Good day, ladies and gentlemen, and welcome to the ACCO Brands' Second Quarter 2017 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 follow that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host Ms. Jennifer Rice, Vice President of Investor Relations. Ma'am the podium is yours.

Good morning, and welcome to our second quarter 2017 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. When speaking to quarterly results, we refer to adjusted results. Adjusted results exclude transaction, integration and restructuring items, and apply 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 the 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. Once again, I'm pleased to report that we had a great quarter with better than expected profit results driven by higher gross margin and strong performance in certain international markets. Net sales increased 19%, thanks to our two newly acquired businesses, Pelikan Artline in Australia, and Esselte in Europe. While net income declined for the quarter because of expected integration and restructuring charges, adjusted net income grew significantly, the result of our acquisitions, higher gross margin and continuing cost management. Each of our business segments demonstrated resilience in spite of the ongoing challenges in our traditional channels. In North America, sales were down and profitability improved. Expected declines in the office superstore channel due to store distribution center closures, lower sales of commodity items, and an expected shift in timing of back-to-school orders from June to July impacted the top line, while unfavorable customer and product mix as well as productivity improvements largely drove the higher bottom line. Some of the strong gross margin will benefit the full-year, but some will come out of the third quarter. For the fourth consecutive year, we are seeing good school products sell-in to the mass and e-tail channels, with prominent placement and in-store merchandising of our Five Star, At-A-GLANCE and Mead brands. We are working closely with our partners to ensure we have another good sellout during the back-to-school season. ACCO brands EMEA is performing well. The acquisition of Esselte and its powerful brands has given us considerable scale in Continental Europe and integration activities have already begun in several countries. In addition, the new management team in EMEA is implementing a number of programs to improve our results in the United Kingdom with the legacy ACCO Europe business struggled in the recent past. Last month I visited several of our key operations in the EMEA region and I’m optimistic about the potential for growth there and impressed by the talent and enthusiasm of our people. The International segment comprising of Asia-Pacific, Australia, and Latin America, delivered solid results as well. Brazil's performance was a highlight of the quarter with volume growth in diaries, stationary, and notebooks and an improved gross margin driven by productivity improvements, price increases and a favorable product mix. In ACCO brands Australia, the heavy lifting of the integration of ACCO Australia and Pelikan Artline was largely completed in the second quarter with a consolidation of overlapping distribution centers and enterprise IT system. With six months in the rearview mirror, we are reaffirming our full-year sales and free cash flow guidance and now expect to be at the high-end of our EPS range, primarily because of the strong gross margin year-to-date. With that, I will ask Neal to take you through a more detailed look at our results. Neal?

Thank you, Boris. Good morning, everyone. Second quarter sales increased 19% driven by acquisition. Comparable sales and constant currency decreased 6% primarily due to expected declines with office superstores, lower sales of commodity items, and the timing of back-to-school orders. Net income was $23.5 million or $0.21 per share and included $13.7 million of acquisition, restructuring, and integration related charges. Reported net income was down from the prior year as the prior year in period included a significant one-time noncash gain related to the Pelikan Artline acquisition. Adjusted net income was $35.2 million or $0.31 per share, up $0.05 versus last year with half of the improvement coming from the base business and half from acquisition. During the quarter, we repurchased nearly 600,000 shares of stock at an average price of $11.38 per share. Looking at the specifics, reported and adjusted gross margin improved 150 basis point. The improvement in gross margin is detailed on Page 5 of our slide deck and was primarily driven by improved customer and product mix in North America as well as cost savings. SG&A expenses were up in the quarter due to acquisition. As a percent of sales, SG&A was up 140 basis points on a reported basis and up 130 basis points on an adjusted basis. The increase in adjusted SG&A to sales was primarily due to lower volume, increased incentive compensation expense, and higher go-to-market investment. Turning to an overview of our segments for the quarter. In North America, sales decreased 5%, but excluding acquisitions decreased 6%. Recall we were up against a very difficult comparison with 5% growth last year. The decline this year was due to the expected declines for the office superstores, lower sales of commodity items, and the expected shift in the timing of some back-to-school orders that…

Thank you. [Operator Instructions] Our first question comes from line of Bill Chappell from SunTrust. Sir, your line is now open.

Thanks. Good morning.

Good morning, Bill.

Just first on the quarter, can you just remind us how much of an impact on North America was the timing shift from last year to this year? And also kind of alluded how much of impact that have on gross margin improvement? It sounded like the shift was of lower margin products, so did that have a meaningful impact on gross margin?

The shift was a few million dollars. We haven't quantified it and it was of lower margin products. So we do expect them to ship or they have shipped in July of this year. So we do expect some of that to spill over into Q3 and to dilute a little bit at the margin in Q3.

Okay. And then we're now in August and surprisingly in Georgia where they’re going back-to-school now. What’s kind of your take on the back-to-school season so far? Where do you -- is this going to be a good one, both from kind of a placement standpoint, an early gauge on kind of consumer takeaway?

We are very early in the season. There's a little bit of a lag between now and when we get the POS sell-through information. So through the first -- just few weeks of back-to-school season, it looks like back-to-school is going to be comparable to prior year, which was a good back-to-school, but so much of it is still ahead of us. So its -- there's still opportunity for it to change, but right now it looks good.

Okay. And last one for me. Any thoughts on the potential of Office Depot, Staples retail merger? Does that change your kind of outlook in terms of how the industry consolidates and the impact on you?

Nothing specific on that speculation, but we are reducing costs just in general in anticipation of the office product superstore environment being -- continuing to be tough in the future as well. So we’re not waiting for any movements there. We are staying ahead of it.

Great. Thanks so much.

Thank you, Bill.

And our next question comes from the line of Kevin Steinke from Barrington Research. Sir, your line is now open.

Good morning.

Good morning, Kevin.

So another factor that you called out for the better-than-expected results besides gross margin was improved performance in certain international market. So just wondering if you could elaborate on that a little bit more?

Yes. This is typically a pretty low quarter for international, but Brazil really stands out. They had an outstanding Q2 even by absolute measures. And then relative to how their economy is performing, it was really a big home run. So Brazil did well, Mexico did well, and Asia-Pacific did well, but Brazil really stood out.

Okay. That’s good to hear. And then you referenced lower sales of commodity items. Was that just an intentional action by you or just more and what's going on there and how that help the margin?

Yes, it was an intentional decision from us. We try to participate in these lower end bids, if we can make incremental dollar gross profit for the Company. And when we do, it's great. But when we don't, we don't bid below the low cost, so in this particular situation we will participate last year in some of these bids and won them and this year we didn't and we didn't chase it. And as a result, our mix was better than it was last year.

Okay, good. And then you mentioned implementing initiatives to improve growth in the U.K. Could you just talk a little bit more about what were you doing there?

Yes, we've had a difficult few quarters in the U.K., and U.K just in general is a fairly weak environment right now. Some of that associated with just the uncertainty around Brexit, some of it is our industry, but some of it is our execution in the market and we're working on fixing the execution and that really evolves around getting more collaborative with the independent dealer channel and working closer with the smaller dealers. We tend to work through bigger regional resellers, and I think the market has shifted from them to more a smaller independent than we have not been as good there.

Okay. That's helpful. And then, lastly, you mentioned higher go-to-market investments hitting SG&A line. Can you just remind us or refresh us on what those investments are and what the payback you're expecting from those are?

Yes, we are investing in brands and more premium products. It's a longer-term investment. We haven't seen payback yet, but we certainly do anticipate that we'll see in the future the demand for our more premium products and branded products will go up. So there will be a return in the future on this investment.

Okay. Thanks for taking the questions and congrats on the nice results.

Thanks, Kevin.

Our next question comes from the line of Chris McGinnis from Sidoti & Company. Sir, your line is now open.

Yes, good morning. Thanks for taking my questions and also congrats on a great quarter.

Good morning, Chris.

Good morning. Can you just maybe just talk, I guess, a little bit about the revenue decline in North America? And I guess, thinking about it for the year, should it get a little better because of the timing? It seems like last year was a little bit stronger and maybe so you have a little bit more difficult comps as well?

Yes, I think the comps were difficult as Neal mentioned in our prepared remarks. Last year we had a 5% growth in Q2, so it was a difficult comp. But besides that, as we mentioned lower commodity products sell-in was one of the drivers. The timing shift between Q2 and Q3 was another driver and just lower sell-in into OSS in particular was another driver. So those three accounted for the majority of the sales decline in North America.

Okay. So we should see, I guess, an improvement from that number probably going stronger in Q3 and Q4, I guess?

We are certainly hoping for that, yes.

Okay. And can you maybe just talk about kind of the independent -- on the commercial side. Just talk about the health and are there any changes in that business impacting you?

Sure. The commercial side for us was flat. So we didn't see the kind of declines that some of the other folks in this industry are reporting. And that's probably more of just the compare issues as well. Last year we saw a decline, so the compares there were little bit easier. The independent channel is bifurcated. There are some resource that are doing phenomenally well and are taking share, and some most of the smaller resellers that are not doing well. So as long as you’re working with the right resellers and remember we are very broadly distributed, so it might take that we are working with the right resellers that it's still a very healthy channel, that's very able to compete with other alternatives out there.

Great. And one last question, I appreciate the time, just on the e-commerce and maybe just talk a little bit about the performance in the quarter? If you mentioned, I apologize, I missed it.

No, e-commerce continues to grow. The growth slow down a little bit on a global basis, just I think it's just a low of numbers. The numbers are getting pretty big, but it is continuing to grow, especially in some of the emerging markets and in the U.S.

Great. Thanks for taking my questions.

Thank you, Chris.

Our next question comes from the line of Brad Thomas from KeyBanc Capital. Sir, your line is now open.

Thank you. Good morning and let me add my congratulations as well for a strong first half of the year here.

Thanks, Brad.

Boris, I was hoping you talk a little about the outlook for the second half of the year here and how it all that's changed based on the first half that you put up, obviously your guidance still speaks to very strong growth in earnings in 3Q and 4Q. But I think if the street moves to the high-end of your range, street numbers may need to come down a little bit for 3Q, 4Q, what if anything has changed about your outlook internally for the back half?

Yes, thanks for that question, Brad. Nothing really changed. If anything, we are very pleased with our performance in the first six months. It's just so much of our year is still to come and so much of our earnings are still to come. Really wanted to see how back-to-school plays out before we change our numbers outside of the current range. And then, as we described in our prepared remarks, there will be a little bit of a mix shift between Q2 and Q3. So we do anticipate that there will be some gross margin impact in our Q3. But overall, we are still very positive for the year and if back-to-school comes in the way, we hope it will then it's possible that our outlook is conservative.

Great. And then with a few more months under your belt of owning Esselte, could you give us any updated thoughts you might have on the potential for revenue synergies from that business? Thank you.

I'm very -- continue to be very impressed with the Esselte business, with the Esselte team. As I mentioned in my prepared remarks, I spend a week traveling throughout Europe and visiting the facilities there and visiting the plant specifically, and it's a very well-managed operation. So my expectations for Esselte if anything are higher now than they were before the acquisition. We are working on revenue synergies, the teams are working on that. That is still not baked into any of our numbers or outlook, but certainly my hope and my expectation is that we will begin to see some of the revenue synergies in 2018.

Great. Thank you so much, Boris.

Thanks, Brad.

And our next question comes from the line of William Reuter from Bank of America. Sir, your line is now open.

Good morning, guys.

Hi, Bill.

The first in terms of the shift to the smaller independents in the U.K., I'm wondering whether this could be a little more costly than the historical channels of distribution that we are getting, I guess, are greater percentage of the share in the past?

It could be that from a SG&A perspective. There will be a little bit more cost, but certainly the margins there should justify the investment. The bigger resellers typically have lower margin, so on a -- from an operating income perspective, it would be neutral or positive.

Okay. And then, I don't know if we’ve got an update recently on your SG&A savings target for the year, which you guys have usually achieved over the last 10, 12 years. Can you remind us what that number is for 2017?

Yes, we didn't provide an SG&A target. We said the overall productivity target is around $20 million, and we’re certainly are on track for delivering that. The reason that’s a little bit lower this year than in the past couple of years is because a lot of our resources are focused on integration and not driving productivity.

Okay. And then just lastly for me, you had some modest share repurchases in the quarter. How are you thinking about uses of free cash this year in terms of, I guess, in the context of share repurchases as well as about evaluating additional acquisitions?

We still anticipate that most of our free cash flow would be used for debt pay down, but as we said before we will be opportunistic with the share repurchases. So if that happens, that could use some of the cash, and we will be opportunistic with acquisitions as well. So that would be a use of cash as well, but my expectation is the vast majority of cash will be used for debt pay down.

I guess, just lastly, one more if can on the acquisitions. Can you comment just at all on the environment in terms of where you guys are seeing, where valuations are, and I guess how big is the pipeline of opportunities you guys are seeing out there?

You know we haven't seen much changes from what we discussed before. The pipeline remains rich. There's lots of candidates out there as we discussed before. The valuations we think are appropriate with the exception of the adjacencies where they’re a little bit high, so we're probably less likely to do something on the adjacency space, just given evaluations. But as far as consolidating the acquisitions or expanding in emerging markets, lots of candidates out there.

Great. I will pass it to others. Thank you.

Thank you, Bill.

And our next question comes from the line of Hale Holden from Barclays. Your line is now open.

Good morning. Thank you for taking my call. I was wondering if you could give us a little more color on Australia. I think you noticed some weakness there and I’m guessing it’s related to the office superstore consolidation or ownership changes? I was wondering how long you thought that might extend for or what are you seeing on a go forward?

Good morning. Yes, Australia was a little weak. Some of that is just the general economy, which there is very much commodities driven. So that's one factor, but the factor as you’re rightly mentioned is just what’s happening with the channel there. You have the ownership transitions on the superstore and you have the biggest reseller there office works trying to go public, so that was discontinuity in status quo. My expectation that some of that is going to get better in the second half of the year, but the office superstore changes will -- are waiting for decision from the competition authorities from the -- from Australia government. So that may take a few moments.

Got it. And then, my second question was just on the Brazil, the growth was outstanding and its all cycle for the back-to-school this quarter. So I was wondering, if you could just give us some more color on what maybe drove that?

Hale, say it again please. Can you repeat the question?

Yes, sorry. Growth in Brazil.

Growth in Brazil?

Yes.

Yes. So Brazil as you know, it has been a touch economic condition for the last couple of years. And I think what has happened is we've taken a significant share in difficult times as we were one of the few companies that could still develop innovative products, supply in a reliable and timely manner and provide some credit to our resellers. So we've been executing really, really well and I have to complement our team in Brazil for doing just a fantastic job. I'm very, very pleased. And as you mentioned, this is really even before our strong selling season, which is in the second half of the year. So we’ve done really well.

Great. Thank you very much. I appreciate the time.

Thank you.

Our next question comes from the line of Karru Martinson from Jefferies. Your line is now open.

Good morning.

Good morning.

I was wondering, just when we look at the e-commerce, the growth slowing the large numbers. What percent -- where are we today as a percentage of sales and where do we see that going here in the next, let’s say, in 2, 3, years?

You know if you look at our sales, about 5% of our sales are to the biggest e-commerce player out there, and we think probably another approximately 5% to everybody else. The reason I say approximately is it's difficult up for us to track those other e-commerce sales as they don’t buy directly from us. E-commerce still continues to grow faster than the average industry, but it is becoming a much bigger part of the pie. So it's just natural that some of that’s going to slowdown and some of it also probably just quarterly perturbations that will work its way out as we average throughout the year.

Okay. And I think separate from the potential retail merger on the office superstore channel here in the U.S., I mean, is there any impact for one of the players going private? Does that change the dynamic for you guys or any share of self concerns?

Nothing that we don't anticipate. Certainly we don’t believe that people change ownership and still run at the same way. There's a reason why they will change ownership, so we do anticipate that the superstores going private will mean probably accelerated store closures for example. And as I mentioned, we are preparing for that and we're reducing some of our costs ahead of that in anticipation that’s going to happen. And if it's not going to happen that’s an upside, but if it is going to happen, at least we are prepared for it.

Thank you very much, guys. I appreciate it.

Thank you.

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

Hi, good morning. So first off, I just wanted to ask, given the transition we are seeing as far as to office superstores, does that lost opportunity given that the ownership change is going on and so forth, or it's just a temporary issue?

The sellout doesn’t really change. The end-user still buys what they buy. It does impact our sales, we think disproportionally because a lot of their focus is on becoming more efficient in reducing inventory. So for example, when Office Depot and OfficeMax merged first four years ago, they had X number of distribution centers. Four years later they have less than half of the distribution center. So they focused a lot on efficiencies. The sellout wasn't really affected whether end-user bought from them or from somebody else, but there's a lot of less of our stuff in the supply chain and that does affect our revenue.

And then, from the aspect most of your items in the channel. Doesn’t that mean your inventory could be too high or you’re running it too high of a production rate and how you adjust into all that?

Well we build to demand. So we certainly -- if we see there is going to be a less demand, we reduce what we buy. Just a comment on inventory, I think the inventory is lower today in the channel than it's ever been. So we think all of our channel partners have become very, very efficient in carrying as little inventory as they can possibly have and still satisfy the demand of their end-user. So I don't think there is a big slack in inventory out there.

Okay. And last thing is just given from what you were talking about product mix, is -- are you seeing any trend in the back-to-school where that product mix could benefit you or harm you more? I know you were saying you sold some lower cost products, but just overall?

Yes, we haven't seen enough of the back-to-school to draw any conclusions yet. So we -- still has to play out and I will have to comment on that on our Q3 call.

Okay, great. Thank you.

Thank you, Hamed.

And our next question comes from the line of Carla Casella from JP Morgan. Your line is now open.

Hi. Most of my questions have been answered, but when you look at Staples and Office Depot, would you see a penetration is better in one versus the other? And what’s your thought about a potential combination there and the impact it would have on the business?

We are very well distributed with both of those customers, they’ve been long-term customers for us. So I’m very pleased with our share and I don't really want to speculate on what may or may not happen there. I think we're preparing for the biggest implication on us and if it doesn’t happen, there will be an upside as I mentioned. But other than that I don't have anything additional. Just beyond if you look at our -- how we managed the business for the last few years in the face of all this consolidation, I think we’ve done a really good job managing that particular consolidation. And my expectation is the future will be just as good.

Okay, great. And then do you also service Staples B2B business?

We do.

The service business.

That’s a bigger part of our mix, their B2B business and their consumer business.

Okay, great. Thank you.

Thank you, Carla.

And I’m currently showing no further questions. And I will like to turn the call back to Mr. Boris Elisman, Chairman and CEO for closing remarks.

Thank you, Brian. In closing, I want to thank you for your participation this morning and for your interest in ACCO Brands. It was another great quarter and I’m pleased with the progress we are making in our business and the integration of our two recent acquisitions. I look forward to reporting to you next time with the success of our back-to-school initiatives in North America. Enjoy the rest of the summer and thank you.

Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program and you may all disconnect. Everyone have a great day.