Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 ACCO Brands Corp. Earnings conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Christine Hanneman. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands First Quarter 2020 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 can accompany this call have been posted to the Investor Relations section of accobrands.com. When speaking about our 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 the earnings release and 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, including statements concerning the impacts of the COVID-19 pandemic on the company, are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially. Among the factors that could cause our results to differ materially from our forward-looking statements is the scope and duration of the COVID-19 pandemic, government actions and third-party responses to it, and the consequences for the global economy and its impact on our business, operations, results of operations, financial condition and liquidity. Please refer to our earnings 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 will turn the call over to Boris Elisman.

Good morning, everyone. Thank you for joining us. I will spend the next few minutes reviewing the first quarter results. But I will spend most of my time giving you an update on our response to the coronavirus and its business implications on the second quarter. Neal will follow me with more color and details on the first quarter and provide additional comments on our cost reductions, balance sheet and expected use of cash in 2020. Then we’ll take your questions. Our first quarter is our smallest quarter of the year. Sales growth were down 2.5% to $384 million. Our adjusted EPS were $0.07, down $0.01 from last year. These results were roughly in line with our expectations. The year started well, but March sales softened, especially in the last two weeks due to COVID-19 related business and school closures. April, which is typically the softest month of the year for our business, deteriorated further due to incremental global government mandates and business closures in addition to the timing of Easter. As we manage our response with the pandemic, our top priority is the health and safety of our employees. In mid-March, employees who could do their job from home, begin working from home. Most of our production and warehouse facilities remain open to meet customer demand as we are designated an essential business in most jurisdictions, although many have reduced staff and hours. We modified operating procedures at our production and warehousing facilities-based on government guidelines and have taken additional steps to protect our employees. Those steps vary from location to location and include taking workers’ temperatures daily, practicing social distancing, wearing masks, additional deep cleaning and disinfecting procedures, quarantines consistent with CDC and WHO guidelines and adjusting our working schedules as appropriate to space out employee interaction. I…

Thank you, Boris, and good morning, everyone. Our first quarter reported net sales decreased 3% due to adverse foreign exchange. Excluding Foroni and foreign exchange, comparable sales decreased 4% as declines in Europe and the International segment offset solid performance in North America. As Boris mentioned, in mid-March, we began seeing government-mandated business and school closures and shelter-in-place orders in many countries in Europe, New Zealand and several states in the United States. By the end of March, this was widespread. We continue to comply with those and other orders as they evolve. We are considered an essential business in many countries and states. So we have been able to continue manufacturing and shipping in many of our facilities as demand warrants. However, due to soft demand and social distancing requirements, we are currently operating many of these facilities with a smaller staff. First quarter net income was $8 million versus a small loss in 2019. Adjusted net income was $7 million, down from $9 million in 2019. Adjusted EPS was $0.07 versus $0.08 in 2019. In the quarter, we spent $19 million of our free cash flow to buy back shares. Our gross margin was 29.2% compared with 31.9% in 2019. The decrease was largely the result of unfavorable fixed cost absorption, largely in North America and an unfavorable product mix, primarily in Europe. We reduced gross margin in International was from the inclusion of Foroni, without which segment margins would have been flat and gross margins for the total business 50 basis points higher. SG&A expenses as a percent of sales decreased to 22.4% from 24.3%. The improvement was primarily from lower incentive accruals as we will not earn any annual incentive bonuses this year in any segment as well as reductions in discretionary spending. The inclusion of…

Thank you. [Operator Instructions] Our first question comes from the line of William Reuter with Bank of America. Your line is now open.

Hi, this is Mary on for Bill. So to start, you touched on it briefly, but can you just expand on the health of your customers? And what kind of changes that you’ve been making to payment terms?

It’s difficult to say. Our customers vary in their profile. We have lots of customers who are very healthy and whose sales are actually up, and business is probably going to grow as a result. And we have some customers that are more in a specialty channels. And these are customers that are focused primarily on the office supplies business that are likely to be stressed by the current economic challenges. It’s hard to paint with a broad brush. Customers that we feel are higher risk, we are having discussions with and apply custom solutions for their particular environment. And as Neal mentioned in his prepared remarks, sometimes it means that we will reduce our sales to those customers in order to protect our receivables.

Got it. And then given just overall weak demand, are you feeling any pressure on price? And if so, what kind of pressure do you expect going forward in this is environment?

No, there is no pressure on price. In fact, I think there’ll be pressure the other way. The commodity environment is very benign, so we don’t see any inflation from the commodity costs. But certainly, operating a business in a COVID-19 environment requires additional cost. Social distancing means reduced productivity. So I think over time, some of these costs, if not all of these costs, will be passed through higher pricing. And it’s not just for our business, that will be the case everywhere. And I’m sure you’re seeing it in retail already where prices have gone up for the last couple of months, but that will come to our industry as well.

Got it. And lastly, just on the e-commerce channels. What kind of – are you seeing anything specific to what products are being sold online versus what’s typically being bought in stores? Any demand changes with that? Or any color, I guess, for what you’ve seen with most of these sales going online?

Yes. I mean, online is clearly benefiting in the current environment. We’re seeing very rapid growth through e-tail. It’s – in the first quarter, it approached triple digits for us. And then our own direct-to-consumer sales were up 17% in the first quarter. So not just third party, I think there’s demand – or we’re seeing demand online pretty much from every angle. So clearly, one of the big benefits in this environment will be online sales.

Got it. That’s all for me. Thank you very much.

Thank you.

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

Yes, good morning. Thanks for taking my questions. And nice job in the quarter, and thanks for providing some guidance for Q2.

Good morning.

Good morning. Can you just maybe, Boris, just talk a little bit about maybe the inventory levels on the commercial side and as states start to reopen, have those conversations changed outside of what you saw in April?

Yes. Inventory overall right now is pretty low for us. And it’s slow for a couple of reasons. One is there were some supply chain disruptions in February and March from China. So as we exited Q1, inventory was in a lower place. And then in April, some of that is coming back online, but we expect more of that to come into our warehouses in the May and June time frame. And as Neal mentioned, we do expect to exit Q2 with a little bit higher level of inventory because the orders were placed back in Q1 and the sales also are going to be down substantially. When it comes to our customers, they’re taking the inventory down by a lot as well because they’re anticipating a lower level of sales. So one of the reasons that April was such a soft month, in addition to just lower demand, there’s incremental destocking that customers are doing as they anticipate lower demand in future months as well.

Okay, okay. And then just on a regional basis, any – obviously, it’s a pretty wide range of sales decline for Q2. But if you just think about the region, and if you said that, I apologize, but maybe just your thought process through the segments of where you’re going to see the most pressure?

Clearly, North America did relatively well in Q1. And we saw weakness in EMEA and in International. If I look at Q2, we expect North America to benefit from back-to-school sell-in. That’s likely to be the strongest part of the business. And then outside of back-to-school sell-in, if I look at the commercial environment, we’re seeing similar trends or similar weakness all over the world. And then seasonally, Q2 is going to be a pretty low quarter or is a pretty low quarter for EMEA and most of International as well, and that’s not likely going to change.

Okay. Thanks for taking my questions [indiscernble] stay safe.

Thanks, Chris.

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

Hey, good morning.

Good morning, Kevin.

Just curious about, obviously, April was very soft, but did you see any stabilization in sales trends, maybe on a week-to-week basis as you move throughout the month?

It’s difficult to tell because we don’t do a year-on-year comparison, on a weekly basis. We did see – sales were better in the second half, just overall of April. Sales were very, very soft up and through Easter. As I think a lot of countries use that to really shut down businesses and schools and send everybody on vacations. But then post Easter, especially the last week or so, we saw some improvement in sales. It’s still much, much lower than prior year. We do expect May and June to be better, both because we are seeing some openings in some of the international countries. We are seeing discussion of openings and actually some openings in early May. In some of the U.S. states, we haven’t seen any business impact of that yet, but certainly, there are openings going on. And then our back-to-school sell-in shipments are really May, June, July. So with May and June falling into Q2, we expect that to help those two months.

Okay, all right. That’s helpful. And that kind of dovetails to my next question here. You mentioned some countries in Europe starting to tentatively reopen. I know it’s still very, very early in that process. But have you seen any green shoots emerging in your sales trends from certain countries beginning to reopen.

We haven’t seen any greens shoots yet, Kevin, but countries are open and shipping, which is a good thing. For part of March and early April, Italy and Spain, and a couple of other countries were pretty much completely shut down. Now they’re open. Our warehouses are shipping so I do expect that we will have stronger May than we had in April.

Okay. And then you mentioned the strong demand for certain work-from-home, stay-at-home items. Can you give us a sense as to how much of your portfolio those items account for and maybe if you been able to address the out of stock items that you mentioned there as well.

Yes. If we look at our sales for those types of products, which is Kensington, TruSens, Derwent, some notebooks. It’s probably in the range of 10% to 15% of our portfolio. We are addressing out-of-stock issues. Certainly, we expect May to be better, but the demand has been so strong that even as we get additional supply of those products, they go out very, very quickly. So it’s a good thing, and I’m confident we will resolve the stock issues. But still, the overwhelming majority of our portfolio is down significantly in terms of sales.

Okay. Is the China supply chain pretty back close to normal now? Or is that still – I think you said ramping up, just what’s the state of supply out of China now?

Yes. The China supply chain is close to normal. Right now, we’re just facing typical forecasting issues where we just can’t forecast the increase in demand that we’re seeing on some SKUs. And given the length of the supply chain, it takes a little bit to recover. So these are good things. I much rather be chasing supply than demand. Back-to-school, I feel very, very confident in but in certain Kensington or TruSens or Derwent SKUs, we’re still chasing supply.

Okay. And then just lastly, just talk about the decision to declare a dividend. And I assume that you continue to – expect to continue new paying one going forward, it sounds like at least a positive signal of your financial strength. So just curious about that.

Yes. We’re very, very confident in our operating cash flow or free cash flow. Dividend is clearly a very important part of total shareholder return. And the Board felt that certainly for Q2 that we should be paying a dividend, given our view on the company in the future. And the Board will continue to evaluate on a quarterly basis, but certainly, given the importance of dividends, something drastic has to happen for us to change our view on that.

Okay, great. Thanks for taking the questions.

Thanks, Kevin.

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

Good morning.

Good morning, Joe.

First question. Given that you were talking about, you’re expecting to see prices to rise given some of the extra cost here. Related to the COVID crisis, do you have any fears or worries that, that could cause a faster shift to the generic side versus the branded side?

No, I’m not worried about that, Joe. I think that the price increases that we’re talking about are nominal, and the increases are going to be comparable to what everybody is doing. Everybody’s implementing similar policies and seeing the same cost increases. Clearly, we will need to remain competitive. But within all of that scope, I do expect to be a pressure on increasing costs – increasing prices.

Okay. And could you just remind us what percent of revenue is derived from consumables?

It’s roughly 50%?

It’s approximately half.

Yes, approximately 50%.

Okay. Thanks on that one. And how has it, if it has, the current crisis had any impact on some of the new product rollouts that you guys were expecting to do this year?

We are still committed to innovation, new product development. Some of the shutdowns in China earlier in the year delayed some of the interaction with suppliers that are manufacturing some of these new products for us. So I think some of these products will be delayed by a couple of months as a result. And then the plus one type of products, so derivatives and some of the minor changes are getting delayed to prior year. As Neal mentioned in his prepared remarks, we are reducing some of the CapEx that supports these less innovative products but the core group of innovative products is staying on schedule. We’re still committed to it, albeit there’s going to be a couple of months potential slip. Just business is not being able to operate as effectively as before.

Okay, great. Thanks for taking the questions.

Thank you, Joe.

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

Thank you. Hi, good morning, Boris, Neal, and Christine. Thanks for taking my questions.

Good morning, Brad.

Good morning, Boris, I want to jump in on maybe looking at the contribution margin and the deleverage that you all are expecting? I think some quick math, Neal, maybe implies a 30% to 35% decremental margin on the sales decline in 2Q. Am I in the ballpark with that? And any insights you’d like to share about how we should think about that flow-through rate as we try and fine tune our models for the balance of the year here?

Yes. Your math is correct, Brad. But that’s, of course, after we’ve taken certain actions to reduce costs on a temporary basis. So the pre cost reduction decremental rate on margins is actually in the low 40s. And then obviously, we took a series of special actions to reduce SG&A in the short-term with all the pay cuts, et cetera, that we’ve done, which takes it down into the – around 30%.

Okay, great. And then maybe a big picture question here for you, Boris. Just as you all have started to think about what the world looks like as we get back to normal, if people are working from home more if they’re potentially changing office layouts or office protocols, how do you think that affects the industry as you think about a recovery as we move into next year?

Yes, we began to think about those things, and we do think that they will – some of these changes will take place as the world recovers. I’m not sure going back to normal is in the cards yet. But certainly, I do expect a recovery of some sorts. And there will be likely more people working from home and more people schooling from home, more people buying through online and convenience channels, so less travel, more emphasis on local products and services, probably more awareness of physical and mental health issues and a search for way to improve both. So as a result of all of that, we will be adapting to the changes in consumer and channel behavior, and it’s very likely that we’ll continue to invest and improve our B2C capabilities around the world, continuing to partner with e-tailers. Not just with Amazon, as the obvious leader in that space, but also with a lot of local e-tailers that exist over the world, transition our sourcing and manufacturing over time to be closer to our selling locations, make additional investments in such product categories as wellness, arts and crafts, computer and school products, change the color waves from more office colors to more home colors conducive to home environment, reduced the pack sizes and intersizes enterprises in our cartons and shipments to facilitate shipments in smaller quantities and more to home locations as opposed to business locations. So those are just some kind of initial thoughts and initial ways we’re looking to be more attuned to the current changes in the environment we’re seeing. And obviously, over time, we will learn more and more about the more permanent changes in consumer behavior, and we will continue to adjust.

That’s very helpful. Thank you so much.

Thanks, Brad.

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

Yes, question, this is Ed Brucker on for Hale. I wanted to ask about the balance sheet. I noticed you gave your long-term leverage target, I guess, maintained at a 2 times to 2.5 times, you’re close to now at 2.8 times. So my first question, I guess, was on how you plan to get there and the timing on that, whether it being debt reduction or earnings growth in the future? And then what do you expect it to kind of be maybe year end?

Yes, Ed, obviously, earnings is the most unpredictable thing between now and end of year because the course of this virus is unpredictive and the response to it. So I’m not going to give any target for the end of the year. We gave the guidance that we felt we could give. And clearly, to give leverage guidance, I’d have to give earnings guidance, and I’m not intending to do that. However, we do not anticipate the virus staying with us on a permanent basis. And so as you move out of this year and you return into a normal level of activity, obviously, earnings will recover. And once earnings recovers, and as we did point out, we will plan to pay down debt this year. We will end the year with less debt, and we will hopefully see a recovery of earnings. And then clearly, our leverage target will quickly come back into the right zone.

Thanks. And then for the covenant relief, did you have to give anything up for that? You are – what seems to be well within even the – what the leverage covenant was before. Was there anything specifically you gave up for that?

So fundamentally, the agreement, while we stay within the original terms prior to this amendment, are very similar. The only change is a LIBOR base rate in the U.S., which will come into effect. But outside of that change, the only change that occurs is if we go above the old 3.75 leverage cap, in which case we would become constrained from purchasing shares – repurchasing our shares. But we wouldn’t intend to do that in that short-term, anyway, when we’re in that period. So it’s an academic restriction. And obviously, there are higher interest rate tiers that apply if we get into that level as well.

Got it. And then my last question is on, I guess, are you seeing any additional costs that you’re having to look at, given what’s going on in the plants in relation to the social distancing restrictions or cleaning the plants, et cetera. And how do we think about that in relation to the $20 million of cost saves in the second quarter and then throughout the rest of the year?

The $20 million in the second quarter is all in and includes all of the cost increases versus cost reductions. We are seeing increased costs as we’re managing our response to COVID-19. And as I mentioned in response to my prior question, some of that will have to pass-through in the form of higher pricing. And I anticipate those costs not to be short-term costs. I think the way we work is going to change. And that will drive almost necessarily higher cost or lower productivity, which will translate into higher cost per units. So some of that is going to get pass-through in higher pricing.

Great. Thanks, guys.

Thanks, Ed.

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

Good morning.

Good morning.

When you look at the range of sales down 25% to 40% in line kind of with what we’ve been hearing from others, what are the parameters of what guides that wide range? What has to happen that we come in at the short end? And where do we come in at the long end? In terms of the pace of openings, the return back to work, school? Obviously, is not coming back this spring here.

It’s really going to be guided by how the commercial side of the business will do. As we mentioned, we saw a very deep decline in April, driven by the commercial side of the business. If businesses start opening up and they start reordering product, and it’s done on a fairly broad scale, multiple countries, multiple states, then we should track to a lower end of that scale. And if the environment stays similar or if it opens up slower or if it reverts back, let’s say, it opens up and then a couple of weeks later, there’s a spike, and there’s going to be incremental shutdown, that will tend to push it towards the higher decreased number. The back-to-school, that’s a sell-in number. So that’s going to be roughly what it’s going to be because the orders are mostly in, we’re going to ship them in May and June. So that’s not going to vary a great deal outside of just the normal what ships in June versus what ships in July thing. But the commercial side is going to have the biggest effect on.

Okay. And then when we look at the positive cash flow for the year, certainly, cushion for you guys to continue to pay the dividend. Any thought given to bolstering that cushion that you guys have? Your leverage is materially low. We’ve seen others raising capital just to put cash on the balance sheet as a safety cushion and your thoughts on the capital structure with that?

Yes. We have ample availability under our bank lines. And so at the end of the quarter, we had $450 million of available credit on our revolving credit facility. So we do not anticipate using anywhere near that amount. It was actually increased to allow us M&A firepower. And so we have no particular needs to bolster the balance sheet right now. We have ample liquidity and we have ample access to it. So we’re very happy with our liquidity position.

And you alluded to my next question. In terms of M&A, are you seeing some of the smaller competitors there is out there having financial difficulties? Is there stuff coming to market in terms of the pipeline?

I think it’s probably a little bit premature for things just to pop up only in the last few weeks, but things obviously will come just given the financial squeeze that’s going on. And there’s plenty of stuff out there. The bar for all of these acquisitions has gone up given even what’s going on. So we will continue to be very prudent. And the priority for our free cash flow is delevering in dividends in 2020.

Thank you very much, guys. Appreciate it.

Thank you, Karru.

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

Hey, good morning. Could you talk about if you’re seeing any share loss or any competitive pressures from mass merchants using lower price competitors versus your higher quality products?

Hi, Hamed. No, we have not seen that. We mentioned – or actually, we mentioned in the last few years that with private label, we’re fairly tactical when it comes to private label. And some years, we’re in it, some years we’ll lose it. That’s not any different. And those decisions are made probably nine months in advance. So this year, I expect us to be playing a smaller role in private label products than we did last year, for example. But again, again, those decisions have been about nine months ago. In answer to your question, we’re not seeing any incremental share loss. In fact, it’s a little bit the other way around. We’re seeing some of our customers having a difficult time right now getting some products, just given what’s going on, both due to logistics issues and some liquidity issues. So there could be a near-term incremental opportunity for our products, given that we make a lot of them here in the U.S. or in other countries where we do business.

And how are you managing capacity utilization, given that, one, right now, it’s weak sales, but then eventually with things opening up how do you adjust that with commercial and school equipment sales? Do you have enough inventory for that?

Yes. We don’t think inventory is an issue. We have different plants that are focused on making different things. We have some plants right now that are on full or partial furlough as a result of lower demand. And these plants are focused primarily on commercial products or end of the year products. And then we have some plants that are focused on back-to-school and they’re in full swing, really working 24/7 in order to prebuild inventory necessary for back-to-school. So we’re we have a very scalable model, and our employees have been very supportive during these difficult times. And are working with us to make sure that we can adjust our cost structure appropriately given the expected demand trends.

Okay, thank you.

Thank you, Hamed.

Thank you. Our next question comes from the line of Bill Chappell with SunTrust. Your line is now open. Bill Chappell, your line is on mute. Please unmute your line.

Sorry about that. Good morning. Hope you and your families are doing well.

Thanks, Bill. Same to you.

Wanted to just talk more about as we come out of this environment, Boris, if you can – or if you can kind of talk about the businesses in a recession, be it three, six months or even longer, just how it’s changed versus the last recession, how you’re maybe prepared more or less in terms of products and offering and private label and kind of what the business looks like, like as we compare it versus seven, eight, nine years ago?

Yes. We think it’s a very, very different situation. First of all, we think the nature of this recession is going to be probably deeper than what we saw in 2008, 2009 time frame and probably broader affecting more businesses, more countries than the last one did. But we think our business is in a much better shape and much more healthier to withstand whatever will come our way. We are much more geographically diversified. We have a much bigger part of our business that’s selling through mass and e-tail than we did in the prior recession. And we think those channels will be the winners in this particular time, and we’ll do just fine. Much more of our product portfolio is consumables versus durables and durables in the last recession took a huge hit as businesses just stop buying anything that’s discretionary. And we think that in this environment, it’s likely to happen again. But again, a much bigger portion of our business is consumables, and we think that’s going to withstand the environment quite well. I mentioned in my prepared remarks, we’re seeing an increased demand in some of our product categories, Kensington, TruSens, Derwent, some of the Five Star notebooks and many of those things we didn’t have before in our portfolio. So I feel very, very confident in our ability to withstand this – the recession, however, long it lasts. In fact, we look at this as an opportunity to accelerate our differentiation versus competition and to expand the distance between us and other competitors out there. We think that companies will want to consolidate their supplier base. Our customers who want to consolidate their supplier base. And we think, given our strength and our breadth and our brands, they will want to consolidate on to us. So whereas it’s going to be very, very difficult, and I don’t underestimate that, I think from a competitive standpoint, we’re in a much better out of shape, and this could be actually a good opportunity for us.

Great. Thanks so much for the color.

Thanks, Bill.

Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back to Boris Elisman for closing remarks.

Thank you, Sarah. Thank you, everyone, for your interest in ACCO Brands. To summarize, the ramifications we’re seeing from COVID-19 are very disruptive to our business, but we are confident in our ability to withstand this crisis. Looking longer-term, we also remain confident about our future and the ability to continue to position the company for growth and strong results for our shareholders. We will be participating in some virtual conferences and non-deal road shows in the second quarter. Please let Christine Hanneman know if you’re interested in speaking with us. Thank you, and we’ll see you after Q2.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.