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Hello everyone, and welcome to the ACCO Brands Third Quarter 2023 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I'll now turn the call over to our host, Chris McGinnis. Please go ahead.

Good morning, and welcome to the ACCO Brands Third Quarter 2023 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 was named CEO on October 1st. Tom will provide an overview of our third quarter results and 2023 priorities. Also speaking today is Deborah O'Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our third quarter results and provide an update to the full year outlook. We will then open the lines 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 transaction, integration, amortization and restructuring costs, a noncash goodwill impairment charge, the change in fair value of the contingent consideration related to the Power A earn-out and other non-recurring 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 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 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 Tedford.

Thank you, Chris, and good morning, everyone. Thank you for joining us. Before I discuss our third quarter results, I want to thank Boris for his mentorship throughout the years. We have partnered closely to ensure a smooth leadership transition, and we will continue to work together until he officially retires in early 2024. I would also like to thank our dedicated team at ACCO Brands for their good work in the quarter. We made significant progress against our key priorities while facing a challenging demand environment. Since I became CEO on October 1st, we have been reviewing our strategies to ensure we have the right focus on driving long-term value for our stakeholders as we navigate the current global demand environment. We have a strong team, category-leading brands and a passion in our business to win. Now let's transition to the third quarter commentary. The third quarter was highlighted by the improvement in our gross margin, strong free cash flow generation, and our solid management of expenses which led to growth in operating income and adjusted EPS at the high end of outlook. At the start of 2023, we laid out four key priorities, which were the restoration of our gross margin, profitable management of our top line, continued investments in our brands and new products, and tight management of expenses and inventory. Our top priority entering 2023 was recovering lost margin from the high rate of inflation experienced in 2022. Year-to-date, we have delivered 380 basis points of gross margin improvement, driven by the combination of our cost savings actions and the cumulative effect of price increases. With the improvement in gross margin, we are back to our 2019 gross margin rate. Additionally, we have focused on more profitable revenue streams, while remaining committed to supporting our broad assortment of consumer-desired products and delivering superior service to our customers. Globally, we grew or maintained our market share in key categories and have introduced exciting award-winning new product solutions. We reacted quickly to a more challenging demand environment and prudently managed our spending within the quarter. We reduced inventory by 15% or almost $63 million versus the prior year, while improving our service levels to our customers. We also announced the next phase of our footprint rationalization program and continue to optimize our supply chain. Our execution on these initiatives led to significantly improved cash flow, debt repayment, and a lower leverage ratio. While we executed well against our key priorities within the quarter, comparable sales were down 10% versus last year. The global macro-economic backdrop continues to challenge our categories. Weaker-than-expected global business IT spending has muted demand for our Kensington branded computer accessories. Additionally, sales trends did not improve as expected in our gaming accessories categories. While near-term challenges persist, we believe technology accessories remain an important source of long-term profitable growth for the company. Global sales of our Kensington branded computer accessories are down year-to-date, after five years of double-digit growth in the category. We protected investments in the business with exciting new products being introduced. We believe as business IT spending recovers, so will the demand for our computer accessories categories. We made progress on our international expansion of gaming accessories and remain confident in the long-term growth opportunities in both our EMEA and International segments as we expand our channel reach, introduce new products and leverage our local commercial teams. Transitioning to the segments, I will focus my commentary this morning on North America. In the North America business, category trends worsened during the quarter, and we continue to see retailers tightly manage their inventories, causing sales to be weaker than anticipated. Back-to-school is an important season for ACCO Brands in North America, and despite a soft market, our brands performed well and delivered value for our customers. We understand the importance of execution during the back-to-school season, and I am proud of our performance. From setting planograms on time to effective demand generation campaigns, the strong consumer value propositions, we delivered for our customers and consumers. Previous industry forecast for the season called for sales to be flat to modestly lower in 2023. However, based on the most recent external data we track, the back-to-school season was weaker than forecasted. Despite the weaker season, the strength of our brands allowed us to gain market share in both dollars and units. The weaker-than-expected season was an additional headwind in North America versus our expectations. And lastly, I want to share a few comments and observations from my first month as CEO. I am humbled by the support of our dedicated and talented team at ACCO Brands. While near-term challenges persist, we have a long history of delivering value for our customers and our shareowners. As we analyze our current performance, we are identifying ways to strengthen the company, including opportunities to accelerate growth and further optimize our cost structure. In my first day as a CEO, we held a summit with our business leaders focused on innovation and new product development. Improving the outcomes of the company's innovation efforts is one of my top priorities. ACCO Brands has a strong history of leading our categories with innovative solutions. I am committed to reimagining how we invest in new product innovation and accelerating the progress of this important work. We are reviewing our near-term strategic plans for each category and segment and are in the process of finalizing their requirements to deliver new product introductions to achieve our revenue and profit objectives. Our restructuring and productivity initiatives are achieving our targets. We are evaluating more opportunities to further simplify our business and reduce our costs. While the third quarter was challenging from a demand perspective, we remain confident that our collection of leading brands, along with our geographic diversity, will allow ACCO Brands to deliver sustainable organic revenue growth as global economies improve. We have the right team in place with a proven ability to respond to and operate well in challenging economic environments. I am proud of our execution to date in 2023. We have a solid balance sheet with no debt maturities until 2026 and low fixed interest rates for over half of our outstanding debt. We expect to generate consistent, strong cash flow and we'll continue to prioritize dividend payments and debt reduction. I will now hand it over to Deb and will come back to answer your questions. Deb?

Thank you, Tom, and good morning everyone. When we last spoke in August, we highlighted a slow demand environment due to the current macro-economic backdrop. While we were expecting demand trends to improve, that did not happen as the global economies continue to challenge demand as both consumers and businesses curbed discretionary spending in response to the higher cost of living and higher interest rate environment. In addition, as the US dollar strengthened during the period, we've realized only a 2% benefit from FX versus our outlook of 4%. The combination of these factors led to our sales shortfall versus our outlook in the third quarter. Despite this, we made great progress in recovering our lost margin from the extreme inflation that challenged the company's margin profile in 2022. Our margin profile significantly improved in the third quarter, and we managed costs well, which allowed us to deliver adjusted EPS at the high end of our outlook. In the third quarter of 2023, reported sales decreased 8% versus the prior year. Comparable sales, excluding foreign exchange, were down 10% versus the prior year. The sales decline was due to lower volumes across all three of our operating segments, more than offsetting global price increases and volume growth in Latin America. Kensington, our computer accessories category saw significant decline following the industry-wide trends that Tom discussed. Gross profit for the third quarter was $145 million, an increase of 5% despite lower sales as gross margins improved 400 basis points from the cumulative effect of our pricing and cost reduction actions. Adjusted SG&A expense of $99 million was up from $95 million in 2022. Adjusted SG&A as a percent of sales increased to 22.1% as strong cost controls were more than offset by increases in incentive compensation expense and the deleveraging from the lower level of sales. Adjusted operating income was $46 million, up 8% compared to the $43 million last year. Adjusted EPS was $0.24 per share versus $0.25 in 2022, as our growth in adjusted operating income was offset by increases in interest and non-operating pension expenses. Now let's turn to our segment results. North America reported and comparable sales both declined 15% as volume declined more than offset a cumulative pricing action. Sales in the third quarter were impacted by lower business and consumer demand due to the weak economic environment. High single-digit declines were due to weaker-than-expected industry-wide back-to-school performance and lower office occupancy trends with the remaining decrease driven by lower sales of computer accessories. Retailers have continued to tightly manage inventory levels, which meaningfully impacted replenishment for back-to-school. Sales of office products are down due to softer demand and declines from the favorable return to office trends realized last year. Office occupancy rates have stabilized at about 50% globally, almost all year. North America adjusted operating income margin increased 160 basis points to 11.6% from the prior year third quarter, driven by pricing and cost saving actions. Now let's turn to EMEA. Reported sales were down 3%, while comparable sales were down 8% due to volume declines. Lower sales of technology accessories were the main driver of the decline, largely due to weaker IT and gaming spend. Although demand for our office products remain challenged due to the economic environment in the region, and we have seen some trade down to our lower-priced offerings, our market shares were stable. In the third quarter, EMEA's adjusted operating income margin increased 500 basis points to 10.7%, with adjusted operating income growing 80% to $14 million. The improvement in adjusted operating income was due to our pricing and cost reduction actions as we successfully recovered margins from last year's extreme inflation in Europe. Moving to the International segment, reported sales increased 5% and comparable sales were up modestly in the third quarter. Sales growth on a year-to-date basis is stronger, reflecting timing shifts amongst the quarters. The growth was driven by price increases and good volume growth in Latin America as back-to-school continues its recovery. These were largely offset by reduced demand for technology accessories and lower overall demand due to a weaker macro-economic environment. The International segment posted adjusted operating income of $18 million, down slightly due to an increase in spending to support go-to-market strategies and the benefit of bad debt reserve releases last year that did not repeat. Switching to cash flow and balance sheet items, due to seasonality, we generally use cash in the first-half of the year and generate significant cash flow in the second-half of the year. Year-to-date, adjusted free cash flow was $63 million versus a use of $12 million a year ago. The $75 million improvement was driven by improved working capital management and lower prior year incentive payouts. We ended the quarter with a consolidated leverage ratio of 3.8 times, well below our 4.75 times covenant ratio and we expect to end the year at approximately 3.5 times. Longer term, we are still targeting 2 to 2.5 times. At quarter-end, we had $523 million of remaining availability on our $600 million revolving credit facility. As shown on our earnings slide, more than half of our debt is at a fixed interest rate of 4.25%, and does not mature until 2029. We ended the quarter with total gross debt of $970 million, over $110 million lower than the same time last year, and our cash balance was $74 million. Turning to our outlook. We are updating our full year guidance for 2023. For the full year, we expect reported and comparable sales to be within a range of down 6% to down 7%. With the recent strength of the US dollar, we now do not expect any benefit from FX on the revenue front for the year. The lower comparable sales growth is due to the expectation of continued soft demand due to economic uncertainty, and lower consumer and business discretionary spending. We will continue to focus on managing our cost tightly until we see an improvement in the demand environment. We expect full year gross margins of approximately 32% to 33%. In the near term, we are focused on maintaining this gross margin rate. As Tom discussed in his earlier remarks, longer term, we are reviewing actions for improvement. SG&A costs will be higher than last year due to increases in incentive compensation from the low levels recorded last year. For the full year, we expect adjusted EPS of $1.03 to $1.07 per share. Adjusted operating income is expected to grow at low double-digit levels, partially offset by higher net interest costs of about $14 million and higher non-cash non-operating pension expenses of $5 million. The adjusted tax rate is expected to be approximately 30%. Intangibles amortization for the full year is estimated to be $44 million, which equates to approximately $0.32 per share of adjusted EPS. We continue to expect our free cash flow to be at least $110 million after CapEx of $15 million. And looking at cash uses in 2023, we expect to continue to prioritize dividends and debt reduction. Now let's move on to Q&A, where Tom and I will be happy to take your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Greg Burns with Sidoti & Company. Greg, please go ahead, your line is open.

Good morning. When you think about managing your expenses in this environment and then balancing that with kind of the new focus on new product development, how do you kind of reconcile those two? Are you willing to sacrifice some margin in the near term to achieve some of your new product growth goals?

Yes, Greg, good morning. This is Tom. Thank you for the question. We've worked very hard to really recover our gross margin rates from the unprecedented inflation that we faced in 2022. The plan is not to give back gross margin rates that we've earned back over this period of time from our cost actions and price increases. As we think about innovation, it's a clear focus of our company. And we think that our innovative products, the new products that we're introducing, need to be accretive to our current margin profile. So it is unlikely that any new innovation would be dilutive to margins on a move-forward basis.

Okay. Thank you. And in terms of the softness in gaming, I guess the expectation was that maybe supply chain issues would get better and those kind of a strong slate of games coming out that might stimulate demand there. It doesn't look like that happened, but can you just give us maybe a little bit more color on what you're seeing in the gaming market?

Yes. It is a bit of a dynamic environment that we're competing in the category. Let me first talk about what our near-term focus has been, which is really the international expansion of the category. We've made great progress, particularly in our International segment, setting the foundation for what I believe is a strong future growth in International. So really pleased with the work that we've done in preparing ourselves to expand the category globally. But the category is under some pressure. And there's a number of reasons we believe the pressure continues to persist. At the beginning of the year, we had anticipated that it would start to see some improving trends. And frankly, those trends have not improved, they've really maintained their earlier performance throughout the back half of the year. And that largely is due to a number of factors. So first party continues to discount as they work through their inventory. Much like all of us, they struggled with chip availability and worked very hard to get chips and build inventory, and now they're working through that excess of inventory as the demand environment has slowed. So we're seeing some first-party discounting that has continued into the third quarter that we did not anticipate. Next, in EMEA, in particular, we suffered through a number of store closures, right? The number of retail outlets that have represented our product lines is down significantly. And certainly, that wasn't anticipated at the beginning of the year and is impacting sales. And then we just continue to see a very cautious spending by the consumer and very cautious replenishment by our retailers. We've seen and experienced with our early orders that the holiday season is weaker than we had anticipated at the beginning of the year, and all of those factors combined have really proven to be headwinds that are too difficult to overcome this year in the gaming accessories market. As I said in my prepared remarks, we do believe that long term, it is a fantastic platform. There's 3 billion plus gamers worldwide. It's a category that's growing. It has more entrants into the category. So long term, we're very bullish on the opportunities, and we'll just have to continue to navigate the challenges that we face in the near term.

Okay. Thank you.

Thank you.

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

Good morning. I just wanted to dig a little bit more into the back-to-school season, which you noted was softer than expected. You mentioned that the lower inventory replenishment by customers. Just what did you see for consumers? Was it just lower volumes purchased, trade down to lower-priced products or, I guess, the combination of all the above?

Yes. First, Kevin, good morning, and thank you for the question. Yes, so back-to-school was a bit weaker than we had anticipated when we spoke last. With that said, I'm very pleased with our performance. We predominantly participate in student note taking and we took share during the season with our collection of brands. And we grew our POS, right? Our through the register sales grew modestly in a season that was down. So our performance was really strong, and you alluded to it, right? The season overall was lower than expected, and that caused retailers to be cautious as they thought about their ending inventory positions in the categories that we compete in, which did not materialize with replenishment orders that we had hoped for, right? The good thing is that most of our retail partners came out of the season very clean, right? They didn't have to do deep discounting, and we are well positioned as we think about 2024 BTS because of our brand performance in this season. So again, overall, pleased with performance. Market was down; however, we grew modestly and took share, but we did not see replenishment orders as we anticipated as retailers just became more cautious through the quarter with their purchases and replenishment.

Okay. Great. That's good color. Thanks for taking the question. I'll turn it over.

Thank you, Kevin.

Our next question comes from Joe Gomes with NOBLE Capital. Please go ahead. Joe, your line is open.

Good morning and thanks for taking my question.

Good morning, Joe.

I wanted to just circle back here with the weakness on the top line. You guys, on the second quarter call that was five weeks into the quarter, when you held that call, a lot of the things that you have mentioned, the retailers and inventory, the economic weakness, strength of the dollar, all of that was already prevalent when you made that forecast in the third quarter being flat to down 3% and it actually came down 7.7%. And understand the foreign exchange, but I'm guessing the kind of question is, what happened that you were not anticipating in mid-August or early August, I guess I should say, that would have resulted in the top line being as weak as it was in the quarter?

Yes. No, good question, Joe. Thanks. I think the third quarter sales performance also went in form how we look at the fourth quarter. And we thought there would be some lessening of the environment and that now there's really greater uncertainty and kind of recession points. The consumer is definitely reducing their discretionary purchases more than we would have anticipated in the fourth quarter. And I think the weaker demand that Tom has talked about in our tech services really hit us harder in the fourth quarter than we would have imagined. The PC trends that we talked about in the third quarter continued into the fourth quarter, and our Kensington business suffered from that, more than we would have anticipated. I think office also was down a little bit lower than what we had expected given the office stabilization that we had thought we'd have more return to office in the fourth quarter than what happened. And then lastly, I would just say the retailers really showed their conservatism in the third quarter that we believe will carry into the fourth and so far has, and that also was an impact as we looked out. We are hearing some messaging too from our retail partners of a softer holiday than we would have anticipated a couple of months ago. And so all of those factors together, I think, has caused us to reevaluate the fourth quarter and come in with our reduced guidance.

Okay. And then kind of a follow-up to that. We're talking about a weaker-than-expected or originally expected environment here. And I know you guys said that one of the things you want to try and do is maintain that gross margin, you don't want to give any of that back. But in a weaker environment, competitive environment oftentimes ticks up. And how quickly do you think your customers will be coming, looking for price reductions to make themselves more competitive and impact your margin level there?

Yes, Joe, an interesting question and certainly one that we talked about internally. First, we try to position our business holistically with our customers, right? We want to drive value for them and value can be defined in a number of different ways. Certainly, price and program are constant negotiations with our customers and rightfully so, that they have a responsibility to do that, and we have a responsibility to make sure that we are competitive in the marketplace, and we believe that our current pricing is competitive. I think we can support that. And I gave an example in our prepared remarks and as a response to the question earlier, with our back-to-school offering, right? We took share, we grew our branded business in a very competitive season in which retailers led with private label. So we know we have an offering that creates value for our customers, and it is desired from our consumers. And so we have to protect that value and that value comes at a cost and at a price. And so we work hard to be competitively priced in the marketplace, and we believe we are. But where we do need to lean in with price, we're prepared to do that, but we have to offset that with more competitive input costs, which we're prepared to do as well. So this is a mix of work that we manage. It's not just simply a negotiation with the customer. And I think we've got a strong history of doing that. And as I mentioned, right, we believe our gross margins are fully recovered, and we want to protect that and maintain that. That's important to our company, it's important to you.

Yes. And I would just add, inflation is still there, Joe. And so we're still seeing the input side, labor's up, things are up. And so as far as to Tom's point, input costs are going up, albeit not like what we had seen by any means, but up. And I don't think the demand environment this year matters on price as much as it does in just the discretionary purchasing.

Okay. Great. Thanks for that insight. Appreciate it. I'll get back in queue.

Thank you, Joe.

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

Thank you for your interest in ACCO Brands. While the operating environment remains uncertain, we are focused on executing against our key priorities and keeping margin improvement at the forefront. We have managed well in difficult environments and are confident in our ability to navigate the current economic challenges. With the reimagined approach to product innovation, prioritization of key growth categories supported by leading brands and a highly effective global commercial team, we will be well positioned to deliver organic growth as global economies recover. As previously mentioned, we are analyzing our cost structure, and we'll be implementing actions to lower our costs. With improving revenue trends and a lower cost structure, we believe compelling market performance will follow. So we look forward to talking to you in a couple of months to report on our fourth quarter results.