Good day, ladies and gentlemen, and welcome to the ACCO Brands Fourth Quarter and Full Year 2018 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 at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Jennifer Rice, Vice President, Investor Relations. Ma’am you may begin.

Good morning, and welcome to our fourth quarter and full year 2018 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. We also posted a newly refreshed investor overview presentation to our Investor Relations website this morning. When speaking to quarterly results, we may refer to adjusted results. Adjusted results exclude transaction, integration and restructuring costs, and apply a tax rate of 32% for the current quarter and 30% for the current year. This is a change from our previous assumption. 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 forward-looking adjusted earnings per share, free cash flow, net leverage ratio, or normalized tax rate guidance. Forward-looking statements made during the call are based on certain risks and uncertainties and our actual 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.

Good morning, everyone. Our fourth quarter results were somewhat mixed. Our free cash flow was higher than our revised expectations, but our sales and earnings were lower. The softer sales resulted from lower-than-expected orders in December, especially in the last two weeks of the month. Our adjusted earnings were lower than anticipated, due to the adverse impact from the higher tax rate, which reduced EPS by $0.02. Our results were also mixed for the year in total. Sales and profits were down in the U.S. and International, but we had an excellent year in EMEA. My comments this morning will focus on the main drivers behind our performance in 2018, and describe the actions we have taken and will take in response. I will also comment on our strategy for the new year. I will begin with and spent most of my time on the U.S., since this is where we saw a significant degradation on our financial performance, which was disappointing to me and to my management team. Prior to 2018, our business in the U.S. had four straight years of profit improvements with moderate sales declines, largely caused by the office superstore consolidation. Our team did a great job managing the consolidation, and associated channel transitions, with growth in mass and e-tail channels, largely offsetting reduced sales to office superstores, as they closed retail locations and distribution centers. Office wholesalers and independents were relatively stable over those years. On the cost side, U.S. inflation was mild during these years and we were able to drive significant profitability improvements in our U.S. business, through cost reductions and better productivity. It is largely the U.S. improvements that drove organic profit improvements in our total business prior to 2018. But what was so different about 2018 than the preceding four years?…

Thank you, Boris, and good morning everyone. Fourth quarter sales decreased 7% and comparable sales decreased 5%, primarily due to lower sales in the U.S. Reported EPS decreased 50% to $0.34 per share, due primarily to the non-repeat of a $25.7 million tax benefit and lower operating income. Adjusted EPS decreased 15% to $0.41 in the quarter. We had a higher than anticipated tax rate in the year, which had to true-up in the quarter, primarily due to our lower U.S. earnings. Our gross profit was lower in the quarter, primarily due to the U.S. business. Overall, our reported an adjusted gross margin declined 170 basis points to 33.5%, as detailed on Page 10 of our slide deck. The decline was mainly attributable to adverse customer mix, product mix, and obsolete inventory, which together accounted for 160 basis points of the decline. Inflation, net of price increases, drove a further 50 basis point reduction year-over-year. These factors offset costs and synergy savings of $5.4 million, which were favorable by 50 basis points. We expect to continue to offset higher costs currently and in the future quarters, with price increases and cost reductions. We were able to deliver an improvement in SG&A in the quarter. As a percent of sales, reported SG&A was lower by 40 basis points and adjusted SG&A was lower by 20 basis points. The improvement in adjusted SG&A was enabled by 120 basis points benefits from lower incentive compensation expense, and 10 basis points from cost reductions and synergy savings. These benefits more than offset the negative effect of lower sales volume, which was 110 basis points. All in reported and adjusted operating income and margin both decreased due to the lower sales in gross profit, partially offset by cost reductions. Turning now to the full year…

Thank you. [Operator Instructions] Your first question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.

Yes. Hi good morning, Boris, Neal and Jennifer.

Good morning, Brad.

Wanted to ask first about the North America market and hoping Boris, you could give us a little bit more color about how you’re thinking about the run rate of trends here in North America, to what degree is there, may be, some destocking that’s going on, as a result of some of the consolidation. How much might that pressure you, as we start into 2019? And what do you think kind of the underlying run rate of the market looks like?

Yes. We look at that 2018 as a reset year for North America. There was a lot of inventory that came out, especially from the two wholesalers in 2018, and it was just a lot of uncertainty, given merger planning that happened between the two of them initially, and then one of them in another company. So the whole environment on the commercial side was uncertain. As a result of that, the dealers were also sitting on the fence a little bit and not making significant investments in inventory. We have seen sales rebound in January, so the people are now buying to sell through. We think the inventory has pretty much come out, and we do expect normalization in 2019. So what that normalization means, is we think that the wholesale and independent sales will be roughly flat. Office superstores will continue to decline, as they continue to rationalize their store base, and especially in the retail end of their business, they are shifting more to private label and focusing more on services on their commercial end. So we do expect decline with superstores. And then the growth that’s going to come from major mass and e-tail channels, and we saw similar growth in 2018. So the big change between 2018 and 2019 is really the inventory – significant inventory coming out of the two wholesalers.

That’s very helpful. Thank you, Boris. And then if I could add a follow-up on the topic of acquisitions? I guess, could you give us any color on how the landscape seems to you for potential acquisitions, and is there any change positive or negative in light of some of the underlying trends around the world?

Yes. The trends look similar Brad. We did three acquisitions in last three years. The funnel is still very robust. We’re still being judicious in the decisions we make. The strategy is still too through acquisitions to reorient our business to more attractive categories, in more attractive markets, as we’ve done over the last three years. And my hope that we’ll continue – be able to continue to do that. As Neal mentioned in his prepared remarks, we generate a lot of free cash flow, and we certainly would like to use part of that for acquisitions. So the strategy remains the same.

Great. Thank you very much, Boris.

Thank you, Brad.

Thank you. Your next question comes from Bill Chappell with SunTrust. Your line is open.

Hi, good morning. This is actually Grant, on for Bill. Thanks for taking the question.

Good morning.

First one is just on EMEA and the customer that became insolvent in the quarter. I don’t know if you guys could quantify the impact on the top line in the quarter and then, is there any potential impact going forward, as maybe that customer liquidates inventory or any other impact on that market there?

Certainly. It’s about a $3 million impact, and it was largely caused by them liquidating inventory in the fourth quarter. And so what we saw in January was a return to normal rates of business, as either the channel or directly or the wholesaler is actually in certain countries operating under bankruptcy protection and disabled order in paper goods again.

Got it. Thank you. And then actually one clarifying question on the potential pricing actions in the U.S. If the tariffs do come through, will you be able to basically get that pricing through immediately, or will there be that three to six-month lag time to pass that through to customers?

Yes, it will be something in between. Just the execution time will take probably 30 to 90 days for us to be able to execute a price increase. But we don’t have to go through a three months to six months notification process anymore. So it won’t be in March, but it also will not have to wait until the fall timeframe.

Got it. Thank you. I will pass it along.

Thank you.

Thank you. Your next question comes from Hamed Khorsand with BWS Financial. Your line is open.

Hey, good morning. So first off, could you just talk about your paper supply in 2019, you were talking about last quarter, and then what you’re doing for 2020, given that Georgia-Pacific is now exiting the industry?

Yes. Paper supply for 2019 remains tight and to avoid the issues that we had in back-to-school 2018, we actually pre-bought paper in the fall of 2018, in order to secure our supply for back-to-school, to guarantee the supply for back-to-school. So we’re fine for 2019 back-to-school. What we are looking to do in 2020, is actually source – potentially source product from abroad to supply the U.S. back-to-school. So that we don’t have this issue and we are initiating the – that process very early. Given the exchange rates, we think that foreign sourced paper could be competitive, with domestic paper for our needs, and that’s the path that we’re pursuing.

Okay. And then just talking about the U.S. size, as far as the wholesalers go, is the entire industry shrinking, or has this purely been a wholesaler driven issue?

This is a wholesaler driven issue. If you look at sellout; sellout is roughly flat to minus 1%, minus 2%, in the categories. And as we mentioned in the prepared remarks, our sales in the U.S. were down 7%. So sales are significantly more affected than the sellout is, and that’s because of the inventory coming out of the wholesale channel.

Okay. Thank you.

Thank you, Hamed.

Thank you. Your next question comes from William Reuter with Bank of America. Your line is open.

Hi, couple of questions. First, your guidance for a high-single digit contribution from pricing in North America, however sales are going to be flat to down low-single digits, that implies a pretty big decline in terms of units. I guess I would have been surprised that the unit declines in these categories would have been this great. Can you talk a little bit about those unit declines and whether it’s due to share losses on your part, or whether the units are declining that much?

Yes, Bill, this is the assumptions we are making on price elasticity for our products. We’re assuming that everything that’s going up in price will be offset in volume. And then there’s going to be additional declines from just channel shifts, as we mentioned office superstores are expected to decline, and not be fully offset with the growth in mass and e-tail and flat sales in wholesale independent. So it’s the assumption that we are making. We hope we are wrong, but we think it’s the right assumption under the circumstances.

Okay. And then your expectation, international sales grow high-single digits longer-term kind of mid-single digits, are these due to share gains or are the categories in these regions growing this much in terms of units?

Yes. The guidance that Neal has provided, the color, that was for 2019, and a lot of that is driven by the acquisitions that we made mid-year and a little tuck-in that we made earlier this year. So that’s what’s driving the high-single digit growth including currency and low-double digit growth excluding currency. If you remove the acquisition, the growth will be more in the 3% to 5% range, which is our long-term view for that particular region.

Okay. And is this basically because some of these developing countries are actually continuing to consume more units, or use more units than they have been?

That’s correct. There is just positive demographics there with more people being educated, more people staying in school longer, and a shift from blue-collar to white-collar workforce, all of that is beneficial for our categories.

Okay. And then just lastly for me, you’ve repurchased bonds in the second quarter of 2018. Will you consider bond repurchases with your free cash flow in 2019? How do you think about that?

You’d understand, we don’t give the right to comments on what we intend to do going forward. We look at all things opportunistically, and make decisions from time-to-time. And that’s all I want to say.

Okay. I will pass to others. Thank you.

Thanks, Bill.

Thank you. Your next question comes from Hale Holden with Barclays. Your line is open.

Hi. Thank you for taking the call. I just had two quick ones. Boris, why do you think you didn’t see any orders over the last two weeks of December, because you guys were very vocal about taking price increases on January, who would’ve thought some guys would’ve bought ahead of that?

Yes, Hale. We believe it’s a combination of things. If you remember, the market environment in December, there are a lot of concerns about trade and U.S. Fed raising rates. So we think that played into it.

Government shutdown as well.

The government shutdown coming in at the end of December, exactly. And then the other thing is the inventory levels of our big customers, as they brought in additional inventory ahead of tariffs, everybody thought that tariffs will go up to 25% and all of those decisions were made probably in the September timeframe. So when the U.S. government made the decision to keep the tariffs at 10% in December, it was too late, that inventory was already coming in, and we think there was just not enough space to take in additional products. So we think that played into it. And then the other thing that we think played into it is just the change in metrics for some of our customers, who are – have gone – undergone an ownership transition, and are just operating to different metrics or they either made their numbers and decided to delay until next year, or they didn’t make their numbers and have no reason to chase. So I think it’s a combination of all those things that affected December.

Great. Thank you. And then the second question is, you called out source sales on planning products on December, and just wondering, if you’ve seen that catch up in January or if that was just products that probably weren’t going to sell through this year, or if it’s even meaningful?

Yes. Our big planning selling season is November, December and January. And from a compare standpoint, we had placement of a lot of SKUs with one of the major retailers in the U.S. in 2017, and we didn’t have that placement in 2018. So sales were down in December, and sales at wholesale were down a little bit in January as well.

Got it. But it’s not inventory that you are getting stuck with necessarily? It’s just a comparable issue?

It’s not an inventory issue. Right. Placement issue.

Great. Thank you so much for the time. I appreciate it.

Yes. Thank you.

Thank you. Your next question comes from Karru Martinson with Jefferies. Your line is open.

Good morning. In terms of the long-term 2 times to 2.5 times target, we’re kind of close to that on leverage today. I mean what’s the timetable that you guys see yourself getting there and kind of maintaining that level?

We believe that with – under normal conditions, we should get there in the next 12 to 18 months. But of course, how we perform is going to influence that, and if we do any acquisitions, are going to influence that. It is a priority for us to try to get to at least 2.5 times, because we will be able to have complete flexibility on when we do what, including share repurchases. But we also are not going to hold off on a strategic acquisition, in order to get to that 2.5 times level. We’re very comfortable with where we are today at 2.8 times. We’d like to get to 2.5 times in the near-term. But we will apply business judgment to that, as we go to it.

Okay. When you guys talk about having a pipeline of acquisitions. I mean, it seems like the industry, every couple of years goes through a major consolidation. Are these – is this pipeline kind of tuck-in varieties, or are we due for another wave of that industry consolidation?

Yeah. The industry consolidation that we’ve been seeing, is more on the channel side. So we don’t really participate in that. The acquisitions that we have done recently, is really expanding in the international markets, where the industry conditions and market conditions are more attractive. So we see a lot of opportunity still on that end, getting bigger and faster-growing markets. There could be some consolidating acquisitions, but those for us would have to be very meaningful and very accretive. I think the chances of that are lower than just expanding in the international markets. And then, we still continue to look at adjacencies. But as I mentioned, on prior quarters, the evaluation there is a little bit too high to make it meaningful for our shareholders.

Okay. And I realize that it’s early days, but wholesale had – wholesale distribution had been a stable category, now, one of the big players being taken over, how does that change the dynamics in that segment of the market?

Yes. Karru, to your point, it’s too early to tell. We kind of expect a continued normal behavior from the customers at least in the first few quarters. Over the long-term, we certainly do expect that there’ll be some shift of purchasing from dealers, from one wholesaler to the other. We think net-net, it will probably be neutral for us. But there could be some quarter-to-quarter variations that may impact our sales. But in the near-term, we expect normal behavior.

Thank you very much guys. Appreciate it.

Thank you.

Thank you. Your next question comes from Kevin Steinke with Barrington. Your line is open.

Good morning. What were you able to find, that enabled you to increase your target for the Esselte synergies?

We just – we had – I don’t want to say conservative, but we had realistic synergy plans, and we executed broadly at the high-end of the top end of, really of our expectations. I think it was all – it wasn’t any new initiatives that we uncovered. But I would say, our execution has been outstanding for the last two years, whether it’s facilities’ consolidation, or removing duplicate functions or duplicate costs in the business. Our European team has done a really outstanding job delivering and obviously over delivering to synergies. So that’s really what drove the overperformance for the last two years, and we have raised our expectations for synergies now from $23 million that we had at the time of the acquisition to now $32 million that we’ll deliver by the end of this year.

Okay. Good. And on the small acquisition you did in Australia, could you offer any more detail in terms of size or what it brings to you strategically?

It’s a small tuck-in. It’s not really material to our results. We bought inventory, customer list and brands from a small company in Australia, and it allows us to get a little bit bigger in the categories where we are present, and leverage scale and it also allows us to increase our share in [indiscernible] which is an attractive category in Australia, as well as a bigger participation in some of the higher margin calendar products, which is also a new category for us in Australia. So we look at it as just a small tuck-in that’s very, very accretive for our shareholders.

Okay, good. And lastly, as we think about incentive compensation, how much of a headwind is that to your 2019 guidance versus 2018? Just the assumption I guess that it’s restored, I guess, on an EPS basis?

Yes. So it’s about a $21 million impact in terms of costs that we didn’t pay in 2018, and we hope to pay it in 2019. And so if you just look at it in pure EPS, it will be about $0.14.

Okay, thanks. That’s very helpful. Thanks for taking the questions.

Thanks Kevin.

Thank you. Your next question comes from Joe Gomes with Noble Capital Market. Your line is open.

Good morning. And I apologize in advance if I repeat some questions here, I had little phone issues here earlier. But just on the competitive environment, that you guys have raised prices here twice. And just wondering, what are you seeing the competitors doing, so where – on a relative basis, are you still, vis-à-vis your competitors, in terms of pricing and everything?

Yes Joe. We always look at competition when we adjust prices. We believe we are very price competitive with companies that we compete with. If they weren’t, we wouldn’t be adjusting prices. Everybody is using the same commodities, everybody is seeing the same cost increases on steel and aluminum and paper and transportation and tariffs, right? So we think from a competitive standpoint, where we need to be. Raising prices is never easy, customers never like price increases, regardless of whether there is high inflation or low inflation, so there’s always a challenging process, but this is something we absolutely have to do, given the rising costs that we see, in the U.S. and Canada and in many other countries of the world. So we have to recover costs and our team historically has done a great job of adjusting our prices to make sure that we recover costs.

Okay, great. And then on the dollar store channel. Over the last two quarters, you’ve mentioned it as having an impact on profitability. But just wondering, what is the differential currently with dollar store channel margins vis-à-vis, the overall corporate margins, when do you expect the dollar store channel margins to kind of migrate, hopefully up, towards the corporate overall margin area? How big is the dollar store channel today as a percent of revenues?

Yes, the dollar store channel is very small for us the U.S. It’s something that is growing. It’s something that we believe we need to become more successful. We are not happy with the balance we had between revenues and profitability in 2018 in that channel. So we’re going to be more balanced between revenues and profitability and margin in 2019. But it is still an important channel for us, because more and more consumers shop in that channel and we want to go and we have to be where the consumers shop. So it’s a small part of our business. We’re talking about single digits in terms of millions of sales. But we’d like to grow it more and we’d like it to be more profitable than it is.

Okay, great. Thank you very much.

Thank you, Joe.

Thank you. And this concludes our question-and-answer session. I’d like to turn the call back over to Boris Elisman, Chairman, President and CEO, for closing remarks.

Thank you, Heather. In closing, despite several near-term factors outside of our control, including higher inflation and tariffs, and ongoing U.S. industry consolidation, we remain confident about our future and continue to position the company for growth and strong returns for our shareholders. Our team is committed to executing through the current challenging environment in the U.S., and is excited about the international opportunity. Thank you for your continued interest in ACCO Brands, and we’ll talk to in a quarter. Bye-bye.

Thank you for your help.

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