?
Thank you, Tom, and good morning, everyone. As Tom mentioned, second quarter sales and adjusted EPS were in line with the outlook we provided in May. Reported sales in the second quarter decreased 10% with a slightly favorable FX impact. This decline reflects a quickly changing U.S. marketplace given the tariff announcements. Initially, there was uncertainty about the environment and the ultimate cost of goods, and many customers ceased purchasing until some clarity developed. This uncertainty lessened as the reciprocal tariffs were delayed and as we progressed throughout the quarter. Overall demand remained soft for our consumer and business products as well as for computer accessories. Gross profit for the second quarter was $130 million, a decrease of 15%, with the margin rate contracting about 200 basis points to 32.9%. The decline was driven by the impact of the tariff announcements and a combination of lower volumes and reduced fixed cost absorption. Due to the strength of our first quarter margin rate, our year-to-date margin rate is down much less, and 80 basis points declined. SG&A expense of $83 million was down versus the prior year due to cost reduction actions and lower incentive compensation expense. Adjusted operating income for the second quarter was $47 million versus $65 million a year ago. The operating income ratio to sales sales has been impacted by the lower volumes deleveraging our SG&A costs. Now let's turn to our segment results for the second quarter. In the Americas segment, comparable sales declined 14%, largely due to the purchasing disruption I mentioned earlier, as well as soft demand in most of our categories. The Americas adjusted operating income margin for the second quarter was 17.4%, below last The margin rate in the quarter was impacted by softer volumes, lower fixed cost absorption, and the impact from tariffs, more than offsetting cost savings. Before moving to the international segment, I want to call out that we have successfully settled the long-standing tax assessments in Brazil. Our reserve of $20 million has been completely resolved for $7 million. We are pleased to have this matter behind us. Now let's turn to our international segment. For the second quarter, comparable sales declined 4%, an improvement from the first quarter. Demand was soft in Europe, especially in Germany, UK, and France, which are the largest markets in EMEA due to continuing pressure and business essential products. Australia benefited from the borough seeding acquisition, and we saw good growth in Asia. international adjusted operating income margin for the second quarter increased to eight and a half percent due to the benefit of pricing cost savings and lower incentive compensation expense more than offsetting the volume decline year-to-date adjusted free cash flow was an outflow of 24 million dollars which was in line with our expectations this includes 17 million dollars in cash proceeds from the sale of two owned facilities. The second quarter is historically the peak of our borrowing needs to support the seasonal aspects of our business. We began generating positive cash flow late in the third quarter and throughout the rest of the year. During the quarter, we returned $7 million to shareholders in the form of dividends. while we continue to believe a balanced capital allocation is appropriate in the near term we will be focused on paying down debt at quarter end we had approximately 200 million dollars available for borrowing under our revolver and we finished the quarter with a consolidated leverage ratio of 4.3 times given the impact of tariffs on second quarter results and a high level of uncertainty in the markets, we decided to be prudent and get additional cushion in our leverage covenants. We amended our bank credit agreement, increasing our leverage covenant by 50 basis points for the remainder of 2025 and by 25 basis points throughout 2026. Now turning to the outlook, we are providing an outlook for both the third quarter and the full year. The evolving tariff environment continues to lead to an uncertain demand environment and muted economies, especially for our America segment. We expect this uncertainty to continue for the remainder of the year. Our outlook reflects our price increases, which will cover the tariff costs and maintain margin. Pricing was announced in the second quarter and takes effect in the third and fourth quarters. We anticipate our pricing actions will partially mitigate the continued softness in consumer and business spending, with the rate of decline improving in the second half of the year. For the full year, we expect reported sales to be down 7% to 8.5% and adjusted EPS to be within the range of $0.83 to $0.90. We expect adjusted free cash flow to be approximately $100 million, including the proceeds from the sale of assets. We anticipate a leverage ratio of 3.8 3.9 times at year end for the third quarter we expect reported sales to be down five to eight percent with fx having a positive impact from the weakening of the us dollars we anticipate adjusted eps to be in the range of 21 to 24 cents even though the current year poses challenges we remain confident in the long-term future of our company and our ability to navigate this dynamic period we have a strong balance sheet with no debt maturities until 2029 and a long history of productivity savings and cost management we continue to anticipate that in the longer term we can grow sales modestly from organic and inorganic initiatives with a target gross margin rate of 33 to 34 percent and consistent cash flow generation now let's move on to Q&A where Tom and I will be happy to take your questions. Operator?
Operator
Thank you very much. If you would like to ask a question please press star followed by one on your telephone keypad now. Please ensure your device is unmuted locally and if you change your mind or your question has already been answered please press star followed by two. Our first question comes from Greg Burns with Sudoti and Co. Greg, your line is now open. Please go ahead.
Morning. When we look at how the back-to-school season is playing out, can you just quantify how much of the decline you would attribute to, I think, last quarter you mentioned that maybe there was some pre-buying or early buying to the first quarter, and then also the tariff demand dynamic that you mentioned at the beginning of the quarter versus maybe just lower market demand for the product categories that you're selling? And also, when we look at how the full season is going to play out, how are channel inventories at your retailers, and are they such that you think that maybe the back-to-school season gets spread out maybe more over the second and third quarter versus maybe more localized in the second quarter? Thank you.
All right. Good morning. This is Tom. So first, let me address kind of the decline question and decline really is a mix of different things compared to our expectations. So certainly we mentioned the shifts into the first quarter. We also did see some softness with orders from our customers, including cancellations. And then we saw some shifts, very modest shifts into the third quarter. So if you compare it to our expectations, those were the three primary drivers of the kind of changes in expectations. As we think about looking ahead, we're early in the season. We're less than 10% through the sell-through season, which really will dictate any demand replenishment that we get later in the season. We've ensured that we have good inventory positions in the event that our customers' demand increases above expectations or above forecast. We're hopeful that that will be the case, but at this point, it's uncertain, and it'll probably be premature to comment. Lastly, I will say our customers continue to manage inventory tightly. Their replenishment expectations are relatively low in our forecast, but we hope that that will obviously materialize differently, and we'll see. Again, it's early in the season, and it's too early to tell exactly what our customers are going to do.
Okay, thanks. And then in terms of new product development, you highlighted a couple of products that you're going to be bringing out in the second half. How should we think about those products contributing to revenue in the second half? Is it more of a 2026 kind of upside from these products as you see the market, or will there be benefit in the second half?
Yeah, the benefit will be very modest, Greg. It takes time for us to get syndication of product, get listings of product. You know, we should see some benefit from the switch to accessories that are entering the market in the second half. But beyond that, it's really 2026 and beyond where we'll see impact from revenue with the new product introductions that are happening this year.
Okay, thank you. our next question comes from kevin think with barrington research kevin your line is now open please go ahead yeah good morning so um just going back to back to school i'm i'm wondering if um you know you uh can make adjustments with your product assortment uh in terms of price points et cetera, given, you know, given the demand environment, if that's something you think about in light of, you know, again, the current trends.
Yeah. So, Kevin, good morning. That's a good question. You know, we feel consistently that we have a good offering of price choices in our portfolio supported by our meat and five-star brand here in in the u.s and our hilroy and five-star brand in canada so we think north america we have a good offering that touches on each one of the price points we collaborate with our customers at the beginning of the season to ensure that we're hitting the price targets that they think will move during the season and we've done a nice job of that this year again it really will our performance will really depend upon uh consumer demand um and you know right now it's kind of wait and see. We're still early in the season, as I mentioned earlier. As it relates to back-to-school and other markets, which are important, such as Brazil, we are going to have to reposition some of our product and make sure that we are competitive in evolving price points as lower-cost competitors from China particularly are entering the market aggressively. And we're doing so right now. So we're adjusting those assortments. We're making sure that we have the features that the consumers need at those price points, and those offerings will be in market this BTS in Brazil.
Okay, on that Chinese competition, I mean, is that something that you expect to persist, or what kind of, what do you think is driving that? Is it just the environment that's opening the door for, you know, lower-cost competitors, or Or just wondering, you know, about the sustainability or, you know, that trend, I guess.
Yeah, that's a hard one for us to predict. I mean, we certainly see low-cost competitors entering and exiting markets all across the globe consistently. This may be a little different because of the trade dynamics, particularly impacting the U.S. market for Chinese suppliers. We'll just have to wait and see. the key for us is just reacting, making sure that we have the right product, the right price, the right assortment to compete in every market that we sell product in.
Okay. And you mentioned that you expect your price increases to, I think, fully offset tariff costs in the second half of the year just kind of thinking about gross margin you talked about that 33 to 34 percent target i know you typically have seasonal strength in the fourth quarter in gross margin but you know i guess we should expect some improvement in the second half in gross margin and i don't know if we might be trending towards the lower end of that 33 34% range or you know how you're thinking about that yeah I think that's right I think
um you know we're expecting it to modestly improve in the back half um gross margin and we have put our pricing initiatives out there so that we are covering the cost of the tariff as well as maintaining our margin um so as we think about the full year you know we took a couple hits here in the first half, but back half, we do expect to come back.
And then just lastly, did you mention the benefit from foreign currency that you've baked into the sales outlook for both the third quarter and the full year?
Right. Yes, we did. And if you kind of go back to our slides and stuff, you'll see that out there, but we do expect a favorable benefit from FX primarily or particularly in the fourth quarter, but third as well.
Okay. It's in the slides. Okay. All right. All right. Thanks. That's all I had. Thank you.
Operator
Thank you very much. Our next question comes from Joe Gomez with Noble Capital. Your line is now open. Please go ahead.
Good morning. First question on PowerA. Good morning. The Nintendo Switch was the fastest selling console in U.S. history when it came out here a month or a half ago or so. Same in Japan. Just trying to get a better, some more color on how that is impacted. your guys power a subsidiary are you seeing that same kind i know it's early days but we've had you know at least a month of july there uh demand for for your products yeah joe great question we're really pleased with our partnership with nintendo and our power a team they've done a great job of getting price or getting product to market as quickly as possible so as we noted in our prepared remarks.
The launch was on June 5th, and so second quarter was really not impacted much by the switch to accessory sales. The big season for us is holiday, and so you'll see Q4 being a strong Power A quarter for ACCO brands. We're well positioned to capitalize on the demand. we understand how the demand curve works. As consoles get launched, get into market, first party typically realizes sales early in the maturity cycle, and third party then steps in shortly thereafter. So we feel like we're very well positioned. We're excited about the accessories that we're bringing to market, and we're in a great position with Nintendo.
So again, really pleased with our team and and have high expectations for our accessories business supporting the launch great thanks for that and then on the the hundred million dollar cost reduction program um and as you mentioned you've gotten 40 million since the beginning of the program you know what do you think is possible for the second half of this year yeah well if you think about the first half we've got about 16 million in because we had about eight in the first and eight in the second so if you just think of that kind of playing out through the rest of the year
joe you're probably pretty close maybe a little bit more um just because of the later impact of some of our actions okay great and then in in um the release you talked about you know an asset sale maybe just give us a little bit more color what that was that you're planning on on having any more asset sales no we don't have any on the horizon um what that really was is the majority of it was our new york location that if you remember joe we took the charge for this year as we were um shutting that up um as part of our footprint rationalization as part of the cost savings initiative um so that facility was closed and sold at um a nice a nice gain and a nice cash flow process. That's primarily what was in there.
Okay, great. Thanks. I'll get back in queue.
Operator
Our next question comes from Hale Holden. Goodbye, please. Your line is now open. Please go ahead.
Deb, the Brazilian tax release, is that sort of cash that comes back to you or just uh an accounting credit um actually you know we resolved it if you remember the reserve was really large a couple years ago and we've been dwindling it down with negotiations and with government coming out with new laws but it ended up being about 20 million dollars of a liability on our books and we are going to end up paying about 7 million out so that 13 million that's going through the income statement is just an accounting adjustment but we'll have 7 million go out over the next year um to the to the government got it um and the second question was um on the on the blended pricing increases that you've taken to offset tariffs um any sense on a percentage basis like what the consumer would see on shelf um versus maybe where you were last year or or your enterprise customers yeah you know it's hard um it's hard to say because we've got the china and the non-china um product coming in that we're pricing accordingly for and we're not pricing really every single item because we do have on-hand inventory as well so you know we're passing on a good price increase as i said to cover the cost and to cover you know to make sure we maintain our margin okay maybe maybe put another way is um would you guys expect
an elasticity hit or do you think you're going to be able to to sort of realize most of it back to yeah hey this is tom um that that's sometimes difficult to to to address because there's so many other macro issues that that go into modeling elasticity we do we do model a modest volume decline as we put through price increases but to give specific numbers it's too speculative from my perspective. So the forecast that we've given appropriately balances price elasticity in it, particularly here in the U.S.
Great. I definitely can respect that. I appreciate it. Thank you.
Operator
Our next question comes from William Reuter with Bank of America. Your line is now open. Please go ahead.
Good morning. The first, given the stressed consumer environment, have you seen your U.S. customers allocating a different amount of shelf space for back-to-school products or traditional office products to the non-branded competition that's out there?
Yeah, you know, that ebbs and flows, Bill, every year. So, you know, the decisions to set VTS typically happen, you know, before the turn of the calendar year. So those decisions were made well in advance of the Liberation Day tariff announcements. You know, I would say this year our listings are pretty constant to the prior year. In fact, they're up modestly. What we believe is going to impact our sales a little more is just the conservative nature in which our retailers are approaching inventory with all the uncertainties that they're trying to manage through. And so that's why we think BTS sales will be a little depressed compared to our past performance. Got it.
And then, I mean, I know you said that only 10% of sell-through has occurred to this point so this may be a difficult question to answer but do you believe that in the u.s you will have gained or lost market share this season for back to school yeah yeah bill that it's way too premature to uh to project whether or not we will or we will we will not we're well positioned i can tell you that our brands historically have performed very very well in back-to-school, particularly five-star.
We're confident in our feature-rich assortment and our price points. We think we hit all the major price points, and we have great relationships with our customers. So the things that we can control, we think we've executed against very well going into this season. Now we just have to see how it plays out.
Got it. And then lastly for me, I'm not sure what you might be willing to provide or not provide, but can you give us any sense for magnitude of the dollar of incremental sales of gaming accessories you might see either in the first quarter of this year or I'm sure in fiscal year 26 based upon all of the momentum behind Switch. Just trying to figure out kind of, is this like a $10 million opportunity, 20? I don't have a sense for context.
Yeah, again, it's a little early on that topic as well. Holiday season is our biggest season in support of the Switch 2 launch. we're starting to get orders in now we have a demand forecast provided to us we're excited about that but i think it would be premature for us to give a specific dollar amount simply because we don't really know yet but so far uh reception has been very strong with our our assortment got it all right that's all for me thank you thank you very much we currently have no further questions, so I will hand back over to Tom for any closing remarks. Thank you everyone for joining us. We are pleased to have delivered second quarter sales and adjusted EPS in line with our outlook. I am confident that our proactive actions are better positioning us for long-term profitable growth. We have a strong balance sheet and generate consistent cash flows, which we will use to invest in revenue growth opportunities. We appreciate your interest in ACCO Brands and look forward to talking with you when we report our third quarter results in October.
Operator
Thank you very much Tom and thank you Deb and Chris for being our speakers on today's call. We appreciate everyone for joining. You may now disconnect your lines.
