ACCO Brands (ABD)

Q3 2011 Earnings Call

October 26, 2011 8:30 am ET


Bob Keller - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Neal V. Fenwick - Chief Financial Officer and Executive Vice President

Jennifer Rice - IR


Arun Seshadri - Credit Suisse

Karru Martinson - Deutsche Bank AG, Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Reza Vahabzadeh - Barclays Capital Inc.

Arnold Ursaner - CJS Securities, Inc.

Reza Vahabzadeh - Lehman Brothers



Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 ACCO Brands Corporation Earnings Conference Call. My name is Lacy, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's conference, Ms. Jennifer Rice, Vice President of Investor Relations. Please proceed.

Jennifer Rice

Good morning, and welcome to our third quarter 2011 conference call. Speaking on the call today are Bob Keller, Chairman 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 E-slides provide detailed information to supplement this call. When speaking to earnings per share, we are using a normalized effective tax rate of 30% and exclude the cost associated with the repurchase of our bonds.

During the call, we may make forward-looking statements and based on certain risk factors, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of those factors. Following our prepared remarks, we will hold the Q&A session. Now it is my pleasure to turn the call over to Mr. Keller.

Bob Keller

Thank you, Jennifer, and good morning, everyone. Earlier this morning we released our third quarter financial results and I'm pleased to report that despite continued global macroeconomic headwinds, ACCO Brands continue to execute well and deliver on our commitments. Sales grew 6% year-over-year, and our operating income margin expanded 100 basis points on sale volume that was essentially flat. EBITDA improved 16% and earnings per share increased 60% to $0.24. We've reduced our debt by almost $50 million through the repurchase of bonds which Neal will discuss shortly, and still ended the quarter with $41 million in cash and no borrowings on our ABL. Consistent with last quarter's performance, all of our business units contributed to our success. Sales in the Americas and in Computer Products were in line with our expectations and the ongoing turnaround of our European business contributed significantly to our bottom line results. Australia and our Asia-Pacific businesses continue to exceed our expectations. We're proud of what we've accomplished to date, but we're particularly pleased with our turnaround in Europe. We lost money there last year and after absorbing the cost of the changes we needed to make in Q1, we've been profitable in both Q2 and Q3. Our margins expanded there by 770 basis points in the third quarter and in spite of the volatility of that market, we expect further improvement in both margins and profitability in Q4. At a company level, we believe that we're well positioned to deliver on our full year 2011 commitments. Our customer relationships are strong, our people are energized, we've added talent to the sales part development and marketing leadership teams. Our new product pipeline is robust and we continue to compete aggressively for profitable growth opportunities.

In closing, while we're cautious about the external operating environment, we do feel good about our own performance. We are reiterating our guidance for the year, with sales expected to be up 2% to 4%, excluding currency, and earnings at the high end of our projected range, growing EPS about 30%, and ending the year with $100 million to $110 million in free cash flow. Now I'll turn the call over to Neal, for a more detailed look at our results. Neal?

Neal V. Fenwick

Thank you, Bob. Our third quarter performance is recapped on Slide 4. Reported sales increased 6% with a 4.5% benefit from foreign exchange. Pricing was favorable 2%, underlying volume was down modestly. Gross profit margin increased 100 basis points to 31.6%. Increases mainly due to improvements in Europe, resulting from price increases which have begun to offset the increases we've seen in our cost of goods as well as operational improvements in areas such as freight and distribution. SG&A expense as a percent of sales increased 10 basis points to 20.8%. Operating income increased 18%, with operating margin expanding 100 basis points to 10.4%. Our highest operating margin since 2007 before the recession began.

EPS from continuing operations, excluding the $0.05 cost associated with repurchasing our senior secured notes was $0.24 versus a comparable $0.15 in the prior quarter. For the nine months, sales increased nearly 5%, largely driven by foreign exchange and pricing. Volume was down 1.5% for the 9 months due to lower end market demand and customer inventory reductions in the first quarter.

As shown on Slide 5, gross margin increased 60 basis points for the 9 months period to 31.2%. Cost savings, particularly in freight and distribution, were the largest driver of improvement. SG&A was up 7% for the 9 months including a $6.9 million impact from foreign exchange. As a percent of sales, SG&A increased 60 basis points to 22.6% of sales, primarily due to the $4.5 million of reorganization cost in Europe and $3.7 million of higher incentive compensation costs. These were partially offset by operational improvements mainly in Europe.

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