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

Thomson Reuters StreetEvents

Q3 2017 ACCO Brands Corp Earnings Call

LINCOLNSHIRE Oct 31, 2017 (Thomson StreetEvents) -- Edited Transcript of ACCO Brands Corp earnings conference call or presentation Monday, October 30, 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

* Hale Holden

* Hamed Khorsand

BWS Financial Inc. - Principal & Research 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

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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 Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jennifer Rice, Vice President, Investor Relations. Ma'am, you may begin.

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

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Good morning, and welcome to our third 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 may refer to adjusted results. Adjusted results exclude transaction, integration, and restructuring, and financing-related costs 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. We reported our third quarter results earlier this morning, and I'm very pleased with our performance for both the quarter and the first 9 months. For the quarter, we met our internal sales goals and exceeded our profit estimate, driven by stronger-than-expected gross margin. Sales grew 23% as a result of the Esselte acquisition. Net income grew 35% to $0.28 per share from $0.21 per share, and adjusted net income improved to $0.35 per share from $0.29 per share, thanks to a combination of the Esselte acquisition, lower interest expense and lower effective tax rate, higher gross margins in North America, and further cost saving. While the acquisitions of Esselte in Europe and Pelikan Artline in Australia have been important developments, the underlying performance of the company continues to improve as well.

Our North America segment had a strong quarter, driven by a good back-to-school season that delivered similar results to last year's extraordinary season. We were encouraged that the product mix was favorable to last year, with sales of premium-branded products, primarily the Five Star brand, outpacing sales of our value brands in private-label product. During the back-to-school season, we performed well in the mass and e-tail channels but that was offset, as expected, by lower sales in the office superstore channel. We continue to demonstrate that we're managing the channel transition well due to demand for our strong brands and our broad market penetration.

In the EMEA region, sales increased substantially because of the Esselte acquisition, and also because of favorable foreign exchange. The integration of the former ACCO Brands Europe and Esselte businesses is proceeding smoothly, and I'm pleased that the sales and marketing organizations are making good progress in identifying ways we can cross-sell our portfolio of premier brands across the expanded ACCO Brands EMEA footprint. We're optimistic that their efforts will bring incremental sales opportunities.

The EMEA management team is also focused on reestablishing sales growth in the challenged U.K. market. And we saw improvements in our execution and in sales during the third quarter.

The International segment was flat on the top line, despite modest positive contributions from both the Esselte acquisition and favorable foreign exchange. Our businesses in Brazil and Mexico performed very well in the quarter beating our sales and profitability expectations. Sales in Australia were lower than we would've liked because of a shift of back-to-school orders from Q3 to Q4. The integration of ACCO Australia and Pelikan Artline is largely complete, and now we're hard at work on optimizing and improving the efficiency of the combined businesses.

With better visibility into Q4 sales and the 9-month year-over-year adjusted EPS improvement from $0.55 to $0.71 per share, we're raising our expectations for 2017 revenue and adjusted EPS. We now expect sales to increase 24% to 26% and adjusted EPS of $1.13 to $1.16.

Now I'll ask Neal to take you through the specifics of the quarter and 9-months results. Neal?

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

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Thank you, Boris, and good morning, everyone. Third quarter sales increased 23% driven by the Esselte acquisition. Comparable sales at constant currency decreased 3%, primarily the result of the later timing of back-to-school shipments in Australia and lower sales in legacy ACCO Europe. Net income was $30.6 million or $0.28 per share. This compared to reported net income of $22.7 million or $0.21 per share in the prior year. Adjusted net income was $38.8 million, or $0.35 per share, up $0.06 versus last year with the improvement coming from acquisitions, lower interest charges and a lower effective tax rate. During the quarter we repurchased 2.7 million shares of stock at an average price of $11.16 per share. Year-to-date, we have repurchased 3.2 million shares at an average price of $11.20 per share.

Looking at the specifics of the quarter. Reported and adjusted gross margin were 33.4%. Reported margin was flat versus prior year and down 10 basis points to adjusted gross margin, as detailed on Slide 5 of our deck. Excluding acquisitions, adjusted gross margin improved 20 basis points. Cost savings mainly drove the margin improvement, which was better than expected due to favorable back-to-school mix in North America. Overall, the Esselte business is less seasonal than ACCO, so it adds to gross margin in H1 and detracts from gross margin during second half.

SG&A expenses were up in the quarter, primarily due to the acquisition. As a percent of sales, SG&A was up 110 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, severance, increased incentive compensation expense and the acquisition.

Turning to an overview of our segments for the quarter. In North America, sales increased less than 1% and excluding acquisitions, decreased 1%. Back-to-school sales met our expectations and were better than the broad market, which was down. The underlying decline was primarily due to lower sales of commodity items in the U.S. and Canada, partially offset by strong sales of Five Star branded school products. North America operating income and margin were both up in the quarter due to the higher gross margin resulting from a favorable back-to-school product mix and lower customer sales rebates, together with cost reduction.

In our EMEA segment, sales increased 245% as the Esselte acquisition added $102 million of sales in the quarter. In Q3, we have largely completed the integration of the sales and marketing functions of the 2 legacy businesses and are beginning to transition some manufacturing and distribution capabilities to enable lower cost production and consolidated customer shipments. Excluding the acquisition and the effect of currency, comparable legacy ACCO Europe sales decreased $4 million due to share loss and lower volume. EMEA operating income and margins increased due to the acquisition. We continue to be pleased with the performance from the Esselte acquisition. Full year-to-date sales were flat with profits slightly up due to cost reduction.

International sales were roughly flat, acquisitions added $1.5 million. Excluding acquisitions and currency translation, sales decreased $4 million. The decline was primarily in Australia where several customers moved their back-to-school shipments from Q3 to Q4. Otherwise, we saw sales growth in Brazil and Mexico. International operating income decreased primarily due to the lower sales as well as temporarily higher distribution costs associated with footprint and IT consolidation in Australia. The decrease was mitigated in part by improved profitability in Latin America.

As detailed on Page 9 of our slide deck, we have provided updated modeling assumptions mainly related to FX and tax changes.

Turning now to our cash flow and balance sheet. Free cash flow was $102 million in the quarter. For the full year, we still expect free cash flow of approximately $150 million with our strong cash generation in the fourth quarter. As previously reported, the full year free cash flow impact from the Esselte acquisition is not anticipated to be significant.

One final notable point is a strong year-to-date improvement of $34 million in our adjusted EBITDA, which has led to our net leverage, per our bank covenant, to drop below 3x. This gave us a 50 basis point reduction in our LIBOR-based interest rate for Q3 and going forward, saving approximately $800,000 per quarter.

Now with that, I'll conclude my remarks and move onto 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 Brad Thomas with KeyBanc Capital.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [2]

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I wanted to first ask about the fourth quarter and I know that's typically an important quarter for you in Brazil. Could you maybe talk about underlying trends in that market and some of the other puts and takes as we think about 4Q and 1Q and back-to-school for the rest of the world?

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

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Yes, sure. Fourth quarter, as you said, is very important for us, it's our most profitable quarter. It was expected to be our most profitable quarter. And not only is it driven by back-to-school sales in Brazil, but also back-to-school sales in Australia and a very strong selling season in Europe, the back-to-business selling season in Europe. Specifically on Brazil, we are expecting to have a good back-to-school, just given on the trends we've seen year-to-date, plus the improving economic conditions in Brazil. But as we remind you on an annual basis, we can't really predict how much of that would fall into Q4 versus Q1 because a lot of the shipments in Brazil also spill over into January. But overall, if I look at the back-to-school season, we do expect an improvement versus prior year in Brazil.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [4]

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Great. And then a follow-up on free cash flow, if I could. Neal, you mentioned that your company's on track for the $150 million this year, I believe you all had previously stated that Pelikan could add $15 million and Esselte could add, I believe, $55 million to free cash flow each over 3 years. Could you talk a little bit about where you think maybe free cash flow could come in for 2018 and 2019, and how those 2 would ramp up and just your latest thinking on that would be very helpful.

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Neal V. Fenwick, ACCO Brands Corporation - CFO and EVP [5]

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Sure. Obviously, free cash flow is one of the pieces of our story that's very strong. We saw this year, the addition of the Pelikan cash flow, offsetting that was the fact that we're now having to start to pay U.S. taxes. We exhausted our U.S. NOLs. Esselte added 0 to our cash flow during the year, or will add 0. It'll add a little bit in the fourth quarter because it's been negative year-to-date. And fundamentally, that's because all of the expenses related to the acquisition and items left on the balance sheet and that was as we expected and forecasted at the beginning of the year. So obviously, as we move forward, you will see a significant increase in our free cash flow generation. We anticipate that being, by the time we work through the Esselte acquisition, so let's go forward 2 years, I'll answer your 2019 question, we would anticipate that being in the ballpark of $200 million, so $190 million to $200 million. As for 2018, we'll give that guidance in February. I'm working through a number of tax issues, which I'd like to finalize on before I actually give that color. But it'll be significantly up on this year.

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Operator [6]

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Our next question comes from Kevin Steinke with Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [7]

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Just wanted to dig a little bit into the increased guidance. You talked about the stronger-than-expected gross margin. So is that the key driver of the guidance raise and something that would -- we should expect to continue into the fourth quarter in terms of that stronger gross margin?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [8]

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The key behind the gross -- the earnings raise is the gross margin -- higher gross margin dollars that we expected, yes. And it's driven by a primarily higher gross margins in North America, which were driven by better product mix than we expected. As Neal mentioned in his remarks, we -- even in prior quarter, we anticipate some of the Esselte mix to offset the gross margin dollars because they are less seasonal and they are accretive in the first half, dilutive to our margins in the second half. But the positive mix largely offset much of that in Q3. So as a result of that beat versus expectations, that's what's driving the raised EPS guidance.

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

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Okay. And what would you attribute the better product mix to? You talked about preference for branded products and back-to-school. I mean, can you just delve into that a little bit further, what's going on there?

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

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I attribute it to superior execution on the part of our teams, on the part of our marketing teams, on the part of our sales teams. We have done a great job with the new products that we introduce every year for back-to-school. And even though '16 has been a phenomenal back-to-school for us, with sales out and being up in the 7% to 8% range. In '17, we nearly comped those sales in a difficult environment, in a declining office superstore store count. So I'm very pleased with the results. And again, I attribute it to the superior assortment and the job that our teams have done.

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

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Okay, great. And I think when you're talking about Esselte and the integration that's ongoing, you seem to talk more about incremental cross-selling or potential revenue synergies there in addition to the cost synergies. So are you finding more opportunities for those incremental revenue synergies than you had before? Or just, if you could expand on those comments please?

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

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Yes, Kevin, we are working -- our teams are working very, very hard to uncover sale synergies, especially on the continent of trying to leverage the great presence we have all over continental Europe, with the 100-plus sales reps to try to sell more legacy ACCO products. I do believe that we will get some. I'm not ready to quantify them. But I do believe that we will have positive sales synergies in 2018 as a result of the combination. This is something that is high priority for us. It was not part of our acquisition thesis. But it certainly would be a nice incremental return if we're able to get that.

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

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Okay, great. And then lastly, any further read on the impact of Staples going private and your planning for that? Or what you're seeing in the market from that so far?

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

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No, we haven't seen anything yet. Staples continues to operate the way they did before. We don't really expect much of a change in the near term. But certainly, in the medium-term, there are likely to be some changes and whatever they are, I'm sure we'll be prepared and we'll be able to react to those changes.

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Operator [15]

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Our next question comes from Chris McGinnis with Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [16]

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I was just wondering -- maybe just digging a little bit more into North America, how do you expand on this next year, the strong performance, the market share gain? When you're thinking about next year, I know it's early but just how do you go about growing that business the way you have over the last few years?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [17]

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You know there's always opportunity to improve. We're good, but we're not perfect. And we know a lot of areas where we can get incremental business and our teams are working on this right now. Because it's really, by the end of this year, where many of those presentations will be made. And maybe not decisions, but certainly directions will be understood. So we need to retain what we had and we need to improve on the promotion efforts to sell out more and we need to gain more placement on products that we didn't have. As I mentioned a quarter ago, we make decisions on whether to win a bid or not depending on whether there's gross margin dollars attached with it. And I think we have, over the last 6 months or so improved our cost structure. So I believe that we'll be able to win more of value businesses. So we need to do that, while still retaining the premium placement that we've had with Five Star and Quartet brands. So I do think that there's an opportunities to do more next year. And certainly, our teams will be trying to do that.

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

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Great. And then just one other follow-up question. Just on the cost synergies from Esselte, I think it's $23 million. Can you just maybe talk about how comfortable you feel with that and is there room for that to go up over time?

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

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I feel very confident in achieving the $23 million in synergies. I am not ready to commit to a higher number at this point in time. We will certainly review it and monitor it and update you if there is that opportunity. But we are on track, we are on track with all of the integration activities and I'm confident in getting to $23 million.

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Operator [20]

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Our next question comes from Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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Boris, a couple of things just you mentioned on the category growth for the quarter. I guess, first, Neal had said that the U.S. back-to-school was slightly down over the -- even though you outperformed and had a -- what you felt a good quarter. Can you kind of talk about that? Were there any signs of concern from the overall category? Where did you win that helped you kind of outperform? Was it across all channels or was it just specifically, in maybe more placement in mass? Maybe just give us a little more color there as well?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [22]

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Sure, we won largely in mass and in e-tail. That's where we saw our strong growth. Especially, in our Five Star branded products. And also in our Quartet branded products. So we did really well there. We had a kind of choppy performance, I would say in the drugstore channels. Some were up, some were down. And then sales out in the office superstore channel were down as that channel went more towards private label. But overall, net-net, sales out for this season were down around 1%, which was better than the -- the market overall.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

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Any thoughts about the overall category being down? Was that -- I know it was a tougher comparison for the whole category but anything else to be concerned about?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [24]

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No, it didn't seem that way, Bill. I mean, it's -- the decline was driven significantly by -- I'm talking about the market overall, it was driven significantly by the performance of office product superstores. That's going to play its way out over the next couple of years one way or the other. The mass channel, which drives the majority of back-to-school and the order of 70% to 75% did really well. And then more -- bigger and bigger shares now shopping online. That's still small, as far as back-to-school is concerned but it's growing very, very nicely and we have good presence there. So, I think as we look at the overall mix, I don't see anything to be concerned about.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [25]

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Got it. And then switching actually to Australia, continuing here at least on the grocery front, there's a pretty intense competition, price wars, stuff like that. Is that having any incremental impact on you or the office supplies category?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [26]

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This has had impact on us over the last couple of years. We've seen that play out -- really starting 2016 and then into 2017, where some of the mass accounts have deemphasized some of the categories in order to improve their profitability. From an incremental and go-forward perspective, I don't see much change but certainly for -- in the last couple of years, it's been a tough market.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [27]

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Okay. And then last one from me. In terms of use of cash, now that it's coming in pretty strong in the back half, any other thoughts beyond acquisitions or share repurchase about using that cash?

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

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I think I spoke last quarter, that as our balance sheet gets cleaned up and our sales are more stable, the board is looking at all of the capital allocation alternatives, including dividends. Obviously, it's the board's decision and we haven't -- the board hasn't decided on anything yet. But we're looking at all ways to return capital to our shareholders.

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Operator [29]

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Our next question comes from Hamed Khorsand with BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [30]

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So I just want to understand, maybe the specific commentary around Australia and the shift in revenue. Last quarter you were talking about that, it's a weak economy, this time you're talking about being pushed out. Which one is it? Are you seeing big change here as far as spending habits go from your customer base, is it the weak economy?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [31]

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Well, the weak economy part hasn't changed. But during the back-to-school season, our quarters can be significantly made by what loading happens for, for inventory, for back-to-school. And last year, several large customers have ordered in the end of Q3 on September, which is end of Q3. This year, they didn't order at the end of Q3. Their forecast and our forecast is still for them to order in Q4. So that's why it's a shift. So hopefully it will happen, we're counting on that to happen. A year from now, maybe going back the other way and they'll order back in Q3. So it's very difficult to predict what happens quarter-to-quarter in a highly seasonal business.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [32]

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And the products that you saw them purchase in this quarter I guess from the shift, is that higher margin or lower margin product than usual?

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

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Typically, from a -- it's an interesting question, that's why I'm hesitating. Typically the product themselves, the products that are ordered for back-to-school have a slightly lower gross margin. But the volume effect helps offset some of the fixed distribution costs. So overall, when you look at our gross margins during the high volume seasons, they tend to go up. So the gross margin in Australia, for example, in Q4 should be higher than in Q3.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [34]

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Got it. And then my last question just a follow-up on that capital question. Just the -- you haven't been paying down your debt as much as it was expressed earlier this year. Are you looking to pay down the debt more or it could be assumed you might hold off on making acquisitions for the time being since the debt to EBITDA is still higher than you'd like?

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

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No, we're still on track with our plans. We pay our debt -- our cash flow is very seasonal and we pay our debt down typically in the last 4 months of the year because this is when we get most of the cash flow. Now, we did buy a little bit more shares as Neal mentioned in his prepared remarks, than we initially thought we would. But still, we do expect to pay debt down in the remainder of the year. And I do anticipate that by the end of the year our net leverage ratio would be in the, call it 2.7x rate.

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Operator [36]

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Our next question comes from William Reuter with Bank of America.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [37]

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In terms of -- you guys talked about the market being down in the U.S., I didn't hear you guys quantify how much you thought the market was down. Do you have a sense for either in dollars or units how much you think the market may have been down in the U.S. this back-to-school season?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [38]

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I mean dollars, in the 2% to 3% range down.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [39]

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Okay. And then you guys in -- I think you laid out a cost savings plan for this year of $20 million. I guess, can you talk about where you guys are in terms of achieving that goal. And I know you probably haven't laid out your budget for next year fully, but how you guys are going to view that opportunity generally?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [40]

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Yes, we're on track to exceed that a little bit. So we are at about 110% of target right now on the cost savings for the year. And while we haven't set our budgets for '18, I can assure you that our goal is going to be higher than $20 million for next year.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [41]

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Okay. And the last time I had heard you guys update us on your leverage target, you were hoping to be in the 2 to 2.5x range. Is that still where you guys hope to be?

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

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That's still the target, yes.

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Operator [43]

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Our next question comes from Hale Holden with Barclays.

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Hale Holden, [44]

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I just had 2 quick ones. On cash taxes, now that you've exhausted the NOLs, I was wondering how we should think about that on a go-forward basis?

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Neal V. Fenwick, ACCO Brands Corporation - CFO and EVP [45]

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So obviously, U.S. cash taxes are increasing quite sharply. We've managed to delay some of the instances of that during the current year and postpone it. But there's a -- there will be a significant increase in U.S. cash taxes next year. Conversely, I'm looking at our international operations based on the acquisitions we've just concluded and we're looking to see what offsets we can make. And that was fundamentally why I declined to discuss it. Obviously in -- just to give you some ballpark, we had been enjoying approximately $50 million of NOLs each year in the U.S. business. And so just at a very simplistic rate, that was going to add $18 million of taxes to the U.S. So we will have had approximately 40% of that impact this year and the negative will impact next year. But we have other issues that will offset that. And as I mentioned earlier, overall I'm expecting our free cash flow to be up significantly next year.

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Hale Holden, [46]

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Great. And then -- I just was hoping you could clarify the -- with Esselte, was the gross margin seasonal drag or hit is in a second half of the year for the consolidated company?

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Neal V. Fenwick, ACCO Brands Corporation - CFO and EVP [47]

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It's less of a -- it itself doesn't have a seasonal drag. It has very stable margins. It's the underlying ACCO business that is seasonal. And so we have very high gross margins in the second half of the year and so it's just math that causes it to be a slight dilution effect.

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Operator [48]

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Our next question comes from Karru Martinson with Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [49]

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You guys talked about the e-tail side of the business being small, especially for back-to-school. I was wondering, when you look at the Amazon Business Prime, they expanded their shipping, they're currently continuing to grow, when you think about that e-tail business where does that go today, where is that today and where does that go over the next couple of years?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [50]

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So e-tail, overall, is becoming a significant part of our business. But for back-to-school, specifically, it's a smaller part of the back-to-school season because a lot of the back-to-school season is experiential shopping parents and kids in the stores. So it's less than -- e-tail is less than 10% of back-to-school. Whereas, overall, it's 15% to 20% of their overall purchases. Most of e-tail purchases today for our types of products are for individual consumers and for home and small businesses. Amazon business is growing, but it's still a relatively small part of the business and the majority of purchases through Amazon, specifically, is also consumer and home businesses.

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Operator [51]

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Our next question comes from Carla Cesella with JPMorgan.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [52]

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I'm wondering if you can give us a sense for how much the margins differ between the branded and the private brand products or how much they could differ by retail channel?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [53]

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Is your question on the margins for us? How much have the margins differed for us between branded and private label?

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [54]

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Yes. Could you mention the mix shift in greater Five Star helping...

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [55]

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Yes. It could be 10% to 20%, so it's -- 20 basis point. It's significant. So we're talking about 30 to 40 versus 20 to 30 versus 15 to 25. It's a significant difference between branded, especially the premium brands such as Five Star and private label.

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Neal V. Fenwick, ACCO Brands Corporation - CFO and EVP [56]

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And Carla, we also see a significant difference between our own brands, between our premium brands and our value brands. And so what we've discussed was the fact that we had a significant shift towards our premium brands during back-to-school, right?

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [57]

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Okay, great. And then just one follow up, you mentioned the European, you've been exiting some of the larger accounts there. At what point will we have annualized that process or is that something that's going to be ongoing beyond this year?

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

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Carla, say it again. I missed the -- we've been what in the large accounts?

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [59]

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The exiting of some of the lower margin accounts in Europe. Will we -- will you be finished with that this year or is that something we'll continue to see in the numbers?

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [60]

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No, my expectation is that we will be finished this year. I think, much of that is a result of the decisions that we made last Q4 for the 2017 catalog season. So it's certainly my hope that we will work through all of that, or most of that during this year and then we will begin to grow again in 2018.

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Operator [61]

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I'm showing no further questions at this time. I'd like to turn the call back over to Boris Elisman, Chairman and CEO, for closing remarks.

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Boris Y. Elisman, ACCO Brands Corporation - Chairman, CEO and President [62]

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Thank you, Shannon. Once again, we had a great quarter, bolstered by a solid back-to-school season in North America and our acquisition of Esselte in Europe. I look forward to reporting a strong finish to the year when we're back with you again in February. Thank you very much for being on call, and have a nice day.

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Operator [63]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.