Acco Brands 2026 Q2 Earnings Call

Good morning, welcome to ACCO Brands' conference call to review our second quarter results. Speaking on the call today is Tom Tedford, President, Chief Executive Officer of ACCO Brands, Deb O'Connor, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the investor relations section of accobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude amortization and restructuring costs, non-cash goodwill and intangible asset impairment charges, bargain purchase gain, unusual tax items, include adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedules of adjusted results and other non-GAAP financial measures, a reconciliation of these measures to the most directly comparable GAAP measures are in the earnings release and slides that accompany this call.

Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking non-GAAP financial measures. Forward-looking statements made during the call are based on the beliefs and assumptions of management, based on the information we have at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties, our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain risk factors and assumptions. Our forward-looking statements are made as of today, we assume no obligation to update them going forward. Now, I will turn the call over to Tom Tedford.

Thank you, Chris. Good morning, everyone, thank you for joining us today for ACCO Brands' second quarter earnings call. Last night, we reported second quarter results with sales and adjusted EPS exceeding our outlook. We are pleased with our first half performance, reflecting the results of our multi-year cost reduction program and our renewed focus on commercial excellence and strategic growth initiatives, including the recent acquisition of EPOS. Our work integrating EPOS is progressing as planned, we are pleased with the results in the quarter. Based on the first half performance, we are raising our full year outlook for both sales and adjusted EPS, while maintaining a prudent view of the second half of the year. Our outlook reflects the seasonally adverse product and geographic mix in the back half of the year, as well as an uncertain global operating environment.

Deb will review the details of the drivers of our revised annual outlook. Second quarter consolidated sales grew 5%, ahead of our expectations, driven by strong performance in the Americas segment, solid contribution from the EPOS acquisition, and favorable foreign exchange. In the Americas segment, sales benefited from strong back-to-school placements in North America and solid growth in Mexico. This more than offset weak industry demand in technology peripherals, as well as soft demand in Brazil. North America back-to-school is an important season for ACCO Brands, and product sales and margins are recovering from the tariff disruption a year ago. Our focus on creative product solutions, strong supply chain support, and compelling value for our consumers has been well-received by our channel partners.

In Latin America, sales were mixed, with strong performance in Mexico offset by weaker sales in Brazil due to a soft economy, which has created hesitancy in customer purchasing and an adverse product mix. Over the past several quarters, we've adjusted our product assortment, go-to-market strategies, sales incentive plans, and pricing where appropriate to better align with consumer needs. In the international segment, sales growth was driven by the EPOS acquisition and favorable foreign exchange. Demand in Australia and EMEA was weaker than expected due to geopolitical and economic conditions. EMEA sales were also negatively affected by a systems upgrade at our largest distribution center in Europe. That upgrade is now behind us, with performance improving in June. Sales for technology peripherals were soft in the second quarter.

The difficult demand environment for peripherals reflects cautious spending from end users due to elevated hardware costs, constrained memory chip availability, a soft console gaming market, and shifts in enterprise investments to AI. We expect these trends to continue in the second half of the year. In gaming accessories, second quarter comparisons were difficult due to last year's initial load-in of accessories for the Nintendo Switch 2 launch. We remain optimistic in our PowerA brand and believe we are well-positioned to benefit when industry dynamics improve. We expect the fourth quarter release of Grand Theft Auto VI to drive positive sales momentum in gaming accessories categories. In computer accessories, industry trends worsened as global PC shipments declined. Our computer accessory categories were directly impacted by lower hardware demand. EPOS integration remains on track, with second quarter sales ahead of our expectations.

We continue to expect approximately $80 million in sales in 2026 and $15 million in cost synergies in 18 months from the closing date of the acquisition. While the near-term demand environment is challenging, the targeted technology peripheral categories in which we compete offer attractive long-term growth opportunities. We continue to execute our strategy to expand our global market shares and enhance our technology peripherals portfolio through organic and inorganic initiatives in these large and growing categories. Turning to cost optimization and productivity, we continue to manage costs well and expect to realize our targeted $100 million cost reductions this year. In summary, I am pleased with the second quarter results and the execution against our value-enhancing initiatives. We are making meaningful progress on our strategy to transform ACCO Brands into a more focused, efficient, and growth-oriented company. I will return to answer your questions.

Now let me turn the call over to Deb.

Thank you, Tom, and good morning, everyone. We were pleased to deliver second quarter sales and adjusted EPS above our outlook. Reported sales in the second quarter increased 5%, and comparable sales were down 2%. Growth in the quarter was driven by the EPOS acquisition and favorable FX. Comparable sales reflect growth for back-to-school products in North America, as well as strong performance in Mexico. This was partially offset by soft demand in Brazil and in technology peripherals. Our international segment experienced a weak quarter in most markets. Adjusted gross profit for the second quarter was $138 million, an increase of 6%, with a margin rate of 33.1%, which was up 20 basis points. The margin rate increase was mostly attributable to cost savings. Adjusted SG&A expense of $89 million is up compared to the prior year, the increase is entirely due to the EPOS acquisition.

We continue to have strong cost mitigation in place, with savings more than offsetting cost inflation. Adjusted operating income for the second quarter was $48 million, up versus the prior year, reflecting cost savings partially offset by fixed cost deleveraging due to organic volume declines. The integration of EPOS remains on track, and our full-year outlook includes $80 million of 2026 sales. As we previously mentioned, EPOS has a higher gross profit rate than our consolidated average, but we expect it to be neutral to adjusted EPS for the year. We remain on track to deliver the outlined $15 million in cost synergies within 18 months from the date of the acquisition. Before moving to the segment results, let me provide an update on the status of our tariff refunds. We recently submitted claims for $20 million of refunds related to phase two, which we expect to receive in 2026.

We will submit an additional claim of $5 million, expected to be received in 2027. Our actual results and our outlook does not assume any benefit from these two claims. We are accounting for this benefit as a gain contingency, which delays our recording of the refund until receipt is assured. Let's turn to our segment results for the second quarter. In the Americas segment, sales were up 6%, with comparable sales up 2%. We had good growth in learning and creative in both North America and Mexico, which was partially offset by softer demand in Brazil and in our core office and technology peripheral products. We now expect sales of back-to-school products to be up mid-single digits for the full season. The Americas adjusted operating income was $56 million in the second quarter, up approximately $13 million, with the margin rate improving 380 basis points to 21.2%.

The margin rate improvement was driven by stronger volume and cost savings. Remember that prior year results were impacted by tariff-related disruption, and the current year margin rate is comparable to the 2024 rate. In the international segment for the second quarter, sales were up 4%, with comparable sales down approximately 9%. Demand in EMEA and Australia was soft due to purchasing hesitancy related to geopolitical and economic factors. In addition, the planned EMEA distribution system upgrade disrupted our supply chain and customer deliveries, which also negatively impacted sales. This disruption is behind us, and we saw improved performance in June. International adjusted operating income was $4 million, with the margin rate at 2.4%, both down versus the prior year. The second quarter is seasonally our weakest margin quarter due to lower sales and volume. This was compounded by the softer demand.

Historically, the second half has had stronger sales and improved margin rate. Due to our seasonality, we generally use cash in the first half of the year and generate significant cash flow in the second half of the year. Year-to-date free cash outflow was $39 million, comparable to last year and in line with our plan. While inventory was up $14 million compared to last year, this was entirely due to the EPOS acquisition, as underlying organic inventory was down. During the quarter, we returned $7 million to shareholders in the form of dividends. At quarter end, we had approximately $205 million available for borrowing under our revolver, and finished the quarter with a consolidated leverage ratio of 4.3 times, which is well below our debt covenant.