Hello and welcome to the ACCO Brands 4Q 2022 Earnings Conference Call. My name is Emily, and I’ll be coordinating today’s call. [Operator Instructions] I would now turn the call over to ACCO Brands’ Senior Director of Investor Relations, Chris McGinnis. Please go ahead, Chris.

Good morning and welcome to ACCO Brands fourth quarter 2022 conference call. This is Chris McGinnis, Senior Director of Investor Relations. Speaking on the call today are Boris Elisman, Chairman and Chief Executive Officer of ACCO Brands Corporation; Tom Tedford, President and Chief Operating Officer; and Deb O’Connor, 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, a non-cash goodwill impairment charge and the change in fair value of the contingent consideration related to the PowerA earn-out and other non-recurring 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 the 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. Forward-looking statements made during the call 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’ll turn the call over to Boris Elisman.

Thank you, Chris and good morning everyone. Thank you for joining us. Before I talk about our 2022 performance and priorities for 2023, I want to say that the solid fundamentals of our business are intact and we believe we have the right strategy and team to weather the current economic slowdown and continue to deliver sustained organic revenue growth as the economy improves. The transformative actions we have taken over the past few years to be more consumer-centric and geographically diverse helped us achieve record comparable sales and maintain or grow market share in many of our key brands in 2022. 2022 was a tale of two halves. We began the year strong as customers turn to us for surety of product for the important back-to-school season, and as office occupancy rates rebounded in North America. In our EMEA segment, we had strong volume growth for computer and business products with sales tracking above pre-pandemic levels through the first half of the year. The trend in EMEA began to change in the summer of ‘22 as high levels of inflation, the war in Ukraine, and the energy crisis dampened consumer and business demand. In North America, retailers became concerned about an impending economic slowdown. And they began to take an aggressive stance on reducing inventory levels in the third quarter that continued throughout the fourth quarter, leading to lower overall demand in our North America segment. These actions were on top of the impacts from pulling orders forward into the first half of the year. All of these factors reduced our sales volume in the back half of 2022. Profit in 2022 followed a similar trend as the rate of inflation continued to increase throughout 2022, for raw materials, finished goods and transportation, and outpaced our aggressive pricing actions,…

Thank you, Boris and good morning everyone. During the fourth quarter of 2022, we initiated restructuring plans for both our North America and EMEA segments. The actions are intended to expand 2023 margins through initiatives focused on improving operating efficiency, and reducing costs while continuing to support key seasonal product sets, for our retail partners and category-leading service levels for all of our customers. In North America, our actions are focused on streamlining and simplifying the organization through consolidation of supply chain operations, SKU reduction and automating our sales support process. In EMEA, we are focused on reducing redundancy and enhancing productivity with SKU reduction and other sourcing initiatives. We expect to realize $13 million in annual cost savings from these actions, the vast majority of which will come in 2023. We are in the middle of a multiyear journey to rationalize our facilities footprint. Last year, we closed 1 distribution center in California, and rebalanced our manufacturing and distribution capabilities in the U.S. These actions will save us $2.5 million per year. We are looking at additional opportunities to leverage our existing footprint in the U.S. and shift more outsourced distribution into our facilities. In EMEA, we recently completed the move from a third-party distribution facility in the UK and consolidated shipments to our UK warehouse. Earlier this month, we approved a manufacturing facility closure in Continental Europe. And will consolidate its production into another ACCO Brands factory in Europe. This project will be executed this year with the P&L savings to come in 2024. We are in the process of analyzing other global manufacturing and distribution consolidation opportunities and we will announce those as decisions get made after appropriate consultations with works council and other relevant entities. Finally, we are looking at opportunities to reduce our office space…

Thank you. [Operator Instructions] Our first question today comes from Greg Burns with Sidoti & Company. Greg, please go ahead.

Good morning. Just in regards to the inventory destocking issues. What are the level of channel inventories right now? And historically, in other cyclical downturns, have you seen similar patterns? And how do they – how does this play out over the next couple of quarters? Because I’m assuming they can only take inventory down to – they can only take it down so low. So how should we – how are you thinking about this issue playing out over the next couple of quarters?

Yes. Thanks for the question, Greg. The levels of channel inventory are pretty low right now, historically, at pretty low levels. We see increased levels out of stocks for our products on shelf. We saw an improvement. We saw less destocking over the last few weeks compared to what we saw in Q4. But right now, what we expect is retailers will just buy to just replenish to POS. We don’t think they are going to bringing in additional inventory until they see macroeconomic improvements. Obviously, that excludes back-to-school because they will have to bring product for back-to-school in the second part of Q2. But if you look at Q1, it’ll probably likely be just POS replenishment and not stocking up on more inventory.

Okay, great. And then the growth in the international segment was a little lower than we were looking for and I guess what the growth rate was for the first three quarters of the year. So was there any change in any of the markets there in particular that maybe led to a little bit slower growth?

Yes, the growth was around 7%. And for the year, they were 19% and then we just some compare issues. Specifically, Brazil continues to perform well, but we had slower growth outside of Brazil. Some of that is due to just macro issues in Australia and Asia specifically. And in Mexico, we actually didn’t have enough product to shift. So that was more of an inventory issue, and we expect to make that up in the first quarter of ‘23.

And then the $13 million in cost savings, how should we think about that in terms of the timing of the realization of that? Is it back half loaded, ratable throughout the year? What’s the timing? Deb O’Connor: Yes. It’s pretty ratable. I’d say there is a little bit of it back-end loaded as we’ve instituted some of the actions later in the year, but it goes pretty much throughout the year, I would say, Greg.

Okay, thank you.

Thanks, Greg.

Your next question comes from Joe Gomes with NOBLE Capital. Joe, please go ahead.

Good morning. Thanks for taking my questions.

Good morning, Joe.

You mentioned in the release, part of what impacted the sales in the quarter were weaker gaming sales, lower inventory replenishment, some reduced volume. Can you kind of size that up as to what each one of the impact was from each one of those for the quarter?

Will you have that one? Deb O’Connor: Well, I think for the quarter, if you look, a lot of a big proportion would be the inventory destocking that was pretty pervasive as you looked across North America, by many of our customers. And then I would say gaming is a smaller piece of the total, but it declined 26% for the year, so when you take that into account, it had a pretty significant impact in the quarter.

Yes, I would agree with that, because gaming is the biggest quarter of the year, Joe, so… Deb O’Connor: That’s right. And expectations were higher for it.

Yes. In Q4, those two draw a predominant decrease in sales, inventory destocking and gaming.

Okay, because I think in the previous quarter, you were looking for the gaming to be down about 15% for the year. So that’s a pretty significant decline in the quarter. And so… Deb O’Connor: Can I?

You’re looking at PowerA – I’m sorry? Deb O’Connor: No, go ahead. I was just going to say for strategy. It’s a big season for gaming that fourth quarter.

Right. So I mean I think you touched a little bit on it, but Boris, you’re still looking on a longer-term basis for that PowerA to show some double-digit long-term growth. And I know you’ve mentioned moving into EMEA are expanding into EMEA more. Kind of what – maybe you could give us a little more color on what are your expectations for PowerA in ‘23?

Well, we certainly expect growth in PowerA in ‘23, and we expect the industry to rebound. It will be back half loaded just from a compare standpoint because Q1 of last year was still pretty good. Overall, plenty of supply and demand was pretty good. So the comps will still be difficult in the first quarter, but starting with the second quarter and going forward, they get better, and we expect growth overall for the year. It will be led by our EMEA and International segments. Overall, even in ‘22, despite PowerA being down 26% overall, we saw growth outside of North America. So that will just continue and accelerate. We are hiring people, both in EMEA and international segment to take PowerA direct to our customers in most places. And that, along with a broader product assortment and streamline distribution that Tom referred to should enable continued PowerA growth in EMEA and international. In fact, we expect some acceleration in those two segments. In North America, we just expect a rebound from what has been a very difficult year in ‘22. And you saw reporting from other companies in North America, other public companies, including from Nvidia yesterday, which indicates just how difficult gaming has been in 2022. So while we are disappointed by our performance, we’re not unique in what we saw with gaming institute.

Okay, thank you for that. And last one for me. I mean you’ve given a lot of great detail for ‘23. What could possibly, in your mind, drive results above expectations? What would be the most likely things that could happen that would help potentially drive results above expectations? Thank you.

Well, probably a couple of things, Joe. One is if back-to-school is really good. That should definitely be good for us. I mean if you look at what’s happening in ‘23, the retailers are being conservative with upfront load-ins and then we’re going to chase inventory during the season. And if we have a good season, that should benefit us because we have domestic manufacturing, unlike most of our competitors. So they need more product than they plan on, and we should be able to fulfill it when others cannot. So a good back-to-school season will serve us well. And then just a strong economic recovery in the second half of the year, everybody is expecting a slowdown in the first half and that’s what’s in our guidance. We expect some recovery in the second half. We wanted to keep it stronger than anticipated, that should benefit our global sales and profit overall.

Great. Thanks guys. Appreciate it.

Thanks Joe.

Our next question comes from Kevin Steinke with Barrington Research. Kevin, please go ahead.

Good morning. In terms of the flat to 3% decline in sales you are expecting in 2023, could you maybe just walk through expectations for your three segments, if you would be willing to share any detail on that? Deb O’Connor: Yes. I think we are thinking about EMEA and North America down slightly, with international trending kind of in that mid-single digits like the fourth quarter.

Growth. Deb O’Connor: Growth, international growth.

And North America and EMEA down slightly.

Okay. Well, understood. Thank you, let’s hope for. So, I guess you had the January 1st price increase. Do you think that price increase covers all – at least the known inflationary headwinds that you are currently seeing, or are there plans for additional price increases as we move throughout the year?

We believe the price increase mostly covers all of the now inflation that we are seeing. The only exception that would be some of our smaller foreign countries where they may have to do more just due to exchange rate changes. But as far as North America and EMEA, that increase should cover now the inflation. Deb O’Connor: And I think we have mentioned before, we have been covering the dollar throughout the year, but we have really taken a bite out of the margin, and that’s what we need to get back.

Right. Understood. Can you just talk a little bit about the plan to eliminate SKUs? And I assume you have identified some less relevant or underperforming SKUs that maybe aren’t necessarily need to be part of the portfolio, and just kind of how you arrived at those conclusions or went through that process?

Yes, Kevin, this is Tom Tedford. I will take that question. Yes, we go through a fairly robust SKU analysis annually. And we look at the profitability, the demand of those SKUs, the complexity of managing those SKUs. And each one of the segments has accelerated that analysis. So, they should result – that analysis should result in a number of pretty aggressive SKU reduction actions. In addition to what we typically do, we have looked at what we make in our factories and really done an analysis on future demand on those products. And if it doesn’t meet a minimum criteria, we are going to aggressively retire those as well. But this is a part of an ongoing rationalization approach that we take very seriously as we look at inventory turns improvement and profit management. And I think our teams have a strong track record of doing this. We are just putting a little more pressure to accelerate the work in 2023.

Okay. Thank you. Lastly, I just wanted to again, circle back to PowerA. You mentioned improving ship supply as one of the factors behind your expectations for some improvement in PowerA sales in 2023. So, are you seeing kind of a meaningful improvement in ship availability for the – going into gaming consoles and therefore, console availability improving as well?

We are. We are seeing improvement already on the gaming consoles, and we see better availability of the chips that we need for our accessories. It’s just there is a little bit of a delay due to the supply chain because these are manufactured in Asia, and have to be manufactured and shipped to our countries of sale, and that process takes a couple of months. So, we expect really, at the end of Q1, early Q2, a significant improvement in availability of our products due to the better chip availability.

Alright. Thank you very much for taking the questions.

Thanks Kevin.

The next question comes from William Reuter with Bank of America. Please go ahead.

Good morning. My first question is on the gaming weakness for the year. You mentioned both the industry was down. You also mentioned that you had supply chain issues, and then you also mentioned that you lost a little bit of share. I guess firstly, on the share losses, was it that you had less availability of product than others or what contributed to that? And then if you could try and break down the difference between how much was the industry and how much was specific to you guys?

Yes. On the share loss, it was largely because we didn’t have the product. It was wireless accessories for one of the consoles. We had very large market share in that particular category. And because we weren’t able to supply the demand overall, the share shifted to other products where we have a smaller share. So, that’s really what drove majority of the share loss. And then if I look at the reasons for the decline, 95% are industry-related issues and about 5% are kind of our things, such as what I just talked about in terms of lack of chips for our particular wireless accessories. Deb O’Connor: Yes. PowerA – destocking with the retailers as well.

To the industry. Deb O’Connor: Exactly. I fully agree.

Yes. That kind of moves to my second question. It’s I think an earlier question talks about retailer destocking. In the gaming accessories, do you believe that, that destocking effort is done at this point?

Yes. Again, just like for our school and business products, we see the stock of gaming accessories being fairly low. I mean it is typically lower at this time of the year. It’s a slow season, but it is very low there as well. And we just like for other products, we have higher levels, a lot of stock for gaming accessories as well. So, it’s the same situation as other products.

Okay. And then just lastly for me on capital allocation, you mentioned you are committed to the dividend. You also talked about debt reduction. Will you consider share repurchases this year, or given the challenging macro backdrop, should we assume that those are off the table until leverage moves closer to our targets? Deb O’Connor: Yes. I would say we are really focused on the debt pay-down. Never say never to anything, but I guess we need to get that leverage ratio down, and that’s what we are going to be focused on.

Good to hear. Okay. That’s it. Thank you.

The next question comes from Hale Holden with Barclays. Hale, please go ahead.

Thank you. Good morning. Boris, you made a comment around and not overly discounting your better brands or best brands like Five Star. So, I was wondering how you think about that versus the weaker consumer and room for private label below you? And how you might fill that lower tier gap?

Yes. That’s the benefit of having multiple brands, Hale. So historically, we have been able to position things both for premium price points, better price points, as well as good price points or value price points. And historically, for example, in our school products, Mead played that role of addressing, we already mentioned, price point successfully. Mead’s been a good brand. We saw strong demand in 2022 for that brand. So, that should continue as we position things across the spectrum, depending on what the consumer segment we are targeting. The same thing applies in EMEA. We have Lights, which is more of our premium brand and Esselte, which is more of a mainstream brand. We actually saw growth in ‘22 with Esselte, as consumers are kind of more attractive to those more value price points. So, pretty much in every region, we have this multiple tier approach with our brands. And historically, we have been successful. And I also believe we can be successful in 2023 as we go through this economic slowdown.

And I was wondering what was embedded for back-to-school in the full year revenue guidance, if you were sort of thinking flat to slight volume declines on weaker consumer or if there was something else that might happen?

Right now, we are assuming a flattish back-to-school, and this is really driven by NPD forecast for back-to-school. And that flattish assumption includes lower load-ins, people being less aggressive in bringing inventory upfront and then chasing it as they see the demand being fulfilled.

So, we really won’t know until 3Q, how that turns out.

That is correct. Yes. Deb O’Connor: That’s right.

We will be asking you to bear with us.

And I just I had one other question on debt repayment, which was as you are thinking about debt repayment, obviously, you have two choices, right? You can take the loan, which is floating rate or you could potentially try to purchase the bond at a discount and accelerate the notional amount. And I was wondering how you were thinking about that trade-off or balance? Deb O’Connor: Yes. So we think about it. And I would tell you with the rates that those bonds carry right now. They are nice to have and to keep in the portfolio. So, we will consistently look at it, but it keeps us with a good fixed rate.

Great. Thank you so much.

Thanks Hale.

Our final question comes from Hamed Khorsand with BWS Financial. Hamed, please go ahead.

Hi. Good morning. Could you just talk a little bit more about this back-to-school, the delay in ordering? I thought your mass merchant retailers usually give you pretty good insights to what their ordering habits are. So, are they just holding off and giving you any clarity, or are they just holding so much inventory from last year that they just are still nervous about giving you any kind of order clarity?

No. They are pretty clear and they don’t have much inventory. They are just deciding to bring in less this year as they are concerned about the macro environment. So, they are loading in less than last year. And obviously, last year, they loaded in more than typical because they were concerned about supply chain issues. So, on a comparable basis, it’s substantial. That’s why our Q1 guidance is so much lower. Revenue guidance is so much lower than last year because there is a lot of pull forwards last year that were happening that we will not see. So, the timing of their orders is very similar to what we see historically. But the amount that they will be bringing in will be a lot less than last year, due to things I just mentioned.

Okay. And my other question was just on your SKU strategy and just product strategy in general. How are you incorporating more of a hybrid work environment? Does that mean the changes you made last year for people going back to the office you are reverting back to more of being consumer oriented?

Yes. Hamad, this is Tom Tedford. And our teams have responded already to that change in work behavior very successfully. Our team in Europe, in particular, during the pandemic, we saw sales growth as they shifted more of their product solutions to a hybrid or fully work-from-home remote environment. Our Kensington business has responded quite well with that. So, really across the majority of our brands that are focused on work solutions, we have already implemented a nice balance between remote work, hybrid work, and office solutions for our consumers.

I guess what I am trying to ask is the office solutions you used to have were high price tag and pretty recurring as far as your expectations over several years. What are your expectations on the new work-from-home kind of supplies that you are producing?

Yes. I think Boris alluded to it earlier with the portfolio approach that we have and the multiple brands that we have supporting each category, we are able to meet the consumer where they are. And if they are able to purchase a premium product, we have solutions for them. If they choose to have a more value solution, we also have brands and solutions that meet the consumer at that price point. So, I think over time, we will continue to see a good mix of our business, but it will continue to shift modestly towards more consumer solutions. But that profit profile really isn’t all that significantly different. We just have to sell more units to offset the ASP declines.

Let me add a little bit more color here just on the environment. So, we believe that the hybrid workplace is here to stay. We see actually a quite stable environment with most companies working hybrid or in the office, and very few still are fully remote. We are seeing a positive trickle back to the office. So, it started a year ago, and it continues and its slow, but it’s continuing as more companies demand more presence in the office. So, the product portfolio that we have is able to meet all of those three environments. We did a lot of work back in 2020 and 2021 to kind of restructure our portfolio so that we can supply both in the office and hybrid workers, and that will continue. And then just my other comment on the environment, the inventory reductions that we referred to throughout our discussion today, are more significant in retail than it is in the business-to-business side, as we are seeing our business-to-business focused channel partners continued to support this return to office, a trickle that we talked about. So, the sales there are doing better. And certainly, the inventory situation there is better than it is on the purely retail consumer side.

Okay. That’s helpful. Thank you.

Thanks Hamed.

We have no further questions. So, I will turn the call back to the management team for any concluding remarks.

Thanks Emily and thank you everybody for your interest in ACCO Brands. Previously, we have managed well in difficult environments and are confident in our ability to navigate current economic challenges. We are also confident that we have the right strategy and believe we are well positioned to continue to deliver organic sales growth, compelling market performance, and improved financial results as global economies recover. We look forward to talking with you in a couple of months to report on our first quarter results. Thank you.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.