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Edited Transcript of ACCO earnings conference call or presentation 12-Feb-20 1:30pm GMT

·40 min read

Q4 2019 ACCO Brands Corp Earnings Call LINCOLNSHIRE Feb 28, 2020 (Thomson StreetEvents) -- Edited Transcript of ACCO Brands Corp earnings conference call or presentation Wednesday, February 12, 2020 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Boris Y. Elisman ACCO Brands Corporation - Chairman, President & CEO * Christine J. Hanneman ACCO Brands Corporation - Senior Director of IR * Neal V. Fenwick ACCO Brands Corporation - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Bradley Bingham Thomas KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst * Hale Holden Barclays Bank PLC, Research Division - MD * Hamed Khorsand BWS Financial Inc. - Principal & Research Analyst * Joseph Anthony Gomes NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst * Karru Martinson Jefferies LLC, Research Division - Analyst * Kevin Mark Steinke Barrington Research Associates, Inc., Research Division - MD * William Bates Chappell SunTrust Robinson Humphrey, Inc., Research Division - MD * William Michael Reuter BofA Merrill Lynch, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the 4Q and full year 2019 ACCO Brands Corp. earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Ms. Christine Hanneman. Thank you. Please go ahead. -------------------------------------------------------------------------------- Christine J. Hanneman, ACCO Brands Corporation - Senior Director of IR [2] -------------------------------------------------------------------------------- Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands' fourth quarter and full year 2019 conference call. Speaking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation; and Neal Fenwick, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the Investor Relations section of accobrands.com. When speaking about 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 the 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 are based on certain 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. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Good morning, everyone. Thank you for joining us. I will spend the next few minutes reviewing the highlights of the 2019 results and commenting on the progress we're making against some of our strategic imperatives. Neal will follow me with more color and details on the full year and fourth quarter, and then we'll take your questions. I'm very pleased to say that we reported a record year in 2019 for net sales, which rose 1% to $1.96 billion. Our adjusted earnings per share were also a record, rising 5% to $1.20, and free cash flow increased $11 million to $172 million, our second highest ever, allowing us to return $89 million to our shareholders, $65 million from share repurchase program and $24 million in dividend payments. In addition, we reduced our debt, $71 million and brought our net leverage ratio down to 2.7x. Much of our success in 2019 was due to the strength and resilience of our geographically balanced business and our nimble responses to rapidly changing market conditions as we faced inflation from input costs, multiple rounds of tariffs and changing circumstances with channels and customers. We addressed the higher cost of commodities, logistics and tariffs in a few different ways. First, we pre-bought some of the 2019 inventory in the fourth quarter of 2018. That inventory was already priced for 2019 back-to-school shipments to our customers. We leveraged our balance sheet to avoid some of the impacts from tariffs and successfully brought down those high inventory levels as we sold through the goods in the second and third quarters of 2019. We also took several price increases throughout the year to offset inflation and tariffs. Our pricing lagged the cost increases by approximately 1 quarter, but we successfully implemented what we needed to offset the higher costs. Finally, we worked during the year to move a sizable part of our supply chain out of China and into Vietnam and Taiwan. It is very difficult to operate on the continually changing external circumstances, not just the ones we faced in 2019, and I would like to thank all of our employees whose hard work and diligence allowed us to overcome these challenges and post excellent results. To further strengthen our business, last August we purchased Foroni, the leading provider of branding notebooks and school and office products in Brazil. Foroni is the second largest player in the market after Tilibra, which we already own. As a result, we are now a very significant participant in this growing product area in Brazil. The fourth quarter is the largest and most important quarter for us in Brazil because it encompasses shipments for the back-to-school season as well as calendars and other dated products. Both businesses in Brazil performed well, with Tilibra growing 5% in the fourth quarter and Foroni delivering better-than-expected profitability. Foroni is our fourth strategic acquisition in 4 years, as we continue to focus on rebalancing on our portfolio of brands, channels and geographies to achieve faster and more profitable growth. We will look for additional acquisitions that will provide profitable growth in geographic or category expansion at a reasonable price. Another critical component of our success in 2019 was our outstanding back-to-school performance in the U.S. Our Five Star brand led the way, allowing us to grow mid-single digits and take share in a flat market. The new product ranges introduced in 2019, such as TruSens air purifiers, the GBC automatic laminator, a Kensington docking station for the Microsoft Surface Pro, and a full line of Leitz and Rexel manual shredders, continued to perform very well as the year progressed. We will continue to focus on growing these lines and enhancing them in other categories with additional innovations in 2020. Moving to our productivity initiative. We'll continue to generate substantial savings from our programs. Each year we target approximately $30 million in productivity improvements. In 2019, we achieved more than $40 million in productivity and integration savings. We have reinvested much of that into our business. I expect another year of solid productivity improvement in 2020. Overall, I am very happy with our results. Our full year performance manifests the fact that our strategy of focusing on growing channels, strong brands, innovative products and productivity improvements, complemented by accretive acquisitions and excellent execution is working. Looking at 2020, our guidance reflects the fact that we expect the environment to continue to be challenging, but we are looking for improved profitability and strong free cash flow. With that, I will turn the call over to Neal for a review of segments, our outlook and other financial commentary, and then I'll join him in answering your questions. Neal? -------------------------------------------------------------------------------- Neal V. Fenwick, ACCO Brands Corporation - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Boris, and good morning, everyone. I'm going to focus largely on our full year results. For 2019, comparable sales increased almost 1% based on solid performance in North America. As Boris mentioned, it was critical that we raised prices throughout the year to offset higher input costs, including several rounds of tariff increases on Chinese imports. We were successful in doing so, and that is reflected in posting an increase for the full year in both reported net sales and comparable sales. This is the best growth in comparable sales that we've had in a decade. Adjusted net income of $122 million was even with 2018. Adjusted EPS was $1.20 versus $1.14 in 2018. Having deployed $65 million of our free cash flow to share repurchases, we benefited from fewer shares outstanding. Our gross margin was 32.4%, a bit above 2018's level. SG&A expenses as a percent of sales decreased slightly to 19.9% from 20.2%. We incurred $5.6 million of higher annual incentive expenses based on our performance in 2019. In 2018, very limited incentives were earned. Reported operating income increased to $196 million from $187 million and operating margin rose to 10% from 9.6% in 2018. On a reported and adjusted basis, operating income increased due to acquisitions, higher net pricing and cost savings partially offset by higher incentive accruals. Our adjusted tax rate of 30.5% was higher than we estimated as the various impacts from U.S. tax reform and in particular, the areas related to the impact of our foreign earnings have proven more difficult to forecast, and those non-U. S. earnings have triggered higher U.S. taxes. For 2020, we expect our adjusted tax rate to be similar to the 2019 rate. Now let's turn to some details of our segment results. Net sales in North America rose 3%, with higher prices offsetting higher input costs, including tariffs and lower volume. Our back-to-school season was strong with growth in note taking and ring binders. Growth also continued in the Kensington brand, on the strength of new products in the notebook, docking and security areas. Office supplies and calendar items declined. We saw growth in the independent and wholesale channels, which offset some declines at dollar and other regional retail stores. North America operating margin increased to 13.5% from 12.4% driven by pricing, largely catching up with the cost inflation cycle that began in mid-2018. Pricing, along with cost reductions were only partially offset by lower volume and higher incentive accruals. For the first quarter of 2020, we expect North America sales to continue to benefit from some of last year's price increases, but our pricing will follow changes in tariffs. For example, we will reflect tariff reductions to List 4A items from May onward. For the full year, we anticipate North America sales to be down slightly. Now let's turn to EMEA. Full year sales decreased 6%, almost all of which was related to currency translation. Comparable sales were roughly flat as we saw sequential demand improvement in the fourth quarter from the slower second and third quarters, primarily from gains in lever arch files, do-it-yourself tools and computer accessories. As we have mentioned, EMEA had a very strong 2018 because of the new privacy law that increased demand for shredders. So the comparisons for 2019, particularly by quarter, were difficult. We were very pleased that we almost matched 2018 sales by replacing onetime shredder demand from the privacy law with ongoing demand from share gains and new products. EMEA gross profit and gross profit margin were negatively impacted by adverse foreign exchange and lower volume. EMEA's 2019 adjusted operating income of $61 million, declined 10% due to lower sales, adverse foreign exchange and higher input costs. The cost increase was largely due to weakness in the euro and U.K. pound, which increased the local currency cost of U.S. dollar-sourced products that we purchase in Asia but sell in local currencies. Looking at 2020, on a comparable basis, we expect EMEA sales to be approximately flat for the year. Moving to the International segment. Full year comparable sales decreased almost 3% because of lower volume, partially offset by higher pricing. The GOBA and Foroni acquisitions added approximately $54 million to sales in 2019. Adverse foreign currency reduced sales, approximately $19 million. Australia continues to be a difficult market with lost placements and an unfavorable mix, although we saw a slower rate of decline in the fourth quarter. In Asia, we are seeing the effects of exiting low-margin product lines. For the year, sales in Mexico, excluding the GOBA acquisition, were down slightly. Moving on, Brazil had strong sales during its back-to-school selling. As Boris mentioned, the fourth quarter is the largest quarter seasonally for both Tilibra and Foroni, and both performed well. Keep in mind that because both Brazilian businesses are heavily skewed to the fourth quarter, almost all of the profits there are generated in the second half. As a result, in 2020, we expect full year ownership of Foroni to add approximately $30 million to sales but add minimal incremental EPS. Full year reported international operating income declined slightly because of higher restructuring and acquisition-related costs. Adjusted operating income of $53 million rose 4% because of the acquisitions, partially offset by continuing difficulties in Australia and Asia, along with adverse foreign exchange. For 2020, international sales are expected to be up high single digits with the benefit of full year Foroni, growth in general in Brazil and Mexico, and less of a drag from foreign exchange, Asia and Australia. Let's move now to our balance sheet and cash flow. In 2019, we generated $204 million in net cash from operating activities and free cash flow of $172 million. We repurchased 8.3 million shares for a net $65 million, and we also paid dividends of approximately $24 million, returning $89 million to shareholders. During the fourth quarter, we repurchased 800,000 shares for a net $7 million and paid $6 million in dividends. We also repaid $116 million of seasonal borrowings. At quarter end, our net leverage ratio was 2.7x. Now let's turn to our initial outlook for 2020. We estimate that sales will be in the range of negative 1% to positive 1%, including approximately $20 million from adverse foreign currency exchange and $30 million benefit from having full year Foroni results. Our outlook for adjusted EPS for the year is in the range of $1.20 to $1.30, which includes $0.03 negative impact from foreign exchange and minimal incremental impact from full year Foroni results. We anticipate normalization of incentives and our guidance includes a $14 million headwind as a result. In 2019, our sales seasonality for back-to-school were skewed towards the second quarter. In 2020, we expect back-to-school to be more balanced between the second and third quarters, similar to what we saw in 2018. The outlook for free cash flow is $165 million to $175 million. We do not expect a repeat of the large cash outflow in the first quarter of 2020 that we experienced in 2019 because we have not pre-bought any inventory. The second quarter, therefore, will see a larger, more normal cash outflow as we build back-to-school inventory. Subject to any new acquisitions, we anticipate year-end net bank leverage will be at or below 2.5x. We have included certain modeling assumptions in our slide deck on Page 16. Now let's move on to Q&A where Boris and I will be happy to take your questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Brad Thomas with KeyBanc Capital Markets. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [2] -------------------------------------------------------------------------------- Congratulations on a strong fourth quarter and a strong year. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thank you, Brad. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [4] -------------------------------------------------------------------------------- I wanted to ask a couple of questions. First, was hoping maybe for a little bit more color as we think about some of these margin puts and takes. I recognize that it's not easy to figure them all out across your different channels and countries that you're in, but as we think about pricing and tariffs being behind us as well as some of the cost opportunities that you still have ahead, how are you thinking about some of those margin puts and takes for 2020 as we think about it on an annual basis? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [5] -------------------------------------------------------------------------------- If you look at the gross margins, they should be up a little bit just due to the tariff and inflation pressures largely behind us. We will have some inflationary pressures from currency because U.S. dollar is definitely stronger now than it was on average in 2019. We have increased prices in our international regions on January 1. So hopefully, we will mitigate the dollar weakness, but it has been getting stronger -- the dollar strength, it has been getting stronger, so there will be that additional inflationary pressure, but with all of that, I do expect gross margins to be higher in 2020. And SG&A should be a little bit higher as well because, as Neal mentioned, we have $14 million in incremental incentives to absorb. So even though we do have a restructuring program in place, and we will continue to drive on productivity, it probably will be a little bit higher as well. So if I look from a operating margin standpoint, it should be roughly similar to what we saw in 2019. But we do expect less interest -- significantly less interest in 2020 than 2019, and we expect fewer outstanding shares as well. So that will drive EPS accretion in 2020. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [6] -------------------------------------------------------------------------------- That's very helpful, Boris. And if I could follow-up on how you all are thinking about the U.S. channel, it seems to me that the U.S. consumer is relatively healthy. Clearly, some of the retailers that you're partnering with on the mass side have had some nice momentum. On the other hand, office superstores continue to shrink. How are you feeling about the setup here for 2020 in the U.S.? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [7] -------------------------------------------------------------------------------- It's likely to follow a similar pattern, Brad. We've seen that now for several years. And that's why our Q1 and Q4 are relatively weak because we are more dependent on those challenged channels, and Q2 and Q3 are relatively strong as long as we perform well in back-to-school, which we've done over the last few years. So things are kind of going the same way. I'm very confident in our team. I'm very confident in our ability to manage all of these puts and takes, but the situation on the ground is, I don't think it's going to be any different. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [8] -------------------------------------------------------------------------------- That's very helpful. And if I could squeeze in one more on sort of a topic du jour. As you all assess some of the sourcing that you do from China, can you give us an update on if you're seeing any issues or expecting issues given the coronavirus? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [9] -------------------------------------------------------------------------------- Well, as I'm sure you recognize, it's a very dynamic situation. There's new information that comes in daily and weekly. We don't sell in China. So the virus outbreak will have no impact on the sale -- sell-side for us. But as you mentioned, some of our products are manufactured in China. We have not had any supply disruptions to date, due to the coronavirus. Typically, we pre-buy additional inventory ahead of the Chinese New Year, which lasts us over the period of normal factory shutdowns. This year, the shutdowns were 1 week longer than usual. But now the factories have opened and workers are coming back to work. However, we believe the ramp-up period to get to the normal production output will take longer than usual. Luckily, we're entering our slow selling season from now through April, and we're expediting some shipments out of China to make sure that we continue to stay in stock. Our North American sales start ramping up for back-to-school in May. About 20% of our U.S. back-to-school products are manufactured in China. Based on all the information we have today and our projections for customer needs and ramp-ups, et cetera, we expect to have good supply for BTS. But as I said at the very beginning, the situation is dynamic, and this may change. -------------------------------------------------------------------------------- Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [10] -------------------------------------------------------------------------------- Congratulations, again. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [11] -------------------------------------------------------------------------------- Thank you, Brad. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from Kevin Steinke with Barrington Research. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [13] -------------------------------------------------------------------------------- I wondered if you could touch a little bit more on the new product introductions that you mentioned in terms of the shredders and the other things you're expanding into. I think, what -- can you give us a sense for the size of those in terms of revenue in 2019? And what's the outlook for new product introductions in 2020? It -- will you accelerate that pace? Or will it stay about the same? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [14] -------------------------------------------------------------------------------- Thanks for the question, Kevin. We've launched several very exciting product lines in 2019. The ones I mentioned are the halo products, the ones that are of significant value add, and that's TruSens, that's the GBC Foton 30, that's the Kensington notebook dock and the line of manual shredders under the Leitz and Rexel brands. They were launched throughout 2019 and were very successful. We recognized revenue around $13 million from those products through the partial year of 2019. Many of them are still ramping up because we're introducing them on a global basis. They're nice margin products. So we're very, very pleased with our innovations. This will continue to expand in 2020. We introduce thousands of new products every year. Most of them are seasonal that are either for back-to-school or back-to-business, but we will continue to introduce these halo products. And I expect, certainly, all of the 4 lines that I mentioned in terms of air purifiers, automatic laminators, shredders and notebook docks continue to expand in 2020. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [15] -------------------------------------------------------------------------------- Okay, that sounds great. And you continue to be really consistent with productivity improvements from year-to-year. It sounds like you're targeting more productivity gains in 2020. Can you just kind of give us a sense as to some of the areas where you expect to get those productivity gains? And maybe, is it still $30 million kind of the ballpark range to think about for this year? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [16] -------------------------------------------------------------------------------- Yes, I think $30 million is a good number to think about. This last year, we delivered about $40 million. Some of that was driven from the last year -- the last full year of the integration initiatives between ACCO brands and Esselte that explains the additional -- the incremental roughly $10 million. This year, we're shooting for around $30-or-so million and it's thousands of projects that are targeting both cost of goods, logistics, distribution centers as well as all of the general and administrative functions. We are also rolling out a -- or consolidating on a single ERP in North America in April, and that should enable some additional productivity improvements in the second half of the year. We don't expect something in the summer, but as that ramps up, we should get incremental productivity improvements in the second half. This is something that we live with and do every year. It's a focus of every organization. We are a low-growth business, so for us, really squeezing efficiency out of our operations is really important in order to drive improved profitability. So we're very focused on that. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [17] -------------------------------------------------------------------------------- Great. You mentioned ERP implementation. You haven't called anything out about it before, but has there been any meaningful incremental implementation cost in '19 from that effort that would go away? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [18] -------------------------------------------------------------------------------- Well, over the last few years, we have been -- our capital spend has been in the $32 million to $34 million range, which is up from around $25-or-so million, that we were spending before the last couple of years. That incremental capital has gone into our ERP planning and development. We've talked several times when we will give guidance we're going to be at around $35 million, which should include all of capital needs. So that was part of it. The guidance that we provided today includes what we are planning to spend on the ERP. As we get closer to it, when I give you guys an update after Q1, I'll have more visibility about quarterly impacts because I do anticipate there may be some shifts from Q2 into Q1. But right now, it's just too early to tell. So since we don't give quarterly guidance, we give annual guidance, it doesn't change our outlook for the year, but there could be color within quarters that we will provide you when we speak to you in April. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [19] -------------------------------------------------------------------------------- Okay, good. And then lastly, maybe an update on Australia in terms of the headwinds from customer consolidation that you've been experiencing there? Are we may be getting towards the end of that? Or is that kind of expected to be a continued headwind as we move through 2020? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [20] -------------------------------------------------------------------------------- I certainly expect sales pressures to continue. There is a large customer there that's consolidating. I do expect us to do less business with that customer. And given that they're fairly large, it's difficult for Australia to grow if that customer is shrinking. We are managing Australia for improved profitability. Australia has taken a few restructuring actions last year, and we have a good plan in 2020 to improve our profitability. So I expect Australia to have a better year in 2020, but a better year for me is slightly lower sales and improved profitability. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And our next question comes from Joe Gomes with NOBLE Capital. -------------------------------------------------------------------------------- Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [22] -------------------------------------------------------------------------------- Just real quick on North America, I know the overall year looks really good, but the fourth quarter sales were down after 2 really good strong quarters in the second and third. I was just wondering if you'd provide a little more detail and color, what was going on in North America in the fourth quarter and how you guys were responding to that. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [23] -------------------------------------------------------------------------------- Sure, Joe. This is something that we expect every year, as I mentioned on my previous answer. North America is really driven by Q2 and Q3 because the healthier channels, which are the mass and e-tail channels are more prevalent and represent a higher mix in the second and third quarters. In Q1 and Q4, it's less back-to-school, and it's more back-to-business. And there, the share of the business that is driven by more challenged resellers is higher. So therefore, it has an impact on our business. Again, this is something that's normal. We'll plan for that. Overall, North America was up 3%, which is great, but it's really driven by the success in Q2 and Q3, and our increased share during back-to-school. -------------------------------------------------------------------------------- Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [24] -------------------------------------------------------------------------------- Okay. And on the -- your remarks, you -- when you're talking about channels, you noted that the dollar store channel had declined. And I know a while back, you guys had some positive hope for that channel. I was just wondering what's going on there, and where do you see that channel going? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [25] -------------------------------------------------------------------------------- We continue to experiment with the dollar channel. So we were pretty aggressive with them in 2018, saw incremental sales, but unacceptable profitability for us. So we pulled back in 2019 to try to strike a better balance between revenue growth and profitability, and we saw less revenue, but certainly improved profitability in 2019. It continues to be an important channel for us, but we have to get it right. We have to be able to drive profitable sales through that channel. I think we have a better view on how to do that. I expect that we will have incremental sales through the dollar stores in 2020, but it's not going to be a huge share of our business, it's a nice complement to our overall portfolio, but striking that balance between sales and profitability is important to us. -------------------------------------------------------------------------------- Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [26] -------------------------------------------------------------------------------- Okay. And then you also mentioned that you guys are taking some price increases in the international markets. I'm just wondering, and due to the strength of the dollar, how does that price your guys' products versus some of your competitors'? And is that delta getting to a level where there might be some additional trade-off in product? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [27] -------------------------------------------------------------------------------- We compete against local competition all the time. So certainly, the competitive environment is part of our consideration when we look at pricing. We pass pricing on products that are manufactured in Asia and costed in U.S. dollars that affects most of our competitors as well. So they have to do similar pricing to us. All of our locally produced products we price differently because we don't have the same currency inflation going through them. So it certainly is part of the consideration in our teams, so local teams review that to make sure that in the market, at the end of the day, we're competitive, we can sell, we have a good value proposition to both our customers and the consumers. So I feel comfortable where we are throughout the year. If we need to adjust things, either up or down, we do that both based on cost of inflation as well as market conditions. -------------------------------------------------------------------------------- Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [28] -------------------------------------------------------------------------------- Okay. Thanks for the insight on that. And one last one from me, real quick. What is the remaining authorization of the stock buyback program? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [29] -------------------------------------------------------------------------------- Neal, do you have that number? -------------------------------------------------------------------------------- Neal V. Fenwick, ACCO Brands Corporation - Executive VP & CFO [30] -------------------------------------------------------------------------------- Off the top of my head, it's north of $100 million. I can't remember, off the top of my head, the exact number, Joe. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [31] -------------------------------------------------------------------------------- We'll follow up with you, Joe. We have enough, certainly, for this year. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question comes from Bill Chappell with SunTrust. -------------------------------------------------------------------------------- William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [33] -------------------------------------------------------------------------------- Just starting on the top line outlook for North America and then for Europe. On North America, I think you said it possibly goes backwards. Is that all on -- I mean, it could be flat to down. Is that all on just the roll-off on price? Or do you expect volume to be flat to down? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [34] -------------------------------------------------------------------------------- I certainly expect volume to be down. Price should be up a little bit. Overall, I mean, we had a great, great year in 2019 with North America. I expect the back-to-school to be roughly similar. But then in Q1 and Q4, I do expect some falloff, again, driven by the decline in more challenged -- with more challenged resellers. So I just expect it to be -- we expect it to be slightly down versus our superb year of 2019. -------------------------------------------------------------------------------- William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [35] -------------------------------------------------------------------------------- And then on Europe, is it -- the currency is included in that? Or you expect sales to be just flat as is and then currency, and I guess, anything you can give us on would be helpful. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [36] -------------------------------------------------------------------------------- No, that's right. Comparable sales to be roughly flat, and then currency will certainly take them down a little bit. -------------------------------------------------------------------------------- William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [37] -------------------------------------------------------------------------------- Okay. And then last one, I don't -- I guess I -- help me understand the $14 million of increased normalized comp in 2020, just coming off of what you're saying is a very good year. I didn't realize or didn't understand maybe if accruals stopped sometime in 2019? And why they weren't fully paid out? And then why there's such a big jump because, I guess, it's about $0.10 to EPS headwind on variable comp or on normalized comp in 2020. So maybe a little more color there would be helpful? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [38] -------------------------------------------------------------------------------- Yes, it's an unfortunate dilemma, Bill. We did have a great year, but some of our incentive objectives were not met during 2019, so hence, we did not earn our target bonus. So for 2020 -- as we plan 2020, we're assuming we're going to earn that in 2020, and that's the $14 million. Most of that is driven by annual incentives that were not meant for 2019. So it's unfortunate, but facts are facts. So that's where we are. -------------------------------------------------------------------------------- William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [39] -------------------------------------------------------------------------------- Well, I guess, I'm just trying to understand, I mean, you had a 1% overall growth or almost 1% organic growth in '19, you're looking for flat to that -- roughly that, in 2020, maybe help me understand where you would have missed or where you fell below your expectations? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [40] -------------------------------------------------------------------------------- Well, if you look at the year, Bill, it was fairly uneven between regions, right? So the overall company is a consolidation of all the regions. North America certainly did better than international or EMEA. So EMEA and international have not met many of their objectives for 2019, which rolls into the enterprise. And then the other one that we missed, even though we certainly met our free cash flow objectives, that is not a metric in our annual plan, our annual incentives are based on working capital efficiency, and we set ourselves a pretty high goal in 2019. And we haven't met that as an enterprise as well. That's about 20% of our total annual incentive. So as a company, we haven't met that either. So it's more of a, I think, a goal-setting issue other than a company-performance issue because I think we can all recognize that we did, as an enterprise, very well in 2019. But goal setting is a challenge. We do that early in the year when we don't have visibility to the full year. And unfortunately, we haven't met some of our short-term targets in 2019, that hopefully, we will get a chance to meet in 2020. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Our next question comes from William Reuter with Bank of America. -------------------------------------------------------------------------------- William Michael Reuter, BofA Merrill Lynch, Research Division - MD [42] -------------------------------------------------------------------------------- Previously, you had said that the impact of tariffs in 2020 was going to be $7 million. Is that still the number that you expect? Or has the List 4 and 4A decrease in percentage lowered that number? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [43] -------------------------------------------------------------------------------- It's going to be a little bit lower than that because of -- exactly because the 4B is no longer there and 4A is down from 15% to 7.5%. So it will be a little bit lower than that. -------------------------------------------------------------------------------- William Michael Reuter, BofA Merrill Lynch, Research Division - MD [44] -------------------------------------------------------------------------------- Okay. And then earlier, you mentioned that you expected a little bit of gross margin expansion based upon some price increases that will more than offset the tariffs. Will this be evenly spread throughout the year or based upon the timing of implementation of those and the tariffs, will we see a little pressure in the beginning of the year that will be offset by expansion later on? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [45] -------------------------------------------------------------------------------- Yes, the gross margin expansion is driven really by international and productivity. There's not going to be so much due to tariffs anniversarying, and I don't want to provide any color by quarter, Bill, because it's so difficult to predict. So I think, overall, for the year, we're looking at a little bit of an expansion, but exactly where it's going to come throughout the year, it's hard to tell. -------------------------------------------------------------------------------- William Michael Reuter, BofA Merrill Lynch, Research Division - MD [46] -------------------------------------------------------------------------------- Okay. And then just lastly, you're near your target leverage ratio. I guess, as you look at the M&A pipeline at this point, how do you view it? Do you think you'll be active during 2020? Do you think valuations are attractive at these points? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [47] -------------------------------------------------------------------------------- Bill, it's -- anything that has to do with acquisitions is very difficult to predict. I can't really comment anything more specifically. Acquisitions are core to our strategy. We like what we've done, and we like the incremental results that we've delivered to our shareholders due to acquisitions, but we are patient and prudent buyers. We want to make sure that we don't overpay. Whether something is going to happen in 2020, I don't know, I can't tell you that. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Our next question comes from Hale Holden with Barclays. -------------------------------------------------------------------------------- Hale Holden, Barclays Bank PLC, Research Division - MD [49] -------------------------------------------------------------------------------- I was wondering, just to follow-up on Bill's tariff question. The commentary that -- for 4A when you step down in, I guess, in the second quarter for pricing, when you give that back or adjust back for your -- with your customers, is that sort of 1:1 on margins? Or is there a lag time on how that works? And it sounds like 7.5% of just the 20% from China, so relatively small top line number. I just want to make sure I have the thinking correctly? -------------------------------------------------------------------------------- Neal V. Fenwick, ACCO Brands Corporation - Executive VP & CFO [50] -------------------------------------------------------------------------------- Yes, I think you have to understand, first of all, the actual tariff reduction didn't happen until February. And then we have to work it through our purchase inventory cycle, and so that's the lag to me. And we do that in the same way when we raise prices. When tariffs go up, we don't raise prices straight away, there's a 3-month lag. And so we try and match our cost with our selling price. That's fundamentally what we're trying to do. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [51] -------------------------------------------------------------------------------- It'll be margin neutral. -------------------------------------------------------------------------------- Neal V. Fenwick, ACCO Brands Corporation - Executive VP & CFO [52] -------------------------------------------------------------------------------- It will be margin neutral, therefore. -------------------------------------------------------------------------------- Hale Holden, Barclays Bank PLC, Research Division - MD [53] -------------------------------------------------------------------------------- Okay, great. And then the only other question I had was I was just wondering if you could give us sort of an update on what you were seeing in EMEA, one of the few regions we haven't talked about in the call yet, in detail? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [54] -------------------------------------------------------------------------------- EMEA had, overall, a good year in 2019. It came on the back of a record year in 2018. We had a -- really a phenomenal year. So as Neal mentioned, we had similar sales -- comparable sales to 2018. We were hurt by currency in EMEA. Sales in actual U.S. dollars were down 6% because of currency. And then EMEA had a kind of an unusual year. We had a strong Q1, relatively weak Q2 and Q3, and then a strong Q4. So we expect a flat business in EMEA, we have a very strong business there, but the economies there are slowing down a little bit. So we don't have expectations for significant growth in EMEA in 2020. -------------------------------------------------------------------------------- Hale Holden, Barclays Bank PLC, Research Division - MD [55] -------------------------------------------------------------------------------- And there's no shredder impact '19 to '20, like there was in '18 to '19, right? -------------------------------------------------------------------------------- Neal V. Fenwick, ACCO Brands Corporation - Executive VP & CFO [56] -------------------------------------------------------------------------------- That's right. The shred -- the privacy laws in Europe came out in the second quarter of '18. So you saw a surge in sales in Q2 and Q3, and that's what makes it such a difficult comp in '19. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Our next question comes from Karru Martinson with Jefferies. -------------------------------------------------------------------------------- Karru Martinson, Jefferies LLC, Research Division - Analyst [58] -------------------------------------------------------------------------------- Just on -- for back-to-school. As those superstores continue to shrink and consolidate, where do you see that U.S. consumer going? Where are the channels of growth that you're seeing? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [59] -------------------------------------------------------------------------------- Superstores are very, very small for back-to-school. Back-to-school is really made by 3 primary players, and that's Walmart, Target and Amazon. And that's really been the case for the last couple of years, and I expect that to continue to be the case. We are very strong with all 3 of them. They drive back-to-school, that's the reason why we were successful the last few years. And again, my expectation is that this will continue. Superstores are a bigger player in -- on the business side, in Q1 and Q4, but really marginal for back-to-school. -------------------------------------------------------------------------------- Karru Martinson, Jefferies LLC, Research Division - Analyst [60] -------------------------------------------------------------------------------- Okay. And then on the business side, are you seeing expansion from other players? Or is it still being dominated by Staples and Office Depot? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [61] -------------------------------------------------------------------------------- On the back-to-business side, Amazon is certainly making inroads, especially with small and medium business, and independents are doing a great job. So over the last few years, we've seen independents take share for -- on the business side. They are focused on that small and medium customer, and they do a great job servicing those customers. So one of the reasons we did well in 2019 in North America is because independents have done well in North America in 2019. So that channel is certainly something that we support and pay attention to, and we expect further growth from. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- And our next question comes from Hamed Khorsand with BWS Financial. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [63] -------------------------------------------------------------------------------- So first question I had was what are your capital allocation plans for 2020 because your presentation slides assumes very small, almost 0 share buybacks? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [64] -------------------------------------------------------------------------------- Yes, we don't really forecast share buybacks in our future plans, Hamed. So you know the history, we purchased $75 million in 2018 and $65 million in 2019. We certainly have the free cash flow to do more in 2020, by exactly how and when, we don't give guidance on that. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [65] -------------------------------------------------------------------------------- Okay. And then is there any indication that you're going to do more of the store brand sales this year? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [66] -------------------------------------------------------------------------------- Can you elaborate a little bit? What do you mean by store brand? Oh, private label? -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [67] -------------------------------------------------------------------------------- Last year -- yes, the private label. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [68] -------------------------------------------------------------------------------- Got it. Got it. Got it. Private label is about 6% or 7% of our sales. We will continue to do private label. I expect that to be a little bit less in 2020 than 2019. In 2019, we won some incremental private label business -- seasonal private label business for back-to-school, which I don't expect to repeat. But other than that, the steady-state private label business, I expect us to continue to participate, but it will be in that 6% range. It shouldn't be higher or significantly lower than that. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [69] -------------------------------------------------------------------------------- And are you assuming that some of your input costs stay the same, even though there's been some deflationary pressures lately? -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [70] -------------------------------------------------------------------------------- We certainly work very -- we certainly work very hard, Hamed, to capture all of the savings from lower input costs. And whatever we can achieve and consolidate, we will take into either incremental profit or into our demand-generation programs. As I mentioned in my prepared remarks, the $40 million of productivity that we achieved in 2019, most of that we reinvest back in the business to drive demand. I mean it's really important for us to continue to feature our brands, to continue to feature our products. So we will capture the lower input costs, but a lot of that will go back and drive demand. -------------------------------------------------------------------------------- Neal V. Fenwick, ACCO Brands Corporation - Executive VP & CFO [71] -------------------------------------------------------------------------------- You remember another thing, at the end of 2018 we forward-bought an awful lot of inventory to avoid tariff cost increases that obviously can't be done again. And so in 2020, what we've had to do is either work on resourcing those items to different areas or we will be receiving cost increases. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Boris Elisman for any closing remarks. -------------------------------------------------------------------------------- Boris Y. Elisman, ACCO Brands Corporation - Chairman, President & CEO [73] -------------------------------------------------------------------------------- Thank you, Jimmy. In closing, to summarize, we're very pleased with how the business performed in 2019. We remain confident about our future and continue to position the company for growth and strong returns to our shareholders. I look forward to speaking with you again after we report our first quarter earnings. Thank you. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.