First Quarter Post Call Commentary

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Post Call Commentary

A Look into the Fourth Quarter and Full Year 2022 Results

Joe Gomes

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Industrials

Industrial Products

Acco Brands Corporation

Fourth Quarter Operating Results
For ACCO, the year 2022 was a tale of 2 halves. The Company began the year strong as customers turned to ACCO for surety of product for the important back-to-school season, and as office occupancy rates rebounded in North America. In the EMEA segment, ACCO enjoyed strong volume growth for computer and business products with sales tracking above pre-pandemic levels through the first half of the year. The positive first half began to change in the summer of 2022, starting in EMEA as high levels of inflation, the war in Ukraine, and the energy crisis dampened consumer and business demand. In North America, retailers became concerned about an impending economic slowdown, and began to take an aggressive stance on reducing inventory levels in the third quarter that continued throughout the fourth quarter, leading to lower overall demand in the North America segment. These actions were on top of the impacts from pulling orders forward into the first half of the year. All of these factors reduced sales volume in the back half of 2022. Profit in 2022 followed a similar trend as the rate of inflation continued to increase throughout 2022, for raw materials, finished goods and transportation, and outpaced ACCO&#8217;s aggressive pricing actions, which included numerous price increases throughout the year.
The snowballing of these effects were seen in the fourth quarter results. In the fourth quarter, ACCO reported revenue of $499.4 million, down 12.4% from 2021&#8217;s $570.3 million. Adverse foreign exchange reduced sales by $25.5 million, or 4.5%. Comparable sales fell by 7.9%.&nbsp;Both reported and comparable sales declines were due to weaker sales of gaming accessories, lower inventory replenishment by retailer customers, and reduced volumes due to a deterioration in the macroeconomic environment, more than offsetting global price increases.
Fourth quarter comparable net sales in North America decreased 16% to $227 million. The decrease was due to volume declines for gaming accessories, lower inventory replenishment by retailers, and a slowing demand environment. Quarterly operating income was $8.9 million, down from $34.2 million in 2021, while adjusted operating income fell to $18.7 million from $41.9 million in 2021. North America adjusted operating income margin in the fourth quarter decreased due to negative fixed cost leverage from the volume declines, higher cost of finished goods and specific commodity materials, and higher inbound freight and outbound transportation costs that were not offset by price increases. Adjusted operating income was also negatively impacted by the previously mentioned one-off items, which contributed the equivalent of 340 basis points to margin rate decline in the fourth quarter.
Fourth quarter EMEA segment net sales of $156.0 million decreased 17.0% versus the prior year&#8217;s segment revenue of $187.9 million. Adverse foreign exchange reduced sales by 11.7%. Comparable sales of $177.9 million decreased 5.3% versus the prior-year period. Both reported and comparable sales declines were due to lower volumes which more than offset price increases. In Europe, the current energy crisis and significant inflation have created a challenging macroeconomic environment impacting sales. Fourth quarter operating income in EMEA was $12.7 million versus $21.6 million a year earlier, and adjusted operating income was $18.4 million compared to $24.9 million a year ago. The decreases in both reported operating income and adjusted operating income were due primarily to lower sales and reduced gross margins reflecting negative fixed cost leverage and higher costs for finished goods, raw materials and freight due to significant inflation. In the fourth quarter, EMEAâ€™s operating margin improved on a sequential basis benefiting from pricing actions and deflation in certain product and transportation costs.
The bright spot in the quarter was the International segment. Fourth quarter segment sales of $117.7 million increased 5.7% versus the prior year&#8217;s segment revenue of $111.4 million. Adverse foreign exchange reduced sales by 1.8%. Comparable sales of $119.7 million increased 7.5% versus the year-ago period. Both reported and comparable sales increased primarily due to price increases, more than offsetting lower volumes. Strong sales in Brazil benefited from a return to in-person education. Fourth quarter International segment operating income was $22.7 million versus $20.9 million a year earlier, and adjusted operating income was $24.3 million compared to $22.9 million a year ago. The increases in both operating income and adjusted operating income were due primarily to price increases, and the strong performance in the&nbsp; Company&#8217;s Brazil business.
ACCO reported overall operating income of $35.6 million in the quarter, including the impact of a $7.3 million restructuring charge, compared to operating income of $63.6 million in the fourth quarter of 2021, which included $4.3 million of one-time items. For the fourth quarter, net income totaled $18.8 million, or $0.20 per share, compared to $53.5 million, or $0.55 per share in the same period last year. The fourth quarter of 2021 benefitted from an abnormally low 6.5% tax rate, compared to a 34.5% tax rate in the fourth quarter of 2022. On an adjusted basis, ACCO reported EPS of $0.32 versus adjusted EPS of $0.54 in the fourth quarter of 2021.
Disappointing 2022 for PowerA&nbsp; 
 
Sales of gaming accessories were down 26% for the year. In 2022, the gaming market faced a number of challenges and a difficult comparison to 2020 and 2021, when consumers spent more on in-home entertainment activities due to the pandemic. As demand for the category softened with the reopening of other activities, many retailers engaged in aggressive inventory destocking. The gaming market also experienced semiconductor chip shortages throughout 2022, which limited both video gaming consoles and gaming accessories production.
We continue to believe in the long-term growth opportunity for gaming accessories. ACCO is executing plans to expand its product assortment and accelerate growth in the EMEA and International segments. In 2023, we expect the industry backdrop to stabilize and improve as the year progresses with semiconductor chip supply and new console production improving, which should bode well for PowerA. In addition, there are several new game titles coming to market in 2023, which historically has spurred greater gamer engagement and the sales of associated gaming accessories. 
 
Cost Control and Restructuring 
 
As we have discussed previously, ACCO has been active on the cost front: limiting discretionary spending, implementing office hiring freezes, flexing direct labor headcount with volume, and closely managing the SG&amp;A cost structure throughout the year. In the fourth quarter of 2022, the Company implemented additional cost savings and restructuring activities in North America and EMEA, intended to expand margin through initiatives focused on improving operating efficiency and reducing costs.&nbsp;In the Company&#8217;s North America segment, the plan is focused on consolidation of supply chain operations, SKU reduction, automating sales support process, and sourcing optimization. In the Company&#8217;s EMEA segment, the focus is on reducing redundancy and enhancing productivity in its operations, SKU reduction, and sourcing initiatives. The cost initiatives are expected to drive $13 million in annual cost savings, the vast majority of which will come in 2023. ACCO took a $7 million pre-tax restructuring charge in the fourth quarter related to these actions. Management expects normal ongoing productivity initiatives to yield another $15 million of incremental savings in 2023.
Balance Sheet and Cash Flows 
 
 ACCO remains well capitalized with no debt maturities until 2026 and low fixed interest rates for over half of the outstanding debt. At year-end, there was $62.2 million of cash and equivalents on the balance sheet. Long-term debt totaled $936.5 million. The Company&nbsp;ended the year with a consolidated leverage ratio of 4.2x. This was higher than expected due to lower EBITDA and free cash flow. Longer term, management continues to target a net leverage ratio in the the 2x to 2.5x range. 
 
For the full year 2022, ACCO generated $78 million in adjusted free cash flow, below management&#8217;s expectation of $90 million to $100 million, with the shortfall due to lower EBITDA and a greater proportion of paid inventory given the timing of inventory receipts. As this timing normalizes, it should provide a tailwind in 2023. For the full year, inventory was down $33 million or 8% despite the higher inflation. This puts the Company in a good position for a normal working capital cycle in 2023. The Company&nbsp;utilized free cash flow to fund dividends of $29 million, paid a contingent earn-out of $27 million, and repurchased $19 million of shares.
Updated Projections 
 
According to management, 2023 will be about focusing on four key priorities. First, the Company is laser-focused on restoring gross margin. ACCO has implemented multiple rounds of price increases, including the most recent round on January 1 of this year. ACCO maintains the ability to continue to raise prices to offset inflation, if warranted. ACCO&#8217;s ongoing productivity program delivered $20 million in mostly Cost of Goods savings in 2022. This included actions to improve supply chain processes and consolidate manufacturing and distribution footprints in North America. The Company plans to reduce the number of SKUs offered globally to simplify the manufacturing and distribution processes, improve sourcing capabilities, and reengineer current product specs for lower cost. These actions will meaningfully mitigate the inflationary pressures experienced over the last 18 months and improve overall gross margin. We expect management to continue to evaluate additional cost reduction measures, including facilities consolidations in response to current macroeconomic environment and secular trends.
The second priority is to profitably manage the top line in what is expected to be a slow economic environment, especially in the first half. We believe ACCO has a nice spread of product covering most price points, providing consumers with choice and the ability to &#8220;tradedown&#8221; if necessary. For example, historically, the Company has been able to do that with the Five Star and Mead brands, Five Star and Hilroy, and Leitz and Esselte brands. The third priority will be to continue to invest in the product innovation, key brands, and growth initiatives, as innovation and new product development have been a key factor behind the successes of ACCO&#8217;s brands and their ability to grow or maintain leading market share positions. Finally, management will continue to manage SG&amp;A spend to improve management of headcounts and discretionary expenses. 
 
We continue to believe the solid fundamentals of ACCO&#8217;s businesses are intact, and we believe the Company has the right strategy to weather the current economic slowdown and continue to deliver sustained organic revenue growth as the economy improves. The transformative actions taken over the past few years to be more consumer-centric and geographically diverse are key competitive advantages, in our view. The uncertain economic environment will go a long way to determining 2023 results. If we get better than expected performance, than ACCO may be able to exceed our expectations. The first half of the year will be challenging but we expect improvement in the second half of the year. For the&nbsp;first quarter, we are projecting revenue of $390 million and adjusted EPS of $0.04. For the full year, we are at revenue of $1.91 billion and adjusted EPS $1.11 per diluted share.

Acco Brands Corporation (ACCO)

Post Call Commentary

Fundamental Analysis:

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First Quarter Post Call Commentary (ACCO)

A Look into the First Quarter (ACCO)

Post Call Commentary (ACCO)

A Look into the Fourth Quarter and Full Year 2022 Results (ACCO)

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