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Edited Transcript of ACCO earnings conference call or presentation 1-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 ACCO Brands Corp Earnings Call

LINCOLNSHIRE Aug 21, 2017 (Thomson StreetEvents) -- Edited Transcript of ACCO Brands Corp earnings conference call or presentation Tuesday, August 1, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Boris Y. Elisman

ACCO Brands Corporation - Chairman, CEO and President

* Jennifer Rice

ACCO Brands Corporation - VP of IR

* Neal V. Fenwick

ACCO Brands Corporation - CFO and EVP

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Conference Call Participants

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* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Carla Marie Casella Hodulik

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Hamed Khorsand

BWS Financial Inc. - Principal and Research Analyst

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Walter Hale Holden

Barclays PLC, Research Division - MD

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the ACCO Brands Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host, Ms. Jennifer Rice, Vice President of Investor Relations. Ma'am, the podium is yours.

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Jennifer Rice, ACCO Brands Corporation - VP of IR [2]

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Good morning, and welcome to our second quarter 2017 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 to quarterly results, we refer to adjusted results. Adjusted results exclude transaction, integration and restructuring items, and apply a normalized effective tax rate of 32% in the current year. 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 this morning’s earnings release and the slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our adjusted earnings per share or effective tax rate guidance. For more information, see this morning's press release. Forward-looking statements made during the call are based on certain risks and uncertainties, and our actual plans, actions and results could differ materially. Please refer to our press release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements are made as of today's date, and we assume no obligation to update them going forward.

Following our prepared remarks, we will hold a Q&A session. Now it is my pleasure to turn the call over to Boris Elisman.

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [3]

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Thank you, Jennifer, and good morning, everyone.

Once again, I'm pleased to report that we had a great quarter, with better-than-expected profit results driven by higher gross margin and strong performance in certain international markets. Net sales increased 19%, thanks to our 2 newly acquired businesses, Pelikan Artline in Australia and Esselte in Europe. While net income declined for the quarter because of expected integration and restructuring charges, adjusted net income grew significantly, the result of our acquisitions, higher gross margin and continuing cost management.

Each of our business segments demonstrated resilience in spite of the ongoing challenges in our traditional channels.

In North America, sales were down but profitability improved. Expected declines in the office superstore channel due to store and distribution center closures, lower sales of commodity items and an expected shift in timing of back-to-school orders from June to July, impacted the top line; while a favorable customer and product mix as well as productivity improvements largely drove the higher bottom line. Some of this strong gross margin will benefit the full year, but some will come out of the third quarter.

For the fourth consecutive year, we're seeing good school products sell-in to the mass and e-tail channels, with prominent placement and in-store merchandising of our Five Star, AT-A-GLANCE and Mead brands. We're working closely with our partners to ensure we have another good sellout during the back-to-school season.

ACCO Brands EMEA is performing well. The acquisition of Esselte and its powerful brands has given us considerable scale in Continental Europe, and integration activities have already begun in several countries. In addition, the new management team in EMEA is implementing a number of programs to improve our results in the United Kingdom, where the legacy ACCO Europe business has struggled in the recent past. Last month, I visited several of our key operations in the EMEA region, and I'm optimistic about the potential for growth there and impressed by the talent and enthusiasm of our people.

The International segment, comprising of Asia Pacific, Australia and Latin America, delivered solid results as well. Brazil's performance was a highlight of the quarter, with volume growth in diaries, stationery and notebooks, and an improved gross margin driven by productivity improvements, price increases and a favorable product mix. In ACCO Brands Australia, the heavy lifting of the integration of ACCO Australian and Pelikan Artline was largely completed in the second quarter with the consolidation of overlapping distribution centers and enterprise IT systems.

With 6 months in the rear-view mirror, we are reaffirming our full year sales and free cash flow guidance, and now expect to be at the high-end of our EPS range, primarily because of the strong gross margin year-to-date.

With that, I'll ask Neal to take you through a more detailed look at our results. Neal?

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Neal V. Fenwick, ACCO Brands Corporation - CFO and EVP [4]

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Thank you, Boris. Good morning, everyone. Second quarter sales increased 19%, driven by acquisitions. Comparable sales at constant currency decreased 6%, primarily due to expected declines with office superstores, lower sales of commodity items and the timing of back-to-school orders. Net income was $23.5 million or $0.21 per share and included $13.7 million of acquisition, restructuring and integration-related charges. Reported net income was down from the prior year as the prior year in period included a significant one-time noncash gain related to the Pelikan Artline acquisition.

Adjusted net income was $35.2 million, or $0.31 per share, up $0.05 versus last year, with half of the improvement coming from the base business and half from acquisitions.

During the quarter, we repurchased nearly 600,000 shares of stock at an average price of $11.38 per share.

Looking at the specifics, reported an adjusted gross margin improved 150 basis points. The improvement in gross margin is detailed on Page 5 of our slide deck and was primarily driven by improved customer and product mix in North America as well as cost savings.

SG&A expenses were up in the quarter due to acquisitions. As a percent to sales, SG&A was up 140 basis points on a reported basis and up 130 basis points on an adjusted basis. The increase in adjusted SG&A to sales was primarily due to lower volume, increased incentive compensation expense and higher go-to-market investment.

Turning to an overview of our segments for the quarter. In North America, sales decreased 5%, but excluding acquisitions decreased 6%. Recall, we were up against a very difficult comparison with 5% growth last year. The decline this year was due to the expected declines with the office superstores, lower sales of commodity items and the expected shift in the timing of some back-to-school orders that shipped in July of this year versus June of last year. North America operating income and margin were both up in the quarter due to the higher gross margin resulting from a favorable customer and product mix. The favorable mix was in part due to the later timing of certain back-to-school orders that are lower margin and that will fall in the third quarter this year versus the second quarter last year.

In our EMEA segment, sales increased 211% due to the Esselte acquisition, which added $93 million of sales in the quarter. Excluding the acquisition and the effect of currency, comparable sales decreased 8% or $3 million due to share loss and lower volume primarily in the U.K. EMEA operating income and margins increased due to the acquisition. Looking at how the Esselte business has performed year-to-date, pro forma sales were flat with profit slightly up.

International sales increased 10%, driven by acquisitions, which added $9 million. Excluding acquisitions and currency translation, sales decreased 4%. The decline was primarily in Australia, where the economic environment is weaker and large customers are in transition. Otherwise, we saw growth in Brazil, with Mexico and Asia-Pacific flat. International operating income increased primarily due to improved profitability in Brazil.

Turning now to our cash flow and balance sheet. We had our expected seasonal outflow of cash in the quarter to support the North American back-to-school inventory build. Adjusted free cash flow was a use of $62 million. For the quarter, the impact from acquisitions was not significant. For our year-to-date cash flow, transaction-related outflows for Esselte were partially offset by the inclusion of Pelikan's favorable cash flow and higher cash flow for the base ACCO business.

For the full year, we still expect adjusted free cash flow of approximately $150 million with our strongest cash generation in the third and fourth quarters.

One final notable point is the strong year-to-date improvement in our adjusted EBITDA of $24 million. This has led our pro forma net leverage, per our bank covenant, dropping below 3x. This will give us a 50 basis point reduction in our LIBOR-based interest rate going forward.

Now with that, I'll conclude my remarks and move on to Q&A where Boris and I will be happy to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bill Chappell from SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Just first on the quarter, can you just remind us how much of an impact on North America was the timing shift from last year to this year? And also you kind of alluded how much of impact did that have on gross margin improvement? It sounded like the shift was of lower margin products, so did that have a meaningful impact on gross margin?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [3]

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The shift was a few million dollars. We haven't quantified it, and it was of a lower margin product. So we do expect them to ship or they have shipped in July of this year. So we do expect some of that to spill over into Q3 and to dilute a little bit the margin in Q3.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay. And then, Boris, we're now in August and surprisingly in Georgia, they're going to back-to-school now. What kind of your take on the back-to-school season so far? Where do you -- is this going to be a good one -- but from a placement standpoint, an early gauge on consumer takeaway?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [5]

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You know, we're very early in the season. There's a little bit of a lag between now and when we get the POS sell-through information. So through the first -- just few weeks of back-to-school season, it looks like back-to-school was going to be comparable to prior year, which was a good back-to-school. But so much of it is still ahead of us. So there's still opportunity for it to change, but right now it looks good.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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Okay. And then last one for me. Any thoughts on the potential of Office Depot, Staples retail merger? Does that change your outlook in terms of how the industry consolidates and the impact on you?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [7]

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Nothing specific on that speculation. But we are reducing costs, just in general, in anticipation of the office product superstore environment being -- continuing to be tough in the future as well. So we're not waiting for any movements there, we're staying ahead of it.

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Operator [8]

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And our next question comes from the line of Kevin Steinke from Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [9]

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So another factor that you called out for the better-than-expected results besides gross margin was improved performance in certain international markets. So just wondering if you could elaborate on that a little bit more?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [10]

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Yes. This is typically a pretty low quarter for international, but Brazil really stands out. They had an outstanding Q2 even by absolute measures and then relative to how their economy is performing, it was really a big home run. Also, Brazil did well, Mexico did well and Asia-Pacific did well. But Brazil really stood out.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [11]

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Okay, that's good to hear. And then you referenced lower sales of commodity items. Was that just an intentional action by you? Or just a little more on what's going on there and how that helped the margin?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [12]

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Yes, it was an intentional decision from us. We try to participate in these lower end bids if we can make incremental dollar gross profit for the company. And when we do, it's great but when we don't, we don't bid below costs. So in this particular situation, we participated last year in some of these bids and won them and this year we didn't and we didn't chase it. And as a result, our mix was better than it was last year.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [13]

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Okay, good. And then you mentioned implementing initiatives to improve growth in the U.K. Could you just talk a little bit more about what you're doing there?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [14]

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Yes. We've had a difficult few quarters in the U.K. And U.K., just in general, is a fairly weak environment right now. Some of that associate with just the uncertainty around Brexit, some of it is our industry. But some of it is our execution in the market, and we're working on fixing the execution. And that really evolves around getting more collaborative with the independent dealer channel and working closer with the smaller dealers. We tend to work through bigger regional resellers, and I think the market has shifted from them to more smaller independents and we have not been as good there.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [15]

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Okay, that's helpful. And then lastly, you mentioned higher go-to-market investments hitting SG&A line. Can you just remind us or refresh us on what those investments are? And what the payback you're expecting from those are?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [16]

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Yes, we're investing in brands and more premium products. It's a longer-term investment. We haven't seen payback yet, but we certainly do anticipate that we will see, in the future, the demand for our more premium products and branded products will go up. So there will be a return in the future on this investment.

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Operator [17]

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Our next question comes from the line of Chris McGinnis from Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [18]

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Can you just maybe just talk, I guess, a little bit about the revenue decline in North America? And I guess, thinking about it for the year, should it get a little bit better because of the timing? It seems like last year was a little bit stronger and maybe so you have a little bit more difficult comps as well.

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [19]

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Yes, I think the comps were difficult, as Neal mentioned in our prepared remarks. Last year we had a 5% growth in Q2, so it was a difficult comp. But besides that, as we mentioned, lower commodity product sell-in was one of the drivers. The timing shift between Q2 and Q3 was another driver. And just lower sell-in into OSS, in particular, was another driver. So those 3 accounted for the majority of the sales decline in North America.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [20]

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Okay. So we should see, I guess, an improvement from that, that number probably going stronger in Q3 and Q4, I guess?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [21]

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We're certainly hoping for that. Yes.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [22]

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Okay. Can you maybe just talk about kind of the independent -- on the commercial side, just talk about the health? And are there any changes in that business impacting you?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [23]

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Sure. The commercial side for us was flat. So we didn't see the kind of declines that some of the other folks in this industry are reporting. And that's probably more of just the compare issues as well. Last year we saw a decline, so the compares there were a little bit easier. The independent channel is bifurcated. There are some resellers that are doing phenomenally well and are taking share and some, mostly smaller resellers, that are not doing well. So as long as you're working with the right resellers and remember, we're very broadly distributive, so it might take that we are working with the right resellers. That it's still a very healthy channel that's very able to compete with other alternatives out there.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [24]

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Great. And one last question and I appreciate the time. Just on the e-commerce and maybe just talk a little bit about the performance in the quarter. If you mentioned it, I apologize I missed it.

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [25]

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No, e-commerce continues to grow. The growth slowed down a little bit on a global basis, just I think it's just the law of numbers. The numbers are getting pretty big. But it is continuing to grow, especially, in some of the emerging markets and the U.S.

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Operator [26]

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Our next question comes from the line of Brad Thomas from KeyBanc Capital.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [27]

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Boris, I was hoping you talk a little bit about the outlook for the second half of the year here and how it's all at all that's changed based on the first half that you've put up? Obviously, your guidance still speaks to very strong growth and earnings in 3Q and 4Q. But I think if the Street moves to the high end of your range, Street numbers may need to come down a little bit for 3Q, 4Q. What, if anything, has changed about your outlook internally for the back half?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [28]

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Yes, thanks for that question, Brad. Nothing really changed. If anything, we're very pleased with our performance in the first 6 months. It's just so much of our year is still to come, and so much of our earnings are still to come. We really want to see how the back-to-school plays out before we change our numbers outside of the current range. And then, as we described in our prepared remarks, there will be a little bit of a mix shift between Q2 and Q3. So we do anticipate that there will be some gross margin impact in our Q3. But overall, we're still very positive for the year. And if back-to-school comes in the way we hope it will, then it's possible that our outlook is conservative.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [29]

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Great. And then with a few more months under your belt of owning Esselte, could you give us any updated thoughts you might have on the potential for revenue synergies from owning that business?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [30]

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I'm very -- continue to be very impressed with the Esselte business, with the Esselte team. As I mentioned in my prepared remarks, I spent a week traveling throughout Europe and visiting the facilities there and visiting the plants, specifically, and it's a very well-managed operation. So my expectations for Esselte, if anything, are higher now than they were before the acquisition. We are working on revenue synergies, that the teams are working on that. But that is still not baked into any of our numbers or outlook. But certainly, my hope and my expectation is that we will begin to see some of the revenue synergies in 2018.

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Operator [31]

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And our next question comes from the line of William Reuter from Bank of America.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [32]

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The first, in terms of the shift to the smaller independents in the U.K., I'm wondering whether this could be a little more costly than the historical channels of distribution that were getting, I guess, a greater percentage of the share in the past?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [33]

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It could be that from a SG&A perspective, there'll be a little bit more cost. But certainly, the margins there should justify the investment, the bigger resellers typically have lower margins. So on a -- from an operating income perspective, it would be neutral or positive.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [34]

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Okay. And then I don't know if we've gotten an update recently on your SG&A savings target for the year, which you guys have usually achieved over the last handful of years. Can you remind us what that number is for 2017?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [35]

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Yes, we didn't provide an SG&A target. We said the overall productivity target is around $20 million. And we're certainly are on track for delivering that. The reason that delivered lower this year than in the past couple of years is because a lot of our resources are focused on integration and not on driving productivity.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [36]

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Okay. And then just lastly for me. You had some modest share repurchases in the quarter. How are you thinking about uses of free cash this year in terms of -- I guess, in the context of share repurchases as well about evaluating additional acquisitions?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [37]

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We still anticipate that most of our free cash flow will be used for debt pay down. But as we've said before, we will be opportunistic with share repurchases. So if that happens, that could use some of the cash. And we will be opportunistic with acquisitions as well. So that could be a use of cash as well. But my expectation is, the vast majority of cash will be used for debt pay down.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [38]

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I guess, just lastly, one more if I can. On the acquisitions, can you comment, just at all, on the environment, in terms of where you guys are seeing? Where valuations are? And I guess, how big is the pipeline of opportunities you guys are seeing out there?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [39]

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We haven't seen much changes from what we discussed before. The pipeline remains rich. There's lots of candidates out there. As we discussed before, the valuations we think are appropriate with the exception of the adjacencies where they're a little bit high. So we're probably less likely to do on the adjacency space just given valuations. But as far as consolidating acquisitions or expanding in emerging markets, lots of candidates out there.

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Operator [40]

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Our next question is from the Hale Holden of Barclays.

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Walter Hale Holden, Barclays PLC, Research Division - MD [41]

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I was wondering if you could give us a little bit more color on Australia. I think you noted some weakness there, and I'm guessing it's related to the office superstore consolidation or ownership changes. I was wondering how long you thought that might extend for? Or what you're seeing on a go forward?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [42]

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Yes, Australia was a little weak. Some of that is just the general economy, which theirs is very much commodities driven. So that's the one factor but the other factor, as you rightly mentioned, is just what's happening with the channel there. We have the ownership transitions on the superstore end. And you have the biggest reseller there, Officeworks, trying to go public. So that was discontinuity in the status quo. My expectation that some of that is going to get better in the second half of the year. But the office superstore changes will -- are waiting for decision from the competition authorities, from Australian government. So that may take a few more months.

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Walter Hale Holden, Barclays PLC, Research Division - MD [43]

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Got it. And then my second question was just on Brazil, the growth was outstanding. And it's off cycle for their back-to-school this quarter. So I was wondering if you can just give us some more color on what maybe drove that.

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [44]

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Hale, say it again, please? Can you repeat the question?

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Walter Hale Holden, Barclays PLC, Research Division - MD [45]

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Yes, sorry, growth in Brazil?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [46]

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Yes, so Brazil, as you know, there has been a tough economic condition for the last couple of years. And I think what has happened is, we've taken significant share in difficult times as we were one of the few companies that could still develop innovative products, supply in a reliable and timely manner and provide some credit to our resellers. So we've been executing really, really well. And I have to compliment our team in Brazil for doing just a fantastic job. I'm very, very pleased. And as you mentioned, this is, really, even before our strong selling season, which is in the second half of the year. So we've done it really well.

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Operator [47]

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Our next question comes from the line of Karru Martinson from Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [48]

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I was wondering, just when we look at the e-commerce, the growth slowing, the law of large numbers. What percent -- where are we today as a percentage of sales? And where do we see that going here in the next, let's say, 2, 3 years?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [49]

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If you look at our sales, about 5% of our sales are to the biggest e-commerce player out there. And we think, probably, another approximately 5% to everybody else. The reason I say approximately is it's difficult for us to track those other e-commerce sales, since they don't buy directly from us. E-commerce still continues to grow faster than the average industry. But it is becoming a much bigger part of the pie. So it's just natural that some of that's going to slow down. And some of it also, probably, is just quarterly perturbations that will work its way out as we average throughout the year.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [50]

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Okay. And separate from the potential retail merger on the office superstore channel here in the U.S., I mean, is there any impact for one of the players going private? Does that change the dynamic for you guys? Or any share of shelf concerns?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [51]

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Nothing that we don't anticipate. Certainly, we don't believe that people change ownership and still run it the same way. There's a reason why they will change ownership. So we do anticipate that the superstores going private will mean, probably, accelerated store closures, for example. And as I mentioned, we are preparing for that and we are reducing some of our cost ahead of that in anticipation that's going to happen. And if it's not going to happen, that's an upside. But if it is going to happen, at least, we're prepared for it.

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Operator [52]

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Our next question comes from the line of Hamed Khorsand from BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal and Research Analyst [53]

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So first off, I just want to ask, given the transition we've seeing as far as the office superstores, is that lost opportunity? Given the ownership changes going on and so forth. Or it's just a temporary issue?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [54]

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The sellout doesn't really change, the end users still buys what they buy. It does impact our sales, we think, disproportionately, because a lot of their focus is on becoming more efficient in reducing inventory. So for example, when Office Depot and OfficeMax merged 4 years ago, they had x number of distribution centers. 4 years later, they have less than half of their distribution centers. So they focused a lot on efficiencies. The sellout wasn't really affected, whether end user bought for them or from somebody else. But there's a lot of -- less of our stuff in the supply chain and that does affect our revenue.

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Hamed Khorsand, BWS Financial Inc. - Principal and Research Analyst [55]

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And then from the aspect, if there's less of your items in the channel. Doesn't that mean your inventory could be too high? Or you're running it too high of a production rate? How are you adjusting to all that?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [56]

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Well, we build to demand. So we certainly -- if we see there's going to be a less demand, we reduce what we buy. Just to comment on the inventory, I think, the inventory is lower today in the channel than it's ever been. So we think all of our channel partners have become very, very efficient in carrying as little inventory as they can possibly have and still satisfy the demand of their end-users. So I don't think there's a big slack in inventory out there.

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Hamed Khorsand, BWS Financial Inc. - Principal and Research Analyst [57]

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Okay. And last thing is, just given from you were talking about product mix, is -- are you seeing any trends in the back-to-school where that product mix could benefit you or harm you more? I know you were saying you sold some lower-cost products, but just overall?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [58]

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Yes, we haven't seen enough of the back-to-school to draw any conclusions yet. So we -- it still has to play out, and I'll have to comment on that in our Q3 call.

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Operator [59]

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And our next question comes from the line of Carla Casella from JPMorgan.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [60]

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Most of my questions have been answered. But when you look at Staples and Office Depot, would you say your penetration is better in one versus the other? And what's your thought about a potential combination there? And then impact it would have on the business?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [61]

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We are very well distributed with both of those customers, they've been a long-term customers for us. So I'm very pleased with our share. And I don't really -- don't want to speculate on what may or may not happen there. I think we're preparing for the biggest implication on us and if it doesn't happen, there'll be an upside, as I mentioned. But other than that, I don't have anything additional. Just beyond, if you look at our -- how we've managed the business over the last few years in the face of all this consolidation, we -- I think we've done a really good job managing that particular consolidation. And my expectations is the future will be just as good.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [62]

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Okay, great. And do you also service Staples' B2B business?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [63]

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We do.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [64]

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Their service business?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [65]

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That's a bigger part of our mix is their B2B business and their consumer business.

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Operator [66]

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And I'm currently showing no further questions, and I would like to turn the call back to Mr. Boris Elisman, Chairman and CEO, for closing remarks.

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [67]

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Thank you, Brian. In closing, I want to thank you for your participation this morning and for your interest in ACCO Brands. It was another great quarter, and I'm pleased with the progress we're making in our business and the integration of our 2 recent acquisitions. I look forward to reporting to you next time with the success of our back-to-school initiatives in North America. Enjoy the rest of your summer, and thank you.

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Operator [68]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a great day.