Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 ACCO Brands Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Christine Hanneman, Senior Director of Investor Relations. You may begin.

Good morning, this is Kristine Heinemann, Senior Director of Investor Relations. Welcome to ACCO Brands second quarter 2019 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 about quarterly results, we may refer to adjusted results. Adjusted results exclude transaction, integration and restructuring costs, and reflect an adjusted tax rate. 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 today’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 adjusted 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 and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session. Now I’ll turn the call over to Boris.

Good morning. We reported record second quarter sales and adjusted EPS continuing our strong performance of the first quarter. Sales rose almost 7% excluding currency translation led by the strong back-to-school sell-in in North America. Profit growth was driven by sales and excellent controlled expenses. I’m very pleased by our execution year-to-date and while we will always have areas to improve, our results show that our strategies are bearing fruit and delivering good revenue and profit growth. Let me remind you of our strategic imperatives to drive profitable growth the path we’ve been on for the last few years. We’re diversifying our geographies and channels organically and with acquisitions to have a larger presence in faster growing countries and channels and to have less dependency on any one customer. We’re focusing more on the end consumer investing more in consumer centric brands and categories organically and through acquisitions and are choosing routes to market that are more closely aligned with where consumers want to shop. We’re developing more products with end users driven innovation. As demonstrated by our recent launches of TruSens air purifiers, Foton 30 automatic laminators, Kensington SD7000 Surface Pro Docking Stations and Rexel Momentum and Leitz IQ Shredders. We’re laser focused on reducing unnecessary costs in the business and improving the productivity of our resources. Our Lean Six Sigma-based productivity programs generate substantial savings every year that are either reinvested in the business or returned to shareholders. We’re diligent about execution always the most difficult part of any business, but something that we at ACCO Brands do well every quarter and especially this year. And lastly, we’re prudent stewards of shareholder capital ensuring that we invest in areas with good shareholder return and this includes acquisitions or returning capital to shareholders. We’ve been working on these strategic factors over the last few years and have delivered good revenue, EPS and cash flow growth. Our record results this quarter are another confirmation that our strategies are working and that we’re capable of generating profitable growth in a challenging environment. Now let me turn the call over to Neal for review of segments, guidance and other financial commentary and then I’ll join him in answering your questions. Neal?

Thank you, Boris. Good morning, everyone. We posted record sales in the quarter, up 4% based on price increases across all segments and volume growth in North America driven by strong back-to-school selling. We also reported record second quarter adjusted net income of $36.3 million or $0.36 per share based on higher operating income offsetting a $0.02 negative impact from foreign exchange and the higher tax rate. As shown on Slide 7, gross margin was 32% down slightly due to unfavorable product mix in North America and international and one-off expenses in EMEA. SG&A expenses as a percent of sales were down in the quarter to 18.4% from 20% last year primarily because of good expense management and leverage from higher sales. Operating income increased to $61 million from $52 million and operating margin expanded to 11.8% from 10.4% last year. On an adjusted basis, operating income increased largely due to cost savings and higher net sales. Our adjusted rate was 29.7% in the quarter. We still expect our full year adjusted tax rate to be 30% to 31%. Now, let’s turn to some details of our segment results. Net sales in North America rose 9% driven by pricing of 7.5% that was needed to offset input inflation and tariffs. Volume contributed 1.5%, we saw growth in almost all channels and back-to-school orders have been strong and sales growth continued for the Kensington brand and new products. As we mentioned last quarter, in our second and third quarters, the faster growing channel such e-tail and mass merchant carry a higher proportion of sales due to back-to-school shipment. Our initial view on our North American back-to-school season was that sales growth would be consistent with last year when we grew back-to-school sales 2%. We now expect to do better than that…

Thank you. [Operator Instructions] Our first question comes from the line of Bill Chappell with SunTrust. Your line is now open.

Thanks, good morning.

Good morning, Bill.

Boris just wanted to dig a little bit further into the North American performance and kind of what you're seeing and maybe if you can breakdown what you're seeing at of category, do you expect back-to-school to be kind of as a category to be up year-over-year this year? Is it more share gains and mainly I understand the pricing benefit but just trying to understand the volume and then what you expect over the next, as we move through back-to-school season?

Sure Bill. The growth that we saw in North America has been very broad across many categories and many channels. We saw growth in mass and OSS and in Et Al as well. We got bigger placements for our Five Star, Hilroy, Kensington, BBC and Quartet brands and we also gained a lot of private label business for back-to-school and remember from a compare standpoint that's one of the things that we lost a year ago in back-to-school. So we're set up for a very good back-to-school and as Neal mentioned in his prepared remarks, we expect the growth to be stronger than 2% that we experienced last year. Given our 9% growth in the second quarter, I certainly do believe that we took share, I don't think that the market is growing at that particular rate. But we're set up for back-to-school obviously we'll have to see what happens during the season. The season is just starting. So it's a little bit too early to comment on that.

And is the thought or the hope that that OSS is finally not enough of a drag to offset kind of the gains you're seeing in the other channels and maybe we're through the multi-year consolidation impact?

That certainly is the hope and we have seen that especially in the second and third quarter when mass plays a much bigger role in our seasonality. We're seeing the pressures from OSS consolidation to be a lot smaller in those two quarters and then in the first and fourth quarter that they typically are larger. But certainly, as other channels become a bigger part of our mix, the negative effects from OSS consolidation will be felt less. It is important to reinforce that we did see growth in OSS for this in this particular back-to-school sell-in in this particular Q2. It wasn't across all customers and channels but overall, if I combine all the sales, we did see growth in Q2.

Got it and then last one just back on Europe. Maybe a little more color and what's going on and I can't remember the exact impact expected from Brexit, but I mean, as we look over the next few months I know you have a meaningful UK business and how you're expecting that to affect the P&L?

Sure. Europe had a difficult compare versus a year ago. We grew a lot a year ago. We had a couple of one-time things happening a year ago that boosted revenue. We moved the warehouse, so we shipped ahead of that. There was the European privacy law GDPR that was launched in May of last year and then drove a lot of shredder sales in May, in June and also we had a kind of a holiday shift that benefited Q1 and took away from Q2. But that affected European sales. We’re seeing a slowdown in the UK to your point. So we do expect that Brexit will affect sales to some effect. The good thing about our business in EMEA is that UK is now a much smaller percentage of our sales. It used to be around a third of our sales in Europe. Now it's down to 10%-12%. Still we believe it can be flat for the year despite some of the challenges that we expect to be in the UK associated with Brexit.

Got it, thanks so much.

Thanks Bill.

Thank You. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open.

Good morning Boris, Neal and Christine and congrats on the nice quarter here.

Good morning, Brad. Thank you.

I wanted to ask a couple of follow-up questions on North America if I could. I guess, just to ask it directly, do you feel like there were any timing nuances in terms of the timing of shipments that occurred, because I know sometimes there can be some shifting between 2Q and 3Q and orders and how is that playing out this year?

Yes. That's a good question, Brad. We don't think that the shifting was significant. There's always shifting as you mentioned between Q2 and Q3 and some customers wanted little bit early, some customers wanted little bit later. But whatever it was, this year was not really significant to change our view that the back-to-school we think would be better than it was last year. The back-to-school growth will be better than it was last year.

And then just putting into context, I mean, this is a very strong 2Q in terms of North America growth. Do you still believe you can grow sales in North America in the third quarter or do you think this may make a tough bar for posting growth in the third quarter specifically against what is a pretty easy comparison in the third quarter last year?

No, we think back-to-school season will be good. So we always aspire to grow. We achieved our results in the first half in North America with especially strong Q2, we believe we can grow in Q3 and Q4 becomes more challenging one because we have a little less visibility in Q4 and two, as I mentioned that's where the more challenged customers have become a bigger percentage of sales. So growing significantly becomes more difficult.

And then, some of the new products clearly seem like they're having a strong launch and getting some traction out of the gate. I mean, when you think about new product introductions, I mean are they big enough to kind of call out as a specific percentage of sales and worth calling out, how much they contributed here to this quarter or are they still more in their infancy at this point?

It really depends. The products that I mentioned, if we look at shredders that were launched very early in the year, we’ve achieved sales in the millions of dollars. So certainly has an impact on the first half revenue. Some of the other products that we talked about such as TruSens or Foton 30 those launched in the middle to end of Q1. So took about $518 million in revenue, it doesn't really have a huge effect on them.

That's helpful, congratulations.

It’s the growth that has been significant, Brad. The growth has been significant and the trend is off to the right and certainly we hope that at some point in time we'll be calling out the exact amounts delivered by those products. Thank you.

That's great, thanks again.

Thanks Brad.

Thank you. Our next question comes from the line of Chris McGinnis with Sidoti & Company. Your line is now open.

Good morning, thanks for taking my questions and nice quarter.

Thank you, Chris.

I was sort of, you just can maybe comment on the wholesale market that you serve into and how that's performing and is that picking up or are you still seeing some kind of headwinds with the consolidation?

Yes, thanks Chris for that question. Yes, if you remember last year we had a lot of inventory being taken out of the wholesalers, U.S. wholesalers. We've seen that normalized and we're seeing a normal operating performance out of our wholesale channels on a global basis. So there's nothing unusual about the sales pattern that we're seeing with wholesalers.

Thanks. And then secondly, just with the change with the credit facility. Any thoughts about changing maybe a more consistent strategy on the share repurchase?

Could you elaborate on that Chris?

Just with the change in the credit facility, I mean obviously, you've been pretty proactive with share repurchase for your accounts before now that opens you up or freeze you from that. Is it may be more consistent in the sense of you have a dedicative certain amount of free cash flow to share repurchase here? Thanks.

So just as a reminder, we refinanced our facility as Chris mentioned and from a practical standpoint as long as our leverage stays below 3.25, we don't have any limitations on share repurchases. We expect in Q2 and Q3 to be above 3.25, which means we will limit to $75 million, but limitations to go away in Q4 and we don't believe will be buying $75 million in the first three quarters anyway. So we won't have from a practical standpoint the limitation on our repurchases. And then from a strategy standpoint, we remain opportunistic when it comes to share repurchases. If the price is right, we will be buying more shares and if the price don't get high we think that from a shareholder return perspective, we will probably deploy our money better somewhere else.

Thank you very much for the time today. I appreciate and good luck in Q3.

Thank you, Chris.

Thank you. Our next question comes from the line of Kevin Steinke with Barrington Research. Your line is now open.

Good morning everyone. I think when you initially gave your outlook for 2019 there was an assumption that there would be some degradation in sales volume just to do to the significant price increases you were implementing. I mean, it doesn't sound like that's been the case, but have you seen that at all in reaction to the price increases?

Yes. You're correct, Kevin. We assumed pretty much a one-to-one offset between pricing and volume and we have not seen that. So the effect of the price increases has been, a negative effect has been less than we anticipated.

That's good to hear. And then, Neal mentioned somewhat of a headwind in the fourth quarter from accrual of incentive compensation. Just how should we think about that in terms of margin impacts for the remainder of the year?

It was a $7 million or close to $7 million release we had last year which we won't have this year. So literally it's a $7 million impact on Q4 operating margin.

Got it, perfect, thanks. That's all I had.

Thank you, Kevin.

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

Good morning, just a few questions here. Could you just talk about on the back-to-school that you're seeing the volume increase for, is that coming in with a higher ASP than what you've usually been accustomed to as far as what your customers are buying or is this low ASP kind of business, is just volume driven kind of revenue?

Thanks Hamed. It's a combination of the two. We have raised prices on those products that were affected by inflation and tariffs. So, on those products we are seeing higher ASP, but we also won incremental private label business which is typically more commodity, low ASP business. We haven't, I don't think we've done and nor as Neal of the overall portfolio ASP, but I believe it would be a combination of the two.

And is that commoditized business, is that you’re opting for winning, is that purely just to run, you’re manufacturing at an efficient rate or where are you going after that business?

It's a profitable business that gives us marginal profit dollars. Good for our shareholders, yes. And that's I've talked about before, we look at that business opportunistically if it's accretive to our bottom line, we would do it, if not we won't do it. It's not strategic for us in nature, but given the incremental revenue and profit dollars we can get it when we want it.

Then on the accounts receivable, is there any credit quality issues here or is there been net terms extensions, if you could just provide some color as far as what the increase?

The increase is fundamentally driven by the higher sales and so you've also got the acquisition of GOBA which makes an impact on the AR balance. But, the biggest issue is just high sales in the second quarter and the timing of those sales which as you would understand with back-to-school being a big constituent part, they happen late in the quarter and so they will just end up on AR at the end of the quarter.

And DSO there is a comparable to last year, so we don't see any kind of incremental risk.

And my last question is just on that product warranty comment that you made, is this new products that you had issues with and did you provide some aspect of what the impact was and if there was any manufacturing delays because of this product warranty issue?

Yes. We had some quality issues in Europe on some of our products. So we had some reserves associated with that, the products are fairly new that they were not launched this year, but there was fairly new subset of alliance. So we're working through that. We think from an impact to the end-user standpoint as well as the financial reserve standpoint that's all already incorporated in our numbers and beyond that. But it did effect our results especially for EMEA second quarter.

Okay, thank you.

Thanks, Hamed.

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

Hi guys, this is Mike on for Bill. Could you talk about the potential impact of 25% tariff on the list four items?

So, which one are you talking about, there's so many of them. Are you talking about the [$300 million] one that people are speculating about? Are you talking about the one?

Yes.

So, obviously if tariffs are raised on the remaining Chinese imports, we would have to pass through those tariffs onto the consumer, either us nor we believe other manufactures there can absorb a 25% cost increases is what this would be and we'll have to pass it on. We don’t think that it's likely that these [$300 million] will be punitive but if they are, we will pass them on.

And then, is there any estimation about the dollar value of that?

If you look at the tariff impact that is already in place which is roughly the same amount, it's on the order of $28 million. So, basically you would earn another $28 million and additional costs if the other [$300] million would come into play and we would have to recoup that $28 million in additional pricing.

The likelihood of it impacting this year though is getting low just given the way the calendar's working and how long it takes us to be able to implement price increases. So, the effect is always at least a quarter out from whenever a need incur.

Got you, thanks. And lastly, could you talk about what you're seeing in the M&A pipeline and how you guys are looking at valuations right now, thanks.

As I commented before, acquisitions are a core part of our strategy, as we try to change the profile of our business towards faster growing categories, channels, and geographies, we're very disciplined in our approach. There's lot of potential acquisitions out there, when disciplined in our approach and we only act if it makes sense from a return invested capital perspective for our shareholders. Beyond that, I can't comment on any specifics.

Great, thanks so much.

Thanks, Mike.

Thank you. Our next question is coming from the line of Hale Holden with Barclays. Your line is now open.

Good morning, thanks for taking the call. I had two questions. In the slide that you called on, enabling independent dealers to increase direct purchases to become more price competitive. I was wondering if you could give us some more color on what you're doing with the independent dealers in the U.S. and what the opportunities that was there.

Yes. We’ve launched the program a few months ago to enable independent dealers to buy directly from us and economic order quantities if they want to and therefore they can avoid the wholesaler margin and be more competitive with e-tail. And that program's been very successful, we had a lot of adoption, dealers still have a choice whether they want to buy through a wholesaler or directly from us and a lot of them make those decisions based on not just pricing but credit availability and some of the other factors warehouse space et cetera. But we have seen a positive uptick on that program. We have more dealers buying direct from us which allows them to compete more effectively with their competitors. And just as an aside we have a very successful independent dealer initiatives in EMEA where the majority of our sales actually do go directly to independent dealers and not through wholesalers. And as a result, our dealer business and overall business in EMEA is very healthy and robust. So, what's happening in North America in a way is mimicking what we've done in EMEA over many, many years.

You had also called out good sales flow through to the wholesalers or expectations of that and the back-to-school. So, I've seen others been sort of no blowback to you from that channel.

No. I mean, obviously wholesalers want to have dealers buy directly from them but and our sales with wholesalers has been growing albeit because they were taking inventories down last year. So, that compares are a little bit easier but no we haven’t seen a lot of blowback from wholesalers on that.

Got it. And then my second question was in Europe, I think that the office superstore is pretty small component of what you're selling into it. But we have seen headlines earlier in the week that one of them was had a factor that was not providing support to them. I was wondering if that was an issue for you guys at all or not.

Yes, the environment as in Europe is very different as you said superstores are a very small percent of the business in Europe and because that's such a small percent of the business in Europe where effectively can offset some of the headwinds that we've seen from them over the last several years with growth through other channels. So yes, we're aware of all the happenings in Europe. We don’t think it's going to have a material effect on our business there.

Great, thank you so much. I appreciate it.

Thank you, Hale.

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

Just following-up on the wholesalers. Has there been any change really with the Essendant being integrated with or being assumed by Staples parent?

We haven’t seen the effects of that combination yet in our business. We anticipate obviously that something will happen but we have not seen it yet.

Okay. And just with Staples, as they're launching private label a number of brands, how does that change the aspects. Is private label still kind of the category entry point that you always thought it was or has that changed?

No, nothing is really changed, I mean Staples has had private labels for many, many years. They just now branded itself something different than staples but the strategy is not that much different? So, we don’t think it's going to have any different impact that it has had over the last many years in our business.

Okay. And just lastly, in terms of freight and shipping, kind of what's the outlook there?

You just say Karru, freight and shipping?

Exactly.

We have seen rates rise and as a continuation of what we saw last year in the second half, similar issues in terms of shortage of truckers and digital metering et cetera. So, they are still at the elevated levels but not the increasing of the same rate that we saw last year but they certainly are not going down.

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

Thank you, Karru.

Thank you. Our next question comes from the line of Joe Gomes with NOBLE Capital. Your line is now open.

Thanks, and good morning guys.

Good morning, Joe.

Most of my questions have already been asked but one of the things you mentioned was that you're looking at doing some more in-sourcing to your existing plans. I wonder if you could give us a little more color on that and how much can you do, what type of products are you pulling back, anything in there would be appreciated.

Sure. So, if you look at tariffs effect different categories unevenly. They're causing us to actually outsource in some categories because it's cheaper to buy finished product than to import raw materials which are effected by tariffs and then build it in our factories. On the other hand and category like Binders, it's now more effective to manufacture them in our facilities than to import finished goods from Asia, from China. So, Binder specifically will look into in-source more but on some of the categories like glass boards, we're actually manufacturing less and bringing more from Asia.

Okay, great. And then, and also could you give us an impact last year that we talked a little bit about Wall Calendar placements. I was wondering if going in to this period did it, whether you we regained that those placements or not?

Yes. We've seen the loss placement’s anniversary in Q1 of this year. It didn’t really have an effect on our Q2 sales and we're hoping for incremental placement and incremental share in the Q3 and Q4 timeframe. So, the negative effects are behind us and we're hoping for positive effects in the second half of the year.

Okay, great. Thank you.

Thank you, Joe.

Thank you. This concludes today's question and answer session. I would now like to turn the call back over to Boris Elisman, Chairman, President & CEO for closing remarks.

Thank you, Sarah. In closing, we're very pleased with the business is performing well in the first half driven by North America’s strong back-to-school business and GOBA acquisition. We remain confident about our future, we continue to position the company for growth and strong returns for our shareholders. I look forward to speaking with you again after report our third quarter earnings in a couple of months. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect.