ACCO Brands Corporation (ACCO) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 ACCO Brands Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Christine Hanneman, Senior Director of Investor Relations. Thank you. Please go ahead.

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands first quarter 2021 earnings conference call. Speaking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation; and Neal Fenwick, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the Investor Relations section of accobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude transaction, integration, amortization and restructuring costs and other nonrecurring items 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 non-GAAP measures. Beginning with the first quarter we changed the way we calculate and report adjusted non-GAAP results by excluding non-cash amortization of intangible assets. Please see our press release for further explaining of this change. 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. 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 highlighting key elements of our first quarter performance. Neal will follow me with more details on the quarter and provide additional comments on our bond and bank debt refinancing. Then, we'll take your questions. Overall, I'm very pleased with our first-quarter results and in particular, the performance of PowerA and the continued strength in EMEA. The 7% total company sales growth we performed better than we expected, despite comparing a COVID-19 affected quarter against a mostly pre-COVID-19 quarter, last year. Even more impressive, our sales were 4% above our sales in the first quarter of 2019. First-quarter profits were also better than our expectations. We have been seeing a recovery in EMEA for the past three quarters, as offices have been reopening and many schools never fully closed. Our team did a great job servicing customers, investing in growth initiatives, reorienting toward at-home products, and taking market share. In the first quarter, comparable sales in EMEA were up 7% with good organic growth from TruSens air purifiers, do-it-yourself tools, Kensington computer accessories, the [indiscernible] and Cosy ranges of organizational products, Leitz shredders, and Derwent art supplies. We're proud to say that three of our Leitz products won Red Dot Design Awards. Several of the Cosy line of home-office items, our premium shredders, which are stylish and quiet, and are designed for home use and our functional, recycle line of office products in which every product is made with recycled materials. EMEA's sales to e-tailers were up over 80%, and we also saw good sales growth with many independents and tech specialists. North America also had a good quarter, driven by PowerA. Excluding PowerA, sales declined because of the impact of COVID-19, but we began to see improvement in March, our sales grew with many retail and e-commerce customers. This is a good sign that there is more demand now for school supplies as close to 60% of K-12 schools in the U.S. have returned to fully in-person education, and another 30% are using a hybrid approach. Many schools have also indicated they will have an earlier start to the fall semester. This change should bode well for the second half as our customers work through their inventory overhang from 2020. We have adequate inventory on hand to be able to rapidly replenish the stock as needed. Turning to the International segment, Australia, New Zealand, and Asia have been performing better, but it will take a while for the entire segment to improve, given continuing school and office closures and a slow vaccination rollout in Latin America. We hope to see the beginning of a recovery in Latin America, later in the second half and into 2022. We're confident in our strategy. We'll continue to focus on improving sales growth and profitability by shifting our business toward more consumer-centric products. Our growth will come from acquisitions such as PowerA, which I will comment on in a few minutes, and from organic sales generation. Our products that are focused on consumers, technology, or home usage saw a strong demand throughout 2020 and in the first quarter. TruSens air purifiers, do-it-yourself tools, organization and storage products for home-office use, Kensington computer accessories, Derwent art supplies, and manual home shredders, all sold well as people outfitted their home-offices, entertained themselves at home, and remained concerned about wellness. We expect this will remain true in 2021 and believe solid performance from this product lines will continue. For example, our TruSens product line has grown from an introduction in 2019 to $25 million business, currently. Late last year, we introduced smart air purifiers and we have some additional product introductions on tap for later this year, and in 2022. While competition has increased, over time we think the wellness category will be one in which we can establish a significant position. Last year, our Kensington computer accessories business received the largest order we have ever had. That means a difficult comparison this year in some quarters. However, excluding that order, the core business is expected to grow strongly as we will continue to introduce new, innovative products. As an example, in the first quarter, Kensington introduced the StudioDock for the Apple iPad Pro and iPad Air. iPad tablets can be magnetically attached to the docking station in either portrait or landscape modes, and through the dock, connect to a host of peripherals and charging options. A strong testament to our efforts is that the Kensington StudioDock won at CES Innovation Award, as well as a Red Dot Design Award during the first quarter. Turning now to PowerA. For those of you who may not know, PowerA is a leading player in video gaming accessories such as controllers, power charging stations, and headphones, that we bought in late December 2020. I am very pleased with PowerA's results and how smoothly the integration is going. There seems to be a particularly good fit on the people side, with everyone meshing in terms of culture, and with everyone focused on supporting the transition, and PowerA's growth. The gaming market continues to exhibit strong growth trends. Market Intelligence Report forecast that between 2021 and 2026, the gaming console industry is expected to grow approximately 18% per year. The amount of time spent by consumers on gaming is increasing, with the global average now over seven hours a week. Morgan Stanley estimates that mobile gaming users grew 20% in 2020, adding approximately four years worth of new gamers during the pandemic. Most analysts believe this is a permanent shift. Moreover, in the fourth quarter of last year, Sony and Microsoft launched new generation console products, which are still popular bt they are having difficulty keeping up with the demand for controllers. So PowerA is filling that void. PowerA's first-quarter performance was exceptionally strong, with an increase of more than 100% on its pro forma 2020 sales. While we don't expect that rate of growth to continue, we expect strong sales for the rest of the year. In fact, we now think PowerA's sales will grow 25% this year rather than the 15% we initially projected. Another element of our overall strategy is to continue to shift our product sales through our growing channels such as E-tail, mass merchants, and direct-to-consumer platforms while maintaining our presence with successful independents and tech specialists. This shift has resulted in more growth of customers such as Walmart, Target, and Amazon, which are among our top five customers, and performed well throughout the pandemic. Also aligned with the shift, consumer school and technology categories now represent 59% of our sales and are the fastest-growing parts in our portfolio. Moving on, our productivity program is back to normal levels after accelerated cost reduction stake in last year due to the pandemic. We have reinstated merit increases and bonus opportunities, so our SG&A expenses will normalize this year. Still, our full-year productivity savings for the year, I expect it to be over $30 million. Our free cash flow for this year is expected to be at least $135 million. We intend to use the cash to payout dividend and to reduce our debt. We will comment further on this a bit later. In summary, our business benefits from the breadth and balance of our geographic and product portfolio. We're not dependent on any one area for success and have done a good job, partially offsetting channel, customer, and product line declines, with growth elsewhere. I'm proud of the way we have adapted quickly to take advantage of the changing environment. We're assuming a shift in consumer behavior post-pandemic and a change in our product and channel investments as a result. This includes making larger investments in growth areas such as video gaming accessories, wellness products, work, learn, or play-from-home products, and computer accessories while reducing our investments in some commercial office products that we expect will remain weak longer-term such as wide-format laminators and large whiteboards, although we expect some post-pandemic recovery. We will emerge from the pandemic as a strong, growing, financially sound Company that is ready to aggressively pursue the opportunities ahead. Now, I will turn the call over to Neal for a review of the segments, our outlook, and other financial commentary, and then I'll join him in answering your questions. Neal?

Thank you, Boris. Good morning, everyone. As Boris mentioned, we saw the initial impact of COVID-19 hit our EMEA business minimally only in late March last year. So, this is the last quarter of comparing a COVID impacted quarter against one that wasn't impacted very much. Our first-quarter sales rose 7% as a result of the PowerA acquisition. Comparable sales declined approximately 13%. PowerA's sales were much stronger than we expected, coming in at $63 million, mostly in the North American segment, and this compared with pre-acquisition sales, last year, of approximately $31 million. We also continued to see strong sales growth in product lines that focus on work and play-from-home, such as our Kensington computer accessories, TruSens air purifiers, do-it-yourself, and are supplies. Sales to commercial channels remained weak and drove most of the comparable sales decline. Compared to 2020 and excluding PowerA, sales to commercial and B2B customers declined 18%, and retail and mass sales were down 7%. On the other hand, e-commerce sales rose 28%, while sales through tech-specialist channels rose 6%. First-quarter adjusted net income was $10 million or $0.10 per share versus $13 million or $0.14 per share last year. The year-over-year decline was mainly the result of lower volume in North America and International, higher incentive accruals and logistics expense, and higher interest expense associated with the acquisition, that is benefiting EPS for our cost reduction efforts and better profits in EMEA. Our reported profit was also negatively impacted by $14 million of other expense related to the bond and bank debt refinancing, and $7 million due to the earn-out portion of the PowerA purchase price. In addition, we had $4 million in restructuring charges, $1 million of pension curtailment charges, and $4 million increase in amortization charges, and $2 million inventory step up that are acquisition-related. You may recall, though the PowerA earn-out is payable in two equal installments over the next two years if certain sales and profit targets are met. As such, every quarter, we must reflect the fair value of the earn-out and recognize any change as an expense in our income statement. We expect that this will result in [Indecipherable] charges throughout the two-year earn-out period as we forecast strong results for PowerA. This quarter we booked a $7 million expense, which along with the higher charges previously noted, resulted in a small reported operating loss for the total Company. Our gross margin was approximately 28% compared with 29% in 2020. The adjusted gross margin was down 50 basis points versus last year, much less than the margin pressure we experienced in the fourth quarter. The main driver with the cost increases that are impacting our logistics expense, ocean freight and domestic freight, and some inflation in our input and purchase costs. On the positive side, low-cost savings, lower obsolete inventory charges, foreign exchange, and PowerA's accretive margins. SG&A expenses were $94 million compared with $86 million, last year, primarily because of $8 million of higher incentive accruals, and $5 million of PowerA expense, which were partially offset by cost reduction efforts. You may recall that last year we eliminated almost all incentive accruals in the first quarter due to the pandemic. SG&A as a percent of sales was approximately 23%, roughly flat with last year because we were able to leverage PowerA against our core business expenses and largely offset the lower sales in the rest of our business. Adjusted operating income was approximately $25 million compared with $26 million, last year, primarily due to PowerA's contribution largely offsetting the declines in the rest of the business. The adjusted operating margin was 6% versus 7% last year. Our adjusted tax rate for the quarter was 29.1%. Now, let's turn to some details of our segment results. Comparable net sales in North America decreased to 19% to $136 million. Some of the decline is because the first quarter of 2020 benefited from almost $6 million of pre-buying in advance of our IT system conversion, go live last April, as well as some channel inventory build because of COVID concerns. Lower commercial channel sales continue to impact North America as many offices remain closed or had limited openings. As Boris mentioned, we are encouraged to see more schools reopening for in-person learning. This is helping to absorb some of our customers' inventory overhang from last season. We're likely to see less than our usual amount of back-to-school sell-in during the second quarter as last year's sell-in was strong. We expect our major customers will continue to work through the inventory they purchased last year but did not sell because of school closures. We are well prepared to service them with our branded products in the second half as may need replenishment. For the overall North America business, we anticipate a sales increase in the second quarter. First quarter adjusted operating income was $11 million, up slightly from last year. Adjusted operating margin was 6% compared with 6.5% last year. The margin decline primarily was a result of lower sales in our business, excluding PowerA. Also, as previously mentioned, we experienced higher costs, particularly related to logistics that impacted the margin, even with a partial offset from cost reductions. Now, let's turn to EMEA. For the quarter, EMEA comparable net sales increased 7% to $136 million. Reductions in commercial sales were partially offset by growth and TruSens air purifiers, do-it-yourself tools, Kensington computer accessories, our new line of work-from-home storage and organization products, and Leitz's personal shredders together with Derwent art supplies. PowerA contributed $9 million to EMEA sales. This is the third consecutive quarter that we are seeing sequential improvement in EMEA and this quarter showed strong year-over-year growth, even though last year's first quarter had just two weeks of COVID impact. EMEA posted an adjusted operating profit of $21 million versus $15 million in 2020, primarily due to higher sales which offset some gross margin pressure from increased logistics expense, and also higher incentive costs. Adjusted operating margin was approximately 14% versus 12%, last year. We expect EMEA to continue to perform well during the second quarter. Moving to the International segment. Comparable sales declined significantly because of lower demand from the impact of COVID-19. While all markets declined, Australia and Asia sales trends continue to improve, sequentially, both down only 5%. However, Brazil and Mexico continue to be severely impacted by COVID-19 with sales down more than 50% as many schools and offices in both countries remain closed. The current expectation is that this situation will continue for the next several months. International adjusted operating income was $3 million compared with $8 million, last year, primarily as a result of the lower sales, which also reduced fixed cost absorption due to low volume. Bad debt reserves in Latin America remained high, but in total, only increased $700,000 versus last year. Collections improved in Brazil but were worse in Mexico. Let's move now to our balance sheet and cash flow. In the first quarter, we had $42 million of cash outflow from operations and the use of free cash flow of $46 million, which includes $4 million of CapEx. As expected, $28 million was used by PowerA for rebuilding working capital after the acquisition closed, since we did not purchase their receivables or payables in the transaction, and the business has also grown organically. If you exclude PowerA, our use of cash was lower this year than last year by $14 million. CapEx in the first quarter was $4 million and we paid $6 million in dividends. Our CapEx outlook for 2021 is approximately $30 million, including $5 million related to PowerA. As we noted when we acquired PowerA and increased our debt, in the near term, we plan to use our cash to fund our dividend and to reduce debt. Longer-term, we plan to use our free cash flow to fund our dividend, reduce debt, reduce -- repurchase shares, and make acquisitions. During the quarter, we refinanced our bond and bank debt. The company issued $575 million of eight-year bonds at 4.25%. We also amended our bank agreement to lock in more favorable pricing and extend our maturity to March 2026. The refinancing will save $5 million in interest expense for the balance of this year. It also appropriately funds the PowerA acquisition with a better balance of long and short-term debt. At the end of the quarter, we had $219 million outstanding on our $600 million revolving credit facility and had $75 million cash-on-hand. Our bank pro forma net leverage ratio was 4.5 times, which is in line with where we expected it to be after the purchase of PowerA. Even with seasonal borrowings in the second quarter, we anticipate our leverage ratio to be approximately the same. We will use the majority of our free cash flow this year to reduce debt and with continued improvement in EBITDA as we saw this quarter, and lower debt, we should reduce our year-end leverage ratio to approximately 3.5 times, which is where it was prior to purchasing PowerA. Given our financial strength and the proactive steps we've taken to reduce costs, we expect to be able to maintain good liquidity as we manage through the current environment. Now, let's turn to our outlook. It continues to be difficult to forecast longer-term in this environment because there is still much uncertainty due to COVID-19. We are hopeful that as mass vaccinations continue to roll out, we will see reduced impacts from COVID, particularly in the second half of this year and continuing through 2022. For the second quarter, we anticipate another strong performance by PowerA and the rest of our business will have easier comparisons. We are looking for organic growth in all three segments as we expect the recovery to continue. Our second quarter outlook for the entire Company is for sales to be between $460 million to $490 million, with PowerA contributing between $50 million to $60 million. Second-quarter adjusted earnings per share, excluding amortization are expected to be in the range of 25% to 30%. The outlook includes a favorable foreign exchange impact of 5% on sales and $0.01 to $0.02 on adjusted EPS. We anticipate approximately $12 million of pre-tax intangible amortization will be excluded in the second quarter, based on our new definition of adjusted earnings, which represents approximately $0.09 on our adjusted EPS basis. We have reinstated the compensation and benefit reductions we took in 2020. We are also planning to invest more in growth initiatives to support an anticipated stronger second-half demand. As such, our SG&A spending will increase in 2021 in all quarters compared with 2020. We expect our productivity programs will deliver a more normal level of approximately $30 million-plus in savings for the full year. With respect to our cash flow outlook, we feel confident that we can generate at least $165 million of operating cash flow for the full year, and with CapEx expected to be approximately $30 million, we expect to generate at least $135 million of free cash flow. As I mentioned earlier, PowerA will not contribute a normal level of free cash flow in 2021 due to the structure of the acquisition agreement. In late December, we acquired PowerA without normal levels of accounts receivable and payable. We received an $18 million purchase price adjustment from the seller to account for the absence of working capital delivered at closing. But we also need to fund PowerA through both its seasonal peak in December and its substantial growth this year. Thus, we anticipate minimal, if any, free cash flow impact from PowerA in 2021. PowerA working capital will be normalized in 2022 when we expect an incremental $25 million to $30 million in free cash flow contribution. Now, let's move on to Q&A, where Boris and I will be happy to take your questions. Operator?

[Operator Instructions] Your first question is from the line of Chris McGinnis with Sidoti and Company.

Hey. Good morning, Boris, Neal, Christine. Thanks for taking my questions and congrats on a good quarter. Can we just start with the strength of PowerA? Obviously up 100%. Can you just talk about, is that really just driven from the new consoles, and then maybe, can you break down the growth between North America and EMEA, and how is the EMEA integration going? Thanks.

Thanks, Chris, thanks for the question. PowerA growth is driven by multiple factors. There is the overall growth in gaming and that's been accelerated by the introduction of new consoles released last year from Microsoft and Sony. So, that's part of it. The second part of it is just supply availability, chip availability. PowerA has done a great job managing their supply chain, so we have decent product availability and are able to deliver to our customers when some of our competitors, and including first-tier suppliers such as Sony and Microsoft, can't deliver to all of the demand. And rather, the third primary reason, the team in PowerA has done a great job servicing customers and taking share and increasing their lead. So for all those multiple reasons we saw tremendous growth of slightly over 100% during the quarter. The integration of PowerA is going well. We are in the midst of it right now. The plan is to transition from the services agreement with the seller by the end of the third quarter and be completely on our systems, and then we could get exclusively focused on further growth. Did I answer all your questions, Chris?

Yes. I guess, just one more on that, just the growth in North America and EMEA, were they 100% or can you just maybe break that, I don't know if you can provide that [indiscernible]?

Yes, look, I don't have that detail with me. PowerA's business is 80% in North America. So, North America's definitely driven the majority of the growth. Although, EMEA has done well, it's a relatively small number.

I appreciate it. I'll jump back in the queue. Thank you.

Thanks, Chris.

Your next question is from the line of Joe Gomes with Nobel Capital.

Good morning, Boris and Neal. Congratulations on the quarter, and again, thanks for taking my question.

Good morning, Joe.

So, I kind of wanted to follow up a little bit here on PowerA. You gave some guidance of increasing the expectation from 15% growth to 25% growth, but I mean if we look at what you just projected, Neal, you said for the fourth quarter of $50 million to $60 million, if you hit the top end of that, then you really are already at that 25% growth level, and 65% of PowerA sales are in the second half of the year. Are we just taking a more conservative stance here on PowerA growth or is there something else there that would kind of prevent you from putting out even a greater expectation for PowerA revenues for this year? Thank you.

Thanks, Joe. So, there is nothing artificial in that number. The -- we certainly will strive to exceed it, obviously. We'll do as much as we can. The only thing you have to keep in mind is a couple of things. The compares will get much more difficult in the second half because there was significant growth last year due to people staying at home and gaming more. So that's one factor to consider. And the other factor to consider is supply. There may be a lot more demand out there, but that just can't be fulfilled because of the long lead times associated with supply. So, I think your math is largely correct. I think we are assuming some kind of supply constraints for the second half and there is a lot of uncertainty with what's going to happen in the second half. But if we are optimistic, then maybe, we'll do a little better.

Thank you.

Thanks, Joe.

Your next question is from the line of Kevin Steinke with Barrington Research.

Good morning.

Good morning, Kevin

Yes. So, obviously, you talked about commercial office sales in North America continuing to be weak, but also 60% of US schools, they're now fully reopened. And I think in the past, you've tied kind of reopening of schools to maybe some eventual return to the office. So, I'm just wondering if there are any glimmers of recovery or hope in the commercial office sales in North America?

There certainly are glimmers of hope of recovery. We are definitely hearing a lot more companies scheduling dates for returns back to offices. We think a lot of companies will go back in the summer and early fall timeframe. And it will be enabled by schools being fully in-person as well. So, we think there is a recovery ahead of us. We think there is a -- definitely a sales upside ahead of us as things continue and [Indecipherable] going to revert back or [Indecipherable] take hold. But based on everything we're seeing in the marketplace and hearing from our customers, we do think that North America -- US especially, you know, Canada has some slightly different issues, but US, especially, is poised to go back to the office is a lot more [Indecipherable] currently. And well, we do anticipate it's going to be a hybrid kind of arrangement. But certainly, we do expect more offices to be in-person than they are today.

Okay, thanks. That's helpful. Thanks for taking the question.

Thank you.

Thanks, Kevin.

Your next question is from the line of Hale Holden with Barclays.

Good morning. I had two quick ones. Neal, I was wondering, given the growth in PowerA, if you are where you need to be for working capital or if there is further investment in the current quarter expected?

Quick answer to that one, Hale, is: it's a seasonal business and so its strongest sales are in Q4, and therefore, as it seasonally grows in the year, we're going to see an increase in working capital. We were also doing our best to bring up our inventory levels of some of their products because of the chip issues that we're seeing in the supply chain. And so, for both reasons, we are quite happy to invest in PowerA's working capital.

And that actually is my second question is that you alluded to the chip issues that maybe some of your competitors were having, and I was wondering if there is any risk to your sourcing there?

It's why we've been modest about projecting too much growth in the second half for PowerA because of our end supply questions, and obviously, we expect to improve, our forecast will improve.

Great, thank you very much.

Thanks, Hale.

Your next question is from the line of William Reuter with Bank of America.

Good morning. My questions are, I guess, kind of two-part question on raw material inflation, as well as shipping inflation. So, I guess, do you have an estimate of the aggregate dollar impact of inflation across input costs as well as shipping? And then, how much of that's going to impact this year versus maybe some of it being delayed due to some hedging or for purchases contracting, switching, etc? Thanks.

Yes. So, I think two different things. One, we're seeing live the shipping impacts. We saw that in Q1. And from a purchasing point of view, I think that's going to be a much bigger story from the rising costs that we're seeing for raw materials. To the point you mentioned, we do have contracts with building time delays and we have inventory that builds in recognition delays. And so, for both reasons, what we're going to see is an increasing impact of those costs on our business as the year runs on. And that's quite necessary for us to raise prices in the market to offset. And [Speech Overlap] you know, basic commodities, they are up significantly.

Yes. I guess, just on that point, I guess, do you expect that the second quarter is going to see much of that or really will we see the impacts of those in the third quarter and beyond?

No, we're going to start to see cost impacts hit the P&L in the second quarter, and then, much more so in the third quarter and beyond.

Great. I'll pass it to others. Thank you.

And just to follow up on that a little bit, Bill. As Neal mentioned, we have raised prices in April in the US to offset that increased inflation. And we're going to be doing some of that in other countries. And also as Neal insinuated, as we go into the second half, we'll also be looking at that and if inflation continues to be high, we'll be raising prices again in the second half to offset the impact of inflation.

Thank you.

Thanks, Bill.

Your next question is from the line of Brad Thomas with KeyBanc Capital.

Hi. Good morning, Neal and Boris. I got on a little bit late, so I apologize if you covered some of this, but I first want to touch on back-to-school and see if you could give -- so a little bit more color on how you were thinking about the split between 2Q and 3Q, and how you're thinking about that unfolding in the US this year?

Sure. So let me start. We're very optimistic about back-to-school, being 100% in-person, in the US. There was some uncertainty earlier in the year about how exactly it's going to break, but consensus is emerging and we're seeing that today we've 60% of the schools already being fully in-person. That come August, July, even when some schools start to go back-to-school, we feel very good that there'll be at 100% in-person. With that said, given with that back-to-school, buy orders are made pretty early in the season just given the length of the supply chain, and given the situation last year with -- where they had pretty poor back-to-school. And most retailers were conservative in their upfront purchases. And then we will chase supply when demand materializes early. We had a very good back-to-school sell-in last year. If you remember, North American sales were quite strong in Q2 of last year. So we think that from a relative standpoint sales will be -- sales in the end will be weaker than they would have been otherwise just because of the more conservative position that the customers are taking, plus some inventory overhang that someone will have from last year. So, we think there'll be some shift from Q2 probably to Q3. And there'll be more replenishment in Q3 and certainly that we saw last year, but probably, also that we will traditionally see. With all of that, we expect the sell-up to be up significantly. The industry estimates are anywhere from 5% to 25% higher than last year. And also, as Neal mentioned, despite some of these shifts, we do expect growth in North American sales in Q2 versus prior year.

That's very helpful, Boris. Thank you. And if I could add a follow-up on PowerA, certainly, a very exciting new product to bear business. Could you just give us, you know, what's your latest thoughts on how you're thinking about the medium-term, perhaps two-year to three-year revenue opportunity from PowerA? And how you think about the long-term opportunity for PowerA?

Well, this year, we said, we expect roughly 25% growth from PowerA. If you look at the forecasts from industry analysts, they project a 18% sales growth over the next few years for the gaming industry. So, I don't think it's unreasonable for us to expect that we will grow in the medium term, at least with the market. And from a inorganic standpoint, as we mentioned, over the last couple of quarters, we also think that that gives us a new leg for a potential inorganic growth as well. So, we think it's an exciting and important segment for us. We're happy to invest in it and hopefully, looking to continue to grow at the rates that we've been seeing.

Yes, and also in the longer term, we do see geographic expansion is a big piece that we can add to that on top of the industry growth.

Wonderful. Thank you so much.

Thanks, Brad.

Your next question is from the line of Karru Martinson with Jefferies.

Good morning. Just following up on that. In terms of the new leg to invest in, where are you comfortable on your leverage? Or do you have to get down back to that 3.5 by -- by year-end to fund the investments, or how are you thinking about that?

To do something major, Karru, we would have to get down to that 3.5 times, at least, or lower. But we are comfortable doing small tuck-ins at the current level as long as they are strategically aligned and financially very prudent. And when I say small tuck-ins, I'm talking about $10 million or less. But, for a major investment of $50 million or more, we'd like to get to 3.5 times net leverage ratio.

Okay. And you guys referenced funding some growth initiatives for the second half, I was wondering is there any more color in terms of the size [Technical Issues] of those investments, and what they're going behind, other than the PowerA supply issue concerns?

Yes, most of them will be our new product development and demand generation to support our growth. And the product development will be in the work-from-home, video gaming, computer accessories, art supplies, wellness, all of the areas that we are seeing strong demand in. And demand generation will be in the near term to support those but also support back-to-school in North America. So that's where the investments are going to go in.

Thank you very much, guys. Appreciate it.

Thanks, Karru.

Your next question is from the line of Hamed Khorsand with BWS Financial.

Hey, good morning. So I just wanted to ask about back-to-school. Are you seeing any changes in the purchasing habits on the regional side as these schools are going back into the session? And what are your expectations on gross margin as you start to scale up and you go back to normalcy with back-to-school purchasing?

Hamed, it's difficult for us to say because right now, the increased demand from end-users will be in primarily service by the inventory that the customers already have. So, we haven't seen a significant replenishment cycle yet. That's still to come. So, it's difficult for me to give you any additional color on a regional basis. Beyond that, overall, we are seeing sell-through up for pretty much all of our customers in the US. And what was your second question, I'm sorry?

[Indiscernible] Margin, gross margin.

It was gross margin.

Yes, it's also a tough question to comment on, because certainly with scale, we would expect an expansion in gross margin, plus we think some of the -- hourly [ph] absolute inventory accruals will be released as well as volume goes up. But on the other hand, we are seeing increased inflation, raw materials inflation, and we are seeing -- continuing to see logistics and freight inflation. So, how will those things offset each other? It's difficult for us to give you additional color on until we see a little bit more in the quarter.

Okay. Thank you.

Thanks, Hamed.

Your next question is from the line of Carla Casella with JPMorgan.

I'm wondering on the M&A front, if you're seeing any more opportunities out there as we come out of the pandemic? And then, if your success in PowerA has made your -- made you change the view for -- you might be interested on the M&A front more be it more tax versus the traditional business?

Yes, thanks for the question. There certainly is no shortage of M&A opportunities in the whole thing. As we've mentioned over the last few earnings calls, there's lots of things in play there, both because the pandemic has squeezed some players strategically, but also because the valuations there are relatively high. So, people want to monetize the opportunity. We have always thought that [indiscernible] agency would be interested -- interesting for us. We've looked at that for a while. Overall, our strategy doesn't change. It has to make sense strategically for the company in terms of distribution, brands, value add, etc. What else has to make a financial sense from an -- accretion for our shareholders. So, our strategy hasn't changed. As I mentioned in my previous answer, to do something big we have to deliver as well. We have plenty of work on our hand this year to drive organic growth in the business. We think we have lots of opportunity, but we are definitely open to other acquisitions if both strategic and financial criteria are met. And we have the balance sheet to do it.

Great. Thank you.

Thanks so much.

[Operator Instructions] Your next question is from the line of Joe Gomes with Nobel Capital.

Thanks for taking the follow-up. Most of my questions have been answered. But, Boris, maybe you can give us a little bit more insight in some of the new product introductions that you're thinking about here or looking at? I know, previously you talked about humidifiers as a potential area of interest. Maybe you could expand a little bit more on that? Thank you.

Sure. In the wellness area, we're definitely looking to expand of the line. You mentioned that previously we talked about entering the humidifier space, that's definitely something we're looking at. We're also looking at more of a commercial delayed air purifiers. Today, our products are largely focused on the consumer space and the home space, but we think that there is a sustained need for air purification in the office environments as well, and small businesses, given the pandemic, and just the sensitivity to those topics. That's one big area of investment. Work-from-home products is another big area of investment. We think that the world will not go back to the pre-pandemic way of working. We think that because as people return, they will return largely to a hybrid type of situation with people working in the offices a few days a week and working from home a few days a week. So, we think there will be sustained need for work-at-home products. And that includes investments in additional docking solutions, both for traditional PCs as well as for Apple ecosystem, including iPads. Certainly, investments -- continued investments in PowerA and video gaming, and expanding that line. Neal mentioned for international expansion for mobile gaming in headsets, and to support other console introduction. And then the other big area for work-from-home is manual shredding. We think there's a huge opportunity there to introduce value products that actually work and don't break after a few months and also a line of storage products and organizational products for home. We mentioned the [indiscernible] and Cosy range that we introduced in EMEA, which is a big hit. And I think there's an opportunity to introduce that on a global basis. So, there's really not a shortage of ideas for us to invest in the product development. We think we have a great roadmap and I look forward to bringing those to our consumers.

Thank you, Boris.

Thanks, Joe.

There are no further questions. I will turn the call over to Boris Elisman for closing remarks.

Thanks, Natalia. Thank you for your interest in ACCO Brands. To summarize, we're optimistic of our continued recovery throughout the rest of 2021. We're also very pleased with the performance of PowerA and EMEA and expect growth in both to continue. We remain confident about our future and our ability to continue to position the Company for growth, and improving returns for our shareholders. Have a great day and we'll talk to you next time. Thanks.

This concludes the first quarter 2021 ACCO Brands earnings call. Thank you for your participation. You may now disconnect.