ACCO - NYSE

Okay. Hello, everyone, and thank you for joining the ACCO Brands Corporation 2024Q4 and full year earnings call. My name is Marie, and I will be coordinating your call today. On your telephone keypad, if you change your mind, please press star followed by two. I will now hand over to your host, Chris McGinnis, Senior Director of Investor Relations, to begin. Please go ahead.

Good morning, and welcome to the ACCO Brands Corporation fourth quarter and full year 2024 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 fourth quarter and full year and outline our 2025 priorities. Also speaking today is Deborah O'Connor, Executive Vice President and Chief Financial Officer, who will provide greater detail on our fourth quarter and full year results and provide our initial outlook for full year 2025 and the first quarter. 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 this 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. Good morning, everyone, and welcome to ACCO Brands Corporation's year-end 2024 earnings call. Last night, we reported full-year sales and adjusted EPS in line with our outlook, excluding greater-than-expected foreign currency headwinds. We delivered free cash flow of $132 million for the year, in line with our outlook. While the operating environment remains challenging, I am proud of our team's successful execution of our strategic initiatives to reset our cost structure and position ACCO Brands Corporation for better revenue outcomes in the future. Free cash flow was a bright spot in 2024, aided by both our cost actions and improved working capital management, as we reduced inventory levels by 17% for the year and collected a significant amount of receivables in Brazil, given the timing of their sales. Our consistent cash flow and commitment to debt reduction have improved our financial position, with net debt down $94 million for the year. The improvement in our balance sheet allowed us to expand our capital allocation program to include share repurchases while continuing to support our quarterly dividend and debt repayment. We are well-positioned to consider accretive M&A opportunities as well. In addition, during the year, we refinanced our bank credit facilities, extending maturity dates going out to 2029. Let me transition to a brief recap of the year, highlighting the progress we made against my first-year objectives and our updated strategy. At the beginning of 2024, we implemented decisive actions to reset and optimize our cost structure through the introduction of a $60 million multiyear cost reduction program. This program has simplified the organization, delayed our management structure, and rationalized our global footprint through a reduction of our manufacturing facilities. During the year, we realized approximately $25 million in savings from the program. Our proactive approach to cost management allowed us to deliver improved operating margins as gross margins expanded 70 basis points versus the prior year, and SG&A costs were almost $30 million lower than a year ago. We anticipate continued headwinds and uncertainties in 2025 and have expanded the scope of our cost savings program. We are now targeting $100 million in total savings by the end of 2026, increasing our current program target by $40 million. Decisions of this nature are inherently challenging, yet essential to enable us to address external challenges, protect our profitability, and ensure we have an operating model that will scale with volumes. As we improve our revenue outcomes, both organic and inorganic, we will be able to leverage this optimized cost structure for profit expansion. Our priorities have not exclusively focused on cost savings. Our work includes restoring sales growth through new product development, accretive acquisitions, price and promotional excellence, brand building, and other initiatives. However, revenue initiatives take longer to implement and realize the benefits. Our teams are focused on understanding consumer insights and finding innovative product solutions to solve unmet needs. We are partnering with our customers to unlock value for them with our leading brands, and we are aggressively defending leading category positions in our key markets. We have positioned key business leaders closer to customers, leading to strengthened customer relationships, which has opened additional growth opportunities. We have refocused our efforts related to innovation and new product development and have laid a solid foundation to improve our rate of new and refreshed product launches. We have several exciting new and refreshed product launches across our portfolio of categories, including celebrating the 100th year of Swingline staplers, a new high-speed inline commercial lamination solution, and we are expanding our line of more sustainable computer products. In 2024, we successfully entered adjacent categories such as ergonomics, and we will continue to build on this progress. We are committed to investments in our leading brands. Our category shares remain strong in 2024, with many of our brands either maintaining or growing share. Our brands resonate with both consumers and our channel partners. These investments provide the fuel to maintain our leadership position while also driving additional share gain opportunities. We are identifying more opportunities across the portfolio and have other introductions planned, like our Beyond Console initiative within our gaming accessories business. We also shared with you the early success of broadening. In 2024, we tested various products and new channels and are expanding our initial success. Our near-term 2025 outlook assumes the demand environment remains highly volatile due to uncertainties around global economies, potential additional tariffs, soft consumer demand, and a strong US dollar. The magnitude of impact from these factors on our business remains unpredictable. We anticipate 2025 sales to be flat but improving throughout the year on a year-over-year basis. I also want to address how we are handling the recently enacted tariffs.

Thank you, Tom, and good morning, everyone. Our fourth quarter and full year results were as expected, except for an increase in the impact from unfavorable foreign currency exchange rates. This change in rates from the time we issued our fourth quarter outlook to the end of the year resulted in $12 million of lower sales and $0.02 of lower EPS. In the fourth quarter, the overall demand environment remained soft as discretionary spending by both consumers and businesses remained constrained. Similar to the third quarter, sales trends in the fourth quarter were better than the first half of the year. As Tom mentioned earlier, in the fourth quarter, we recorded additional restructuring charges of $11 million as we expand the scope and size of our multiyear cost savings program. Given the volume declines and uncertainty in the environment, we felt it prudent to put plans in place to realize additional savings. We anticipate an additional $40 million in cost savings, bringing the expected cumulative annualized cost savings to $100 million at the end of 2026. Now turning to sales. Reported sales in the fourth quarter decreased 8%. Comparable sales, excluding foreign exchange, were down 6% versus the prior year. The sales decline was due to lower volumes globally, with continued weakness in Brazil. These declines more than offset growth in technology accessories from new product introductions and strong execution of our international expansion for gaming. Turning to our office product categories. Although office occupancy rates have stabilized over the past year, consumption of many products we sell continues to be influenced by new hybrid work habits and low in-office rates. During 2025, we expect these declines to moderate and be more in line with historical trends of down low single digits after several years of volatility. These categories remain very meaningful for us and provide a very solid margin profile and strong cash flows. Gross profit for the fourth quarter was $156 million, a decrease of 9% compared to the prior year, with the margin rate similar to last year. However, for the full year, we expanded our margin rate by 70 basis points. SG&A expense of $91 million was down 10% versus the prior year due to our cost reduction actions. Adjusted operating income for the fourth quarter was $64 million, down 6%, but the margin rate improved by 30 basis points versus the prior year, reflecting a strong gross margin rate and SG&A cost reduction. Let's turn to our segment results for the fourth quarter. In the Americas segment, sales declined 12%, with foreign exchange having a larger negative impact than previously expected due to the strengthening of the U.S. dollar. Comparable sales declined 8%. The exit of lower-margin business accounted for about 2% of the decline in the quarter. We also had lower sales for our learning and creative products in Brazil and for our office-related categories. These declines were partially offset by growth in technology accessories. The Americas adjusted operating income margin for the fourth quarter decreased by 80 basis points to 16.6% compared to the prior year as lower volumes more than offset lower costs.

Now let's turn to our international segment. For the fourth quarter, comparable sales declined 3% as the demand environment remained soft for our business essential categories. This was somewhat offset by growth in technology accessories. International adjusted operating income margin for the fourth quarter increased by 90 basis points to 16.5%, with adjusted operating income up slightly. This improvement in adjusted operating income margin rate was due to both our pricing and cost reduction actions. We finished the year with free cash flow of $132 million. This reflects lower inventory and strong collections of receivables in Brazil from the timing of their sales this year. We ended the year with total net debt of $766 million, $94 million lower than the same time last year. Remember, we recently refinanced our credit facility, and we downsized our revolver to $468 million from $600 million while extending our nearest maturity to 2029. At year-end, we had almost $330 million available for borrowing under our revolver, which is more than adequate for our needs. We finished the year with a consolidated leverage ratio of 3.4 times, well below our 4 times covenant ratio. Longer term, we are still targeting a ratio of 2 to 2.5 times. We will continue to use our free cash flow to enhance shareholder value by deploying capital through a balanced approach. This strategy, whether through debt reduction, dividends, share repurchases, or strategic M&A, is designed to drive value accretion to our shareholders. During the year, we returned $15 million to shareholders in the form of share repurchases while also using $28 million to support our dividend. Now let's move to the full-year outlook for 2025. For the full year, we expect comparable sales to decline 1% to 5%. It is a challenging environment to forecast, given the potential for additional tariffs, adverse foreign currency exchange, and weakening consumer demand. Barring unexpected effects of some of these uncertainties, we do expect year-over-year sales trends to improve as we progress throughout the year, reflecting a more consistent demand environment. For the full year, we expect adjusted EPS to be in a range of $1.00 to $1.05 per share. We expect full-year gross margins to improve compared to 2024. SG&A costs will be comparable to the prior year as savings from our cost actions are offset by increases in merit and incentive compensation expense and other inflationary pressures. The adjusted tax rate is expected to be approximately 30%. Intangible amortization for the year is expected to be $45 million, which equates to $0.32 per share. For free cash flow, we are expecting to be within a range of $105 million to $115 million. Over the last two years, cash flow has benefited from improved working capital, reflecting our significant efforts to reduce inventory after the supply chain disruptions a few years ago. Last year, we had unusually high collections in Brazil, driving some of the working capital improvement. In 2025, we expect strong cash flows but normalized for the Brazil collection and more similar to historical levels. We expect to end 2025 with a consolidated leverage ratio of approximately 3 to 3.3 times. Given the timing of our product sales, historically, the first quarter is relatively small compared to other quarters. We are forecasting comparable sales to be down 5% to 8%, with adverse foreign exchange a significant headwind.

We expect our loss per share to be within a range of $0.03 to $0.05 for the quarter. The first quarter is always our smallest quarter in terms of sales, which is impacting our bottom line. Now let's move on to Q&A, where Tom and I will be happy to take your questions. Operator?

Thank you, Deb. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question is from Joe Gomes of Noble Capital. Your line is open. Please go ahead.

Good morning. Thank you for taking my questions.

Hello, Joe. Good morning, Joe.

So I want to kind of start out and know, big real big picture here. You, Tom, talk about, you know, the primary focus moving forward about improving sales trends. And, you know, some of the things you mentioned, new product development, acquisitions, brand building, all that you guys have done in spades in the past, you know, in brands, 80% of your brands are number one in market share already. And what is different this time that you have not done in the past that you foresee that is going to change the sales trajectory?

Yeah. What it is a great question, Joe. So let me do my best to answer it with information I am comfortable sharing at this time. So it is apparent to us that the majority of the categories that we are competing in now, our path to growth is through share gains. And so while that is a strategy, that is a difficult one to execute. We have too many headwinds in too many of our existing categories. And so you heard me allude to it in my opening remarks, my prepared remarks, that we are looking at things such as expanding beyond console and gaming. Right? We recognize that we are going to have to get into adjacent categories in greater emphasis and with greater impact on the sales line. We started that this year with ergonomics, and we had early success with a number of our initiatives, particularly in our European business. And we will continue to focus on near adjacencies in all of our businesses, technology accessories, learning and creative, and the office product categories. And we believe that along with looking at inorganic opportunities changes the growth profile of the company moving forward.

Okay. Thank you. Thank you for that. And on the gaming side, and you talked about previously, you know, you had some partnerships. I think one was with Epic Games, another one getting this distribution in Japan for Nintendo and Sony. And really have not heard anything much about those efforts. I was wondering if you give us maybe a little update on those.

Yeah, Joe. Another good question. So, you know, gaming for us was good in 2024. And the drivers of the performance were new product introductions and effective execution in our international expansion. We did not see that until late in the year. Right? And so Japan had a really strong Q4. I think it is premature to talk about whether that is long-term success. But we were certainly encouraged by what we saw late in the year with our international expansion efforts. And those were enabled by a number of our licenses that we secured throughout the year and in 2023. So while we have been discussing this, the licensing work that we have done has enabled us to open doors in markets like Japan, which we have talked about on previous calls. I do expect some headwinds in 2025, particularly early as Nintendo is moving to their next gen of Switch. We anticipate the demand for our current products for Nintendo support are going to be weak in the first half of the year. And we will see what happens in the back half once they launch. But 2024 was strong, and it was really driven by new products and international expansion, which we talked about previously on calls.

Okay. Great. And then one more if I may. One of the things you talked about, you know, throughout last year, was retailers and their inventory positions and, you know, them taking a holding less inventory than normal. And I know it is very early days to talk about back to school for this year. But as you are sitting there today, you know, kind of give us your view of what you think the retailers will do on the inventory front.

Yeah. As you said, it is early. So we do not have a lot of insights on BTS 2025 in North America, but we do anticipate that leading retailers in the US will be conservative with their approach, hold us again to a fairly high standard in terms of coming out of the season clean from an inventory perspective. I do not anticipate any headwinds or tailwinds, frankly. I think it will be consistent with what we saw last year in North America.

Great. Thanks. I will get back in queue.

Okay, Joe. Thank you. We have a question from Greg Burns of Sidoti. Please go ahead.

Okay. Good morning. The remainder of the cost savings is $75 million that you expect to get over the next two years, what is the timing or the cadence of that? Is that going to be kind of ratable over the next two-year period or, you know, back-end weighted in 2026 or this year? How should we think about modeling that in?

Yeah. We are thinking next year, you know, we gave this year's number of $25 million. Next year kind of in that $40 million range. And then the remainder in 2026.

Okay. And when you look at M&A opportunities, is it going to be more focused in those kind of near adjacent categories or might you do something like the gaming acquisition getting into a whole new market? What is your preference when you look at M&A?

Yeah. You know, Greg, it is probably a bit premature to talk about anything specifically, but we want to make sure that what we are doing is relatively low risk. M&A inherently has risk associated with it. But you can take that term and that wording as you wish. But, you know, we are looking at highly accretive, relatively low-risk M&A opportunities in the near term.

Yeah. Something that gives us a payback pretty quickly, so we keep that leverage ratio where we are comfortable.

Okay. So you would not be necessarily to lever up the balance sheet anymore than it currently is with one of these transactions?

I mean, acquisitions kind of pop you up a little bit, but we are looking for acquisitions that have good payback. And we are very cognizant of our leverage ratio and keeping it as low as we can.

Okay. Thanks. And then in Brazil, have you seen any change there? I know like this last quarter and then start to the back-to-school season was weak there. Have you seen any improvement or any change in the outlook there for the first quarter?

Yeah, Greg. So in Brazil, we are really wrapping up the back-to-school season. So we are getting insights from the sellout of our product. Certainly, the trends we believe improved modestly from what we saw in Q4. But it is a little early for us to obviously publicly talk about it. But we are seeing modestly improving trends in Brazil. But we are also seeing some things that we need to react to as a business. Right? The price points are very competitive there. We have seen consumers trading down. So our teams are actively looking at the insights from this year's back-to-school season, putting in plans to react to them for 2026 and make sure that we are in the best possible position to take market share and defend our leading category positions.

Alright. Thank you.

Thank you.

As a reminder, to ask a question, please press star followed by one on your telephone keypad. We have a question from Kevin Steinke of Barrington Research. Please go ahead.

Good morning. Just starting off, I guess, with more of a housekeeping question just in terms of the sales outlook for both the first quarter and the full year 2025. You talked about comparable sales. You know, does that are you building any sort of currency impact into that, or is that kind of would that be an addition to the comparable sales ranges that you are talking about?

Yeah, Kevin. So with comparable is without FX, and we are anticipating the FX headwind in the first quarter to be kind of 4%. And then it tapers off to, like, 2% as we end the year. It is a pretty strong headwind that we are facing on the FX, but comparable does exclude the FX.

Okay. Thank you. That is helpful. And so when we think about tariffs, can you just maybe just walk us through some of the scenario planning you are thinking through or going through to account for all the variances and possibilities that could potentially happen on that front?

Yeah, Kevin. It is a good question. Obviously, one that our team is actively working on as we speak. I think the first thing to reinforce is we have a very balanced supply chain. We are not overly dependent on imports from China, which is the one tariff that we know has been enacted that we have reacted to. Our supply chain is diverse. It includes other countries of origin in Asia that support the US, but we also have local manufacturing really across the globe that enables us to be competitive from a supply chain perspective, which is helpful in this scenario. So our teams have sent price increase intent letters out to our customers. So we are working on passing on the impact of tariffs and price, and we are also actively managing our supply chain to ensure that we have the most cost-competitive sources really across the globe. And, you know, I am pretty comfortable with where we are. But as you know, it is difficult work, and it is changing pretty rapidly. So as we get more information, we process that internally, and we work with our customers and our suppliers to mitigate the impact on the company.

Okay. Thank you. Yeah. I guess it has been a while since you have done acquisitions, but can you talk about what you are doing internally to build that pipeline and, you know, how the pipeline is shaping up? Competition for opportunities, valuations, etcetera. To the extent that you are comfortable talking about some of those topics.

Yeah. I think our pipeline is I am comfortable with it. I am probably uncomfortable talking about anything that is specific to it other than what we have already said. Right? There will be synergistic acquisitions. We are going to take a very balanced approach. We are going to be very disciplined. We are going to ensure that it does not have an adverse impact on leverage. You know, we want to be careful. As Deb said earlier, we want to be careful with what we do from a leverage perspective. Inherently, it will go up a bit, but we want to be able to pay that down relatively quickly. So we are really taking a balanced approach to looking at these opportunities, ensuring that they are strategically relevant to us. They put us in a better position as a company. But also financially meet criteria that we have laid out and have aligned as a management team and with our board too.

Okay. Well, thank you for taking the questions. I will turn it back over.

Okay, Kevin. Thank you.

We have a question from William Reuter from Bank of America. Please go ahead.

Good morning. My first on the $40 million of savings in 2025, how will that break down between SG&A and COGS? And what are maybe one or two of the largest buckets there?

Yeah. We are going to there is a lot of for our footprint rationalization that we have been talking about. And that we, you know, announced last year, a couple of closures. So all of that is going to be up in our COGS number. So when you get done, you probably have, you know, kind of fifty-fifty, maybe more heavily weighted to the COGS side, the margin side, but yeah. It represents that as well as, you know, the SG&A reductions that we have talked to you about as well.

Got it. That is helpful. And then on the M&A front, it seems like the tone is slightly different this quarter when you discuss it. Maybe a little more either aggressive or optimistic. Is this something based upon what you have seen in the environment in terms of opportunities? Is it based upon some, you know, behaviors and challenges in terms of kind of your organic business? I guess, am I reading it correctly that you are a little bit more aggressive than it has been in the past, and what are the reasons for that?

No. Let me just kick it off, and then I will let Tom talk more strategically. But, you know, the environment is was improving in the whole interest expense, interest rates. And so, you know, a year ago or a year and a half ago, we were not talking about it at all. Right, given the environment.

Yeah, Bill. I think Deb said it well. You know, we have a long history, as we have done. Suggested in our opening remarks of acquisitions. It is a part of our DNA. We do it well. But I think that the main change in tone is really just the environment. A year ago, as Deb mentioned, with interest rates relatively high, with our debt higher than it is today, we just did not feel like we were in a position to actively pursue M&A opportunities. And as our debt has gone down, as the environment has improved, we think it is important to consider all opportunities that get presented to us in the pipeline, and that is what we are doing.

Got it. And then just lastly, in terms of, clearly, most acquisitions do bring some elevated leverage for a period of time. How high would you be willing to take leverage immediately upon an acquisition, and then, you know, do that from there?

Yeah. You know, I think it is going to depend on the acquisition itself and the payback and sort of how we look at the synergies that could come off of it. You know, we are not going to let ourselves get up to the point, you know, that we had been when after the Power A acquisition. We will keep it we will keep it around there.

Got it. Alright. That is all for me. Thank you.

Thank you.

You currently have no further questions. So I will hand back to Tom Tedford for closing remarks.

Thank you, everyone, for joining us. We are pleased with our strong execution on our strategic initiatives in 2024. Our proactive actions are yielding positive results and better positioning us for long-term growth. We have a strong balance sheet and generate consistent cash flows we will use to invest in both organic and inorganic revenue opportunities. We are actively pursuing highly synergistic accretive M&A that will provide scale and leverage from our leaner optimized cost structure. That will result in higher levels of profitability in the future. We appreciate your interest in ACCO Brands Corporation and look forward to talking with you when we report our first quarter results in May.