Good day, ladies and gentlemen, and welcome to the Q1 2017 ACCO Brands Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I'd now like to turn the call over to Jennifer Rice. You may begin.

Good morning, and welcome to our first quarter 2017 earnings conference call. Speaking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation; and Neal Fenwick, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the Investor Relations section of accobrands.com. I first want to remind everyone that we realigned our segment reporting this quarter due to the recent acquisitions we made and we filed an 8K on April 6 that contains 2016 historical results by quarter for the new segment structure. The new segments are aligned along geographic markets and the results of the computer products business have been incorporated into the new segments based on region. When speaking to quarterly results, we may refer to adjusted results. Adjusted results exclude transaction, integration, restructuring and financing-related costs, and apply a normalized effective tax rate of 32% in the current year. 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 this morning's 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 adjusted earnings per share or effective tax rate guidance. For more information, see this morning's please release. Forward-looking statements made during this call are based on certain risks and uncertainties. And our actual plans, actions, and results could differ materially. Please refer to our press release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements are made as of today's date. And we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session. Now, it is my pleasure to turn the call over to Boris Elisman.

Thank you, Jennifer, and good morning everyone. I'm pleased to report that the year got off to a strong start with net sales increasing almost 30% as a result of our two recent acquisitions. Net income declined due to acquisition-related costs, but excluding these, adjusted net income improved $0.05 per share over last year's first quarter, and adjusted operating margin expanded 190 basis points. In North America, sales decreased 2%, primarily due to the expected declines in the office superstore channel and with certain wholesalers. Q1 is seasonally a small quarter in North America with a high percentage of sales going to the traditional office channels. While sales were down, we saw a sellout growth in retail and e-commerce channels driven by a large mass merchants and e-commerce pure play. North American annual results will be largely determined by our performance in the last eight months of the year, but despite the sales decline, I am happy with our Q1 in North America. Sales in our newly created EMEA segment increased nearly 150%, which was entirely the result of our acquisition of Esselte, effective February 1. Legacy Esselte's pro forma quarterly sales improved 4% year-on-year, an excellent result in a slow growth market. Three months into the acquisition, I am very happy with the Esselte business. There have been no surprises. And if anything, I am more optimistic about what this business can bring to ACCO Brands. Our legacy European business declined 12% or $4.7 million, largely due to slowdown in the U.K., the result of market conditions, share losses, and business ownership changes with certain customers. We believe bigger exposure to continental Europe, much higher sales, and stronger relationships with independent dealers, and a broader product portfolio, all of which Esselte gives us, will position us for an aggregate…

Thank you, Boris. Good morning everyone. First quarter sales increased 29% driven by acquisition. Comparable sales in constant currency decreased 5% primarily due to decline in North America with office superstore and certain wholesale customers and declines in Europe with the legacy ACCO business. Net income was 3.6 million or $0.03 per share and included 7.1 million of acquisition, restructuring, and finance related charges. Adjusted net income was 4.9 million or $0.04 per share, up from a $0.01 loss per share in the prior year quarter. Acquisitions added $0.04 to adjusted EPS. Looking at specifics; risk margin improved 120 basis points including charges and improved 140 basis points excluding charges. Improvement in gross margins is detailed on Page 5 of our slide deck, and was primarily driven by the acquisition. Within the underlying business, gross margin improvement resulting from cost savings was largely offset by unfavorable sales mix. Despite the strong gross margin improvement in the quarter, recall that for the year in total we are expecting gross margin to be roughly comparable to the prior year. The first quarter is seasonally the smallest gross margin quarter for ACCO. And Esselte has a lower gross margin than ACCO in later quarters. As synergy savings accrue, we expect to see improvement in our gross margins of 2018 and beyond. We continue to target a 33% to 34% gross margin. SG&A expenses were up in the quarter due to the acquisition. As a percent of sales, SG&A was flat on a reported basis. It decreased 110 basis points excluding charges. Improvement in adjusted SG&A to sales was primarily due to a lower expense ratio for the acquired businesses. Partly offset by an increase as a percent of sales in the legacy ACCO Brands business due to lower sales. Turning to an overview…

[Operator Instructions] Our first question comes from Bill Chappell of SunTrust. Your line is open.

Thanks, good morning.

Good morning, Bill.

Hi, Boris. Just trying to understand this early in the year the raise of the guidance, I mean it sounds like everything is pretty much on plan, and especially from the top line. Is it just you've found more synergies from the two deals and feel more comfortable with it, or is there something in terms of placements that you see now for the back-to-school season that you feel more comfortable with. Just kind of give more color of why raising guidance now?

Yes, Bill, as you know, Q1 is always a somewhat challenging quarter for us given that it's our smallest quarter. And we did a little bit better than expected in Q1, well just a result of a stronger than expected quarter, we're passing some of that through to the remainder of the year. There's still a lot of the year left to accomplish obviously, and most of our sales and 95%-plus of our profits gets generated in Q2 through Q4, so a lot of things to be done, but just given the better than expected performance in Q1 we passed some of that through.

And I realize it's early, but I mean from ACCO standpoint, what is the outlook for U.S. back-to-school or U.S. market this year. I mean can it be flat, can it grow? Just trying to understand, you said down 2%. It's not really indicative of the market.

Yes, we think that back-to-school specifically is going to be comparable to last year. And last year, if you remember, we had a pretty good back-to-school. It's hard to say, it can be better, it can be worse. Right now, just based on the information that we have on placements, we think it's going to be comparable. Overall, if I look at the U.S. market including Q1 and what we think for back-to-school, and then back-to-business period in Q4, we think U.S. will be all-in down low single digits.

Okay. And then last one from me. Pelikan had a pretty strong or stronger than expected first quarter. I thought this was typically a very small quarter, and you had kind of talked about it not being as meaningful. So, was there something different there on the Pelikan side?

No, Pelikan had a typical quarter. I wouldn't say it was any stronger than usual. Esselte did better than we thought, so Esselte had a 4% pro forma growth if I compare Q1 '17 to Q1 '16, which we think is excellent performance for a European environment. So they did better than we thought.

And is 4% a good number going forward?

I don't know, Bill. I don't want to predict that, no.

I could at least try. All right, thanks so much.

Thank you.

Our next question comes from Chris McGinnis of Sidoti and Company. Your line is open.

Yes, good morning. Thanks for taking my question, and nice quarter. Just to follow-up on the, I guess, the North America back-to-school. I think you've normally talked about increasing placements maybe or expansion of offerings by your customers. Could you maybe just talk about that, and how you're seeing that as we -- I know it's still early in the year, but think about next year's back-to-school?

Yes, for this year what's visible to us right now is there were some puts and takes in the overall placements. We think that we are going to grow in the e-commerce channel. We think we're going to be flat to slightly positive in the mass channel, and we think we're going to be flat to slightly negative in the OSS channel just based on all the puts and takes. So net-net that's why we're calling it to roughly comparable to prior year. We think more stores will carry our assortments, but we also lost some placements to private label in a couple of OSS in a couple of clubs. So that offsets the incremental placement that we got with some of the mass channels.

Thank you for that. Can you maybe expand on; I guess, in North America at least, obviously continued headwinds in the business on the OSS side, but maybe that move to online, how you're positioned for that? And can you maybe just remind us of I guess the growth that you expect maybe in the e-commerce for this year?

Sure. This has been a multiyear effort on our part, and we're seeing the results in our numbers already for many, many quarters. If you look at the industry overall, the e-commerce channel overall has been growing at about 15% per year now for several years. And we're growing slightly north of that specific to school and office supplies industry, the growth is strong double digits. We have close to the top share at Amazon in our categories, and that's what's really driving our growth. And then the focus this year is to maintain that for North America, but to also see how we can expand that to our international regions. That's where most of the upside is.

Great. And then lastly just on the -- you talked about the private label, some of your customers switching to that. Can you just talk about how you compete against that and in maybe your offerings and how they compare to that? As it sounds like at least on the wholesaler side that may be a strategy going forward?

Yes, we participate in private label. Private label is roughly 5% of our global sales. What we like to do is participate in the total category management. And if private label is part of that it allows us to offer a full set to the customer, and then to work with them to up-sell to more valued price points from private label. No, we are a key participant in private label, but when it comes to if the customer wants to take the whole category out to private label, and some of them do, then it just becomes part of a financial equation. And at some point in time we just decide to walk away. And in a couple of instances this year this was the case. So, I'm not too disturbed about it, they're just normal business. Sometimes we'll win those things, sometimes we'll lose those things, it's part of business, so nothing unusual there.

Okay. Thank you very much. I appreciate the time today.

Thanks, Chris.

Our next question comes from Kevin Steinke of Barrington Research.

Good morning. So, just circling back on the EPS guidance raise, if I look at slide seven in your presentation, the only thing that changed in that EPS buildup year-over-year versus last quarter is the FX and the organic growth bucket before showed no contribution, so now it's zero to $0.03 positive contribution. So you mentioned the stronger performance in Q1 and rolling that forward. So should we take that to mean that you're expecting a little bit better organic growth than previously, and that's what's driving the guidance increase?

Yes.

Okay, all right, just wanted to confirm that. So FX is pretty much as is, in terms of the headwind you expected before?

Yes, we're assuming FX to be down low single digits, similar to what we had before. Obviously FX is very volatile and a lot can change in the future, and we'll continue to update you as we go through the quarters.

All right. And just wanted to dig a little bit more into the Esselte pro forma sales growth, 4%, could you talk a little bit more about what drove that? I mean is that a little better than they've done in recent quarters or, again, like you said, it's hard to predict what's going to happen, but just if there's anything to highlight behind that 4% growth?

Yes, thanks for that question, Kevin. I think it just shows how well they are strategically positioned in the European market, and how well they're executing. So if you look at Esselte, they're very strong in continental Europe. And continental European economy is doing well, or relatively well, and certainly is showing signs of growth. They're also very strong with the small independent dealers who are winning in the marketplace. They are taking share from the big contract stationers and the big office product super stores. And then that team has been executing really well over a sustained period of time in a difficult market, and Q1 was no exception. So I think 4% growth is better than average, and it's certainly something that I don't expect for the long-term, but I'm very, very pleased with the performance in Q1. Some of that may have been helped by Easter move. Easter was in Q1 last year; it's in Q2 this year. And in Europe they tend to take some vacation time around Easter, so maybe that helped a little bit. Maybe that would hurt a little bit in Q2. But net-net, I'm still very, very pleased with the performance. And I don't think it's by happenstance, I think it's by both strategic design and just the talent of the team and the execution of the team in Europe.

Okay, great. And then on the headwinds in the office super store channel, obviously as expected. I think you've talked about in the past that you think at some point that channel would kind of reach a low point, and maybe not be as much of a headwind as it is now or has been in the past. So I don't know if it's too hard to call, but do you have any sense as to, one, when that might cease being as much of a headwind and kind of reach a low point?

Yes, Kevin, I do believe that that will happen at some point. Unfortunately I don't think it's going to happen in 2017. I think they will continue to close stores or they announced that they will close store till 2017. So we will still see a negative impact from them. But absolutely I do believe that at some point they're going to reach a level that they'll either have no stores or the level of stores that they'll have will be profitable and sustainable. And then we're going to leave the building from there, and that's probably going to take a couple of years to get to.

Okay, great. Thanks for taking my questions.

Thanks, Kevin.

Our next question comes from Brad Thomas of KeyBanc Capital. Your line is open.

Yes, hi, good morning Boris, Neal, and Jennifer. And congratulations on a strong start to the year here.

Thank you, Brad.

I wanted to ask a couple of follow-ups on Esselte. Boris, you mentioned that you are more optimistic today than you were when you announced the deal. I guess, first, I was wondering if you could talk a little bit about the synergy target, I think it's $23 million in three years. Is that still a number you're targeting, could it be more than that? And how much do you think we might see, here, in year one?

That is still the target. Obviously we're going to try to do everything we can to over-deliver, but that is still the target. We're not committing to anything above the 23 at this point in time. We'll see a little bit of that in '17. Not much at all. Most of that will be delivered through '18 and '19 timeframe, just because it takes a little bit of time to both understand the integration parameters, and then once we have a robust plan to go through the appropriate consultations and jurisdictions in Europe takes a little bit of time as well. We're on track. I am very, very confident in our ability to deliver the synergies. But target is still the target.

Great. And then I think you mentioned in 2Q some systems integration in Europe. Could you just talk a little bit more about what that is, and how you ensure that it won't be disruptive to the business, and what sort of benefits you'll get from these announcements?

Yes, thanks Brad. The system integration that I mentioned is actually in Australia, and not in Europe. And in Australia we had two ERP systems, one for legacy ACCO and one for legacy Pelikan Artline on May 1st of this year. We converged to a single ERP system, and we're live, and we're operating as one ACCO brands Australia. And everything is working fine. We're not seeing disruptions. It's being customer-transparent. So we're off and running and that should unable for us to complete additional synergies in Australia. We committed to $8 million in Australia, and with this integration to single ERP, we will be able to deliver this $8 million.

Perfect. Thanks for clarifying and the additional detail. And then just lastly, if I could follow-up on some of the comments you made in North America, I think you said you're assuming some of the productivity, and then in the non-OSS stores with the mass and some of the other players is pretty similar to what you had last year, that was of course a very strong year. How big is that at this point from a sell-in perspective? How much line of sight here do you have on -- and what placements will look like and how much opportunities there maybe for upside still before everything gets set?

From a sell-in, it's fairly big. We know what the initial waters are, we know the initial shipment schedule. As Neal mentioned, back-to-school for us expands Q2 through Q3, and just looking at the initial shipment schedule compared to prior year, it's a little bit more loaded towards Q3 versus Q2 even though the total is comparable. What we don't know yet is sell-out and replenishment, some of the back-to-school will be driven by how good the sell-out is and the replenishment gets placed primarily in the August timeframe. So that we don't know, and that may lead to some upside or maybe the same, but the sell-in we know and the sell-in is comparable to last year.

Perfect. Thanks for all the detail. Thank you, Boris.

Thanks Brad.

Our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

Hi, good morning. First off, I just wanted to understand, so you were talking about the markets share losses, and how the market is moving more online last few quarters. Do you fear that you might be prone to you know, for a price shocks as far as the merchants asking for lower price points?

I wasn't talking about wholesale market share losses, I was -- the market share losses were specific to the U.K. comments of our business. Overall, we are keeping and growing market share. And specific to your question on the online, we feel that we have higher market share online than in many other channels, because we invested in the online channel significantly earlier than many of our other competitors. So I'm very happy with our market share in the online channels. And that will continue to be a bigger and bigger part of our business. So we'll continue to over-invest in that particular channel. In terms of pricing, that's an everyday phenomenon in our business, and I'd venture to say in everybody else's business. We get price shopped and price negotiated 365 days a year, and we're pretty good at managing that and making sure that we could drive profitable growth for the benefits of our shareholders.

Okay. Is there a change in the estimate as far as how much you're expecting the transaction integration cost will be this year?

Very slightly, if you look at the modeling assumptions, they have moved by couple of million.

Okay, all right. And then lastly -- yes.

Yes, they moved up; I mean if you see Page 8 of the modeling assumptions right now we're planning for $20 million, and as Neal said, it's a little bit higher than before.

Okay. And then just turning to international, there seems to be a trend here developing as far as Brazil and Mexico are concerned from a positive aspect, is there something specific that you're doing in these markets that you're seeing this trend versus the underlying economy? And can you then use that kind of strategy in your other markets?

We are competitively stronger positioned in Brazil and Mexico than in some of our other markets. These are top economies nowadays. And the strong players can fund working capital and plan with their resellers and support some of their programs. And in some of these markets, we are in a unique position to do that. This is something that we would like to leverage in the other regions and certainly something that we are working on, but just the dynamics of the local markets are slightly different in Brazil and Mexico than all other countries. And you're right. The performance that we've seen -- the good performance that we've seen in Brazil and Mexico has been sustained now over several quarters and we continue to outperform by a significant amount.

Okay. Thank you.

Thank you, Hamed.

Our next question comes from William Reuter of Bank of America Merrill Lynch. Your line is open.

Good mornings, guys.

Good morning, Bill.

You talked a little bit about -- it sounds like your sell through at your customers was better than your sell in. Can you talk a little bit about that dynamic?

Yes, that's exactly right. The sell through was better than the sell in. The sell through was roughly flat in -- this is U.S. specific with growth in mass and e-commerce and a decline in the OSS and commercial markets, but overall roughly flat, whereas the comparable sales were down 5%. Our customers are conservative with inventory. As we saw from the GDP report, we are still in a slow growth environment and that's overall for the overall economy. And then there are some industry specific issues and folks are just conservative about how much inventory they carry. And then given that, many of them buy up our inventory at the end of Q4 to make their rebate dollars -- they just believe that they are down in the first few months of the year, so the sell out is higher than the sell in.

Okay. What is that save out where your inventory levels at your retail customers are right now?

They are pretty low. I mean we -- every year we seem to be talking about this phenomenon because all of us try to get better and that includes our customers. So, they try to service their customers and we are talking about the wholesalers there are dealers with less and less inventory and they are being successful at it or somewhat successful at it. So certainly if I look at their inventory as well as our inventory coming out of Q1, it's relatively low.

Okay. And when you were talking about back to school, you mentioned you expected to be flat. Were you referring to your sales and there's obviously been I guess a lot of shifts in the industry moving online and away from some of the office superstores, but if you were to think about the allocation on a same store basis that your customers are allocating and I guess this means more of the seasonal guys mass and such, how has that allocation changed from your conversations?

If I understand your question correctly, Bill, are you asking if I am expecting comparable sales than what it is by channel kind of give you some -- by channel.

Yes, I was asking with regard to mass or kind of the seasonal carriers I guess how you believe that on a same store basis, their allocation of the category is on a year-over-year basis?

Yes, mass is our biggest channel for back to school by far. It's very seasonal. And most Americans for example go to Wal-Mart and Target to buy their back to school goods. We think that sales through those customers will be comparable to last year. We think we have a broad assortment just like we did last year, but there may be some price points that that particular customer decided not to participate in. So, they are going to sell a different mix, but the assortment and our sales expectations are comparable. We expect to sell more through commerce, and that's just a continuation of the trend that we've seen over many years, and we expect to sell less through OSS, but overall in total it's comparable to last year.

Okay. And then just lastly for me, any comments on kind of your M&A pipeline where you guys are in terms of the Esselte integration with regards to your ability to take on another acquisition? Thanks.

Yes, thanks, Bill. Just like I said at the end of -- before this year, we're going to be focusing on integration and executing the commitments that we've made to our company into our shareholders. We're continuing to explore what's possible and continue to build the funnel for the future, but it's highly unlikely that we'll do something in '17, but once we get to '18, and I expect by that time we will be done with Pelikan Artline integration, and we will be well in the middle of our Esselte integration. Then we would be open for other things. And just to remind everybody, acquisitions are a core part of our strategy -- of our growth strategy going forward.

Thank you.

And next question comes from Karru Martinson of Jefferies. Your line is open.

Good morning. Just a quick modeling question, with the tax rate down, on cash taxes that are going to be up around 50 million up from '17, is that just the growth of international or what's driving that?

The big change is in our U.S. NOL position. When we merged with Mead we had five years worth of NOLs and they expire in the middle of 2017. Now in addition to that [indiscernible] acquired taxes that we pay on both Pelikan Artline and also Esselte, which is the other piece that's adding to it, but the big difference is the double -- 15 million, 16 million increase in U.S. taxes.

Okay. And then in terms of the cash flow here since acquisitions, release for '17 will be a big part of the story, is the mindset here just we de-lever the balance sheet and kind of prepare for future?

Yes. As we mentioned before, our net leverage ratio target is to be between two and two-and-a-half times, and we levered up with the Esselte acquisition to roughly three times, so we'll use this '17 to get into that range. We always feel comfortable and then we should be able to do more things in '18.

Perfect. Thank you very much guys, I appreciate it.

Thank you.

There are no further questions. I would like to turn the call back over to Boris Elisman, Chairman, President and CEO, for any closing remarks.

Thank you, Operator, and thank you to all of you for joining us this morning in our call. We will look forward to speaking with you again when we report our second quarter results. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.