ACCO Brands Corporation (ACCO) Earnings Call Transcript & Summary

Over the last couple of years, you've been innovating in the consumer products category and products such as air purifiers. I guess I'm wondering how you believe that internal innovation is going to be important in terms of that continued growth.

It's important for many aspects. One is that it provides us with an ability to get into adjacencies that we think we can leverage. And so people look at air purifiers and they go, that's very different to what ACCO has done in the past. But we make a lot of products already that are electromechanical. It's a combination of laminators and shredders, for example, use very different -- very similar core technology to an air purifier with the exception of the filter and the filters we were able to license from DuPont to bring core technology to bear in the category. What we have been able to do is also use a lot of our skills and knowledge that we have in the technology space to add additional features into a lot of product categories. And similar to what we did with shredders was a good example, creating the auto-feed shredder, so taking just what used to be a manual feed product and allowing you to put a stack of paper in and shred it. So again, when you think of air purifiers, you should think of that really as one of many investments that we've made into driving more technology into our products and also at the same time, looking to bring more differentiation for what we offer versus all of the kind of me-too products that tend to be out there. We see that as a big piece of our role, which is to make sure that the branded products that we have offer something that is superior. And it's either in terms of durability or functionality and what could also be in terms of innovation and features. And so again, if you look at what we've done with air purifiers, one of the things we added to the range that we already launched was specialist filters that go into the air purifiers. So there's one that tackles pet dander, there's another one that tackles smoke, which is particularly important around fire season, as a good example, in either Australia or America. And another one that tackles colds and viruses that seasonally can be very important. And so adding technology and innovation is really something that we need to do to our business and add more of it so that we can build up our growth story. One of the biggest challenges our business has had is top line growth. And we see the -- both acquisitions and organically developed technology are the routes to changing our long-term growth profile.

Shifting gears a little bit to talk about distribution channels and how that's evolved. So I guess, speaking to both the consumer segments and then the commercial segments. On the consumer side, we obviously have a move away from superstores and towards some e-commerce retailers. But can you talk a little bit about how much of your sales are currently being completed through e-commerce to the final consumer on the consumer side? And then in terms of the commercial side, what's been going on there in terms of distribution? And I guess if you could talk a little bit about distributors, what's been happening with those? It's always a little bit opaque from an outside perspective.

Yes. And some of it is opaque from our perspective, too, because some of our customers we sell to, we can't tell how they then onward sell the product. So a good example would be Walmart. We don't know what they sell through walmart.com. We just know what we sell to Walmart. So the statistics I'm giving you are where we know where the e-commerce sales occur. So pre-COVID, worldwide, we were seeing just under 10% sold through e-commerce, where we can see its e-commerce. Now we believe that number was always higher than that for the reasons I've mentioned. But that has jumped significantly in this year, and we're seeing that closer to 15% worldwide. And then if you dig under the hood a little bit, what you'd see is that's geographically very different. So places like Brazil are much less developed than the U.S., as you'd expect. And so the U.S., which was around about 15%, is now closer to 20% of sales going to e-commerce. And as I mentioned, that's an understatement because of the fact we can't always tell where our customers move product through. So e-commerce has definitely become a very vibrant and important part of our business. We see more opportunities for it to get larger, particularly in a couple of areas. We see our own direct-to-consumer being underdeveloped. We see that as an opportunity for us to add more sales directly. And then in terms of your other question, which is what have we seen happen in the rest of the commercial channels, one of, obviously, the big pressures that's been happening for a number of years has been declines that we've seen in both office superstores and with wholesalers. And much as I mentioned earlier that COVID has accelerated some of the future, it's accelerated the declines for some of those categories, at some of those customers as well. And we saw that in EMEA as an example with the bankruptcy of Spicers' office team, which is the big wholesaler in Europe early on in the COVID pandemic. And so pressure on wholesalers, pressure on the popular traditional office superstores. And also, from our perspective, the commercial market itself has been down. Now again, within that commercial market, some of what we ship to those customers go through e-commerce. And again, we can't see that piece of where they are on the ship. So a mixed bag in terms of what's happening. What we do know is when the commercial supply chain gets reconnected more traditionally and people start going back into offices more. And we saw this very strongly in Australia and EMEA, we see a big jump up in sales of more traditional commercial products as well. And I think it's -- while it's true, a lot of people get a stipend to buy products from home, they're often focused more on technology products and on seating and lighting. When they go into the office, they get the opportunity to replenish a lot of more basic stationery items and take them back home to replenish their home office. And so we hope people will use their offices more because it will definitely benefit our businesses.

I think that would make sense that, that does return a little bit. So given that the audience here is credit investors, we're pretty focused on free cash flow. We're focused on cash flow generation and credit metric. So maybe starting with your guidance through the third quarter, you have $10 million of free cash flow for the year. You're guiding to over $100 million. How confident are you that you will exceed $100 million for the year, which implies $90 million coming in, in the fourth quarter?

Our business has always been very, very seasonally strong. And so Q4 has always been the time where we generate most of our free cash flow. And so from the Q4 perspective, it's a normal seasonal pattern that we've had for many years. And that seasonality continues to be the norm in our business. So I'm very confident that it will occur. It's occurred every year I've been the CFO. And it's just a seasonal pattern. Fundamentally, we borrow money in the second quarter to fund back-to-school. Most of that gets repaid in the third quarter and then in the fourth quarter. We fundamentally collect a lot of those higher receivables that we had. And we make most of our money, as people would understand, in the third and fourth quarter. And so naturally, cash flow follows that at the same time. So I'm very confident. And as you would understand, as a management team, we're also heavily incentivized on driving free cash flow.

Yes. Your net leverage target has been 2 to 2.5x. I guess I'm wondering if there has been any change in that and I guess if you could give us some context to you were already above that slightly. And now with the acquisition of PowerA, you've moved above it by more than a turn. So I guess what gave you that comfort that you're willing to move leverage up for this opportunity?

Yes. It's a good question. So our long-term leverage target hasn't changed. We still believe that we want to get the business down into the 2, 2.5x long-term range. But we've always said that we -- the acquisitions as very serendipitous in terms of your ability to find something that you want at a price you view that's attractive and that it's an asset you view as attractive. And so they often come along driven more by the timing that the seller wants to dictate. This was a good example with PowerA. It was a business that was an adjacency we had been looking at, an adjacency where opportunity came along, and we were able to fulfill the requirements of the seller for a quick close on the transaction. And so we understood the business well. The opportunity was good. And the price was attractive because we were able to move quickly. And so from our perspective, this is exactly the opportunity that you may do so and leverage a strong balance sheet. And so we do have very good long-term banking relationships. Our banks will understand the power of our free cash flow generation. And it was easy to get them comfortable with taking leverage up and our intention to get that leverage back down post-acquisition. And so we've always tried to be very balanced with how we view our free cash flow and use it according to what we view as the priorities that shift in time over the business. And so right now, we view this as a very attractive addition to our portfolio, particularly in the current time. And we, therefore, we're very comfortable taking the leverage up. And as you'll see, we will very quickly delever. The advantage of ACCO is it does generate a very, very large amount of free cash flow. And so for our size, we can use that to very quickly delever and get back to more of a balance in terms of how we think of cash allocation.

Yes. I guess, speaking to that deleveraging path, it may be earlier or premature for this, but is there any early insights that you could share with us on what you think that deleveraging path could look like in terms of what amount of return we might be able to reduce on an annual basis? And then given that you are a little bit above your targets, are you comfortable making additional acquisitions at this point? Or will you be on hold until you reach some sort of a threshold?

We certainly will require our bank's consent to make any larger acquisitions that are -- while we're above 3.5x leverage turn. And so as we did with PowerA, we required bank consent to move forward with this acquisition. So for the foreseeable future, we're probably going to be focused on small acquisitions or no acquisitions, depending on what the landscape looks like. I think it's always important to understand that you view opportunities as they arise. And so as we go down the road and get more comfortable with our leverage dropping, if opportunities arise, we will take advantage of them. But we're very conscious of making sure that we have to be comfortable with the acquisitions that we make. A very good example of that is the highest leverage we took the business to with an acquisition with the Mead acquisition, and it had such very strong free cash flow characteristics that we knew we could very rapidly delever afterwards and subsequently did so. And if you look through this acquisition, although we made 4 acquisitions in 4 years, we managed to get our leverage back down each time and effectively over time, maintained a relatively stable leverage throughout that period. And so apart from the seasonal nature of our leverage, if you kind of measure leverage here at year-end, you'll see that we've managed always to quickly delever after taking leverage up with an acquisition. And it really is about changing how we deploy our free cash flow to make sure that we achieve that end. And so I view this as no different. And I do believe that like any other acquisition, you get indigestion for a period of time. And so whether it's from a business focus point of view or a balance sheet leverage point of view, you naturally wouldn't be looking at larger acquisitions for a period of time.

Yes, that deleveraging is something post-acquisition that high-yield investors have certainly become comfortable with and they're reflected in the tight trading levels in your bonds currently. Well, Neal, I think that, that's probably a good place to wrap things up. Thank you so much for participating in the conference. I viewed it as helpful, and I'm sure that all of your investors did as well. But good luck through the remainder of the year and into the next year.

Thank you very much, Bill, and thank you for everybody who listened.

Thank you.