Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

ACCO Brands (NYSE:ACCO)

Q1 2013 Earnings Call

April 26, 2013 8:30 am ET

Executives

Jennifer Rice - Vice President of Investor Relations

Boris Y. Elisman - Chief Executive Officer, President, Chief Operating Officer and Director

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

Analysts

Arnold Ursaner - CJS Securities, Inc.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Simeon Gutman - Crédit Suisse AG, Research Division

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

Christopher McGinnis - Sidoti & Company, LLC

Helen Pan - Barclays Capital, Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Karru Martinson - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 ACCO Brands Corp. Earnings Conference Call. My name is Patty, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Jennifer Rice, Vice President, Investor Relations. Please proceed, ma'am.

Jennifer Rice

Good morning, and welcome to our first quarter 2013 conference call. Speaking on the call today are Boris Elisman, 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. These slides provide detailed information to supplement this call. When speaking to the quarterly results, we refer to adjusted pro forma results, including Mead for the 2012 period. Adjusted and adjusted pro forma results exclude restructuring and merger-related costs and apply a normalized effective tax rate of 35% for the current quarter, and 30% for the prior quarter. Schedules of adjusted pro forma results and a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures begin on Page 10 of our press release.

During the call, we may make forward-looking statements, and based on certain risk factors and uncertainties, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of certain of these factors. Our forward-looking statements are made as of today's date and we assume no obligation to update our forward-looking statements. Following our prepared remarks, we will hold the Q&A session.

Now it is my pleasure to turn the call over to Boris Elisman

Boris Y. Elisman

Thank you, Jennifer, and good morning, everyone. Today, we announced our first quarter results. Clearly, it remains a challenging marketplace for Office Products. Despite the top line challenges, we feel confident in our ability to deliver strong earnings growth and cash flow this year.

For the quarter, net sales were up 22% to $352 million due to the merger with Mead Consumer and Office Products. On a pro forma basis, sales decreased 11% due to soft demand across most of our business. Our adjusted loss from continuing operations was $7.9 million or $0.07 per share, compared to an adjusted pro forma loss of $2.8 million or $0.02 per share in the prior year quarter.

Income declined largely because of $8.8 million of one-time items between the 2 periods, as well as fixed cost deleveraging due to lower sales. Neal will provide greater detail later.

Our first quarter is historically a breakeven quarter, give or take, and that doesn't change with the addition of the Mead business. When revenue comes a little bit better in Q1, it tends to magnify the positive impact on earnings. Conversely, when revenue is softer, as was the case this quarter, it exaggerates the loss. Our revenue was softer than expected in Q1, resulting in lower earnings per share. Weak consumer and business demand, primarily in the U.S., lower customer inventory replenishment and declines in PC sales created a challenging sales environment in the quarter.

In addition, in U.S. and Europe, we exited some low margin businesses at certain accounts, further reducing sales. Around 50% of our sales come from U.S., where we had a decent January. However, our customer sellout in January was soft, and they reacted by reducing their inventory in February and March. Our sales were especially weak at office products superstores and with customers selling to the government and education. Trend-wise, sell-through improved in the second half of the quarter in most areas, and our sales are also trending better in April.

A sharp decline in personal computer sales, which has been widely reported elsewhere, had a negative impact on our Computer Products segment. The growth in our tablet and smartphone accessories was more than offset by the decline in the PC accessories, which still make up 2/3 of the Kensington business.

In Europe, in addition to the macro economic issues, Q1 was our last quarter of tough year-on-year comparisons due to the profitably improvements initiatives implemented at the end of 2011. Additionally, the Easter holiday occurred at the end of March, shortening the selling season in certain European and Latin America markets.

While the overall sales environment was challenging, there were a few bright spots. We had an excellent back-to-school season in Brazil and significantly grew revenues and market share. Over the past 12 months, we invested in expanding our manufacturing capacity there to address the mid-tier consumer price points in addition to the premium price points. That strategy appears to be paying off, and our Brazilian team has done an excellent job implementing it in the market and gaining incremental business with our growth rates outpacing the market.

Our Canadian business is doing well despite the tough macroeconomic environment.

In the U.S., independents and wholesalers performed in line with expectations and the e-commerce channel grew significantly over prior year.

Our sales synergies are on pace to deliver to expectations for the year. As previously discussed, we launched incremental products in Brazil and Mexico and planned additional assortment expansion in both of these markets in Q2, as well as in Asia, Europe and Canada. Another bright spot in the quarter was our continued strong management of cash. We generated $73 million of free cash flow and paid down another $21 million in debt.

While Q1 is our smallest quarter in more than 100% of our earnings and our biggest selling seasons are still ahead, we are taking actions to ensure that we can meet our full year earnings targets even with a softer top line. The last time we spoke, we told you that we expect $25 million of restructuring charges in 2013 associated with completion of the Mead integration and improving our productivity. We began to implement the restructuring initiatives in U.S. and Europe last quarter, and this week, we announced our plans to consolidate our 2 facilities in Canada. We feel confident in our ability to deliver $20 million in cost synergies during 2013. Our productivity improvements initiatives are ahead of plan, and we are raising our 2013 savings targets to $20 million to $25 million.

On the Products front, we plan to more effectively compete at all major consumer price points in the U.S. market. We are thoughtfully and carefully expanding our offerings in notebooks, retail boards and time management products to capture sales with the lower and middle price points, while we maintain the integrity of our premium brands such as Five Star, Cambridge, Quartet and AT-A-GLANCE. This strategy is working well for us in Brazil and it should help us profitably grow market share in the U.S. as well.

In Computer Products, we plan to continue to shift our investments away from the PC space toward tablets and smartphones. Kensington launched several award-winning products for the IOS devices in Q1, and we plan to expand our offering for android devices in the remainder of the year. With these initiatives, we feel confident that we can meet our profit targets for the year despite the softness of the current sales environment.

We are reiterating our expectation to generate $0.95 to $1.05 in adjusted earnings per share and $150 million in free cash flow in 2013. We now expect sales growth to be at the low end of the previously communicated range or roughly flat versus prior year.

With that, I will ask Neal to provide a more detailed review of the quarter. Neal?

Neal V. Fenwick

Thank you, Boris. Our first quarter performance is recapped on our slide deck. Reported sales increased 22% to $352 million due to the merger with Mead. On a pro forma basis, sales declined 11%, driven by declines in volume. During the quarter, we were still faced with the significant headwinds that set in during June of last year across most of our markets. We will begin to lap these factors in Q2. During the quarter, we experienced accelerated declines in our U.S. sales volumes and for our sales of PC-related accessories.

In terms of profit, we made great progress on both our cost synergies and productivity initiatives. However, despite strong cost savings, the decline in sales and one-time items negatively impacted both our gross margin and SG&A. The one-time items, totaling $8.8 million between the 2 quarters, included $1.6 million in the current year related to the absorption costs as we closed our Day-Timer facility. We also incurred $1.2 million of costs through the relocation of our corporate headquarters. While both of these actions will drive savings beginning in Q2 onwards, we had to incur transition costs during Q1.

The prior year quarter benefited from $6 million of accounting timing changes that would have reduced profit in the prior year quarter for the Mead business had we owned it.

In terms of gross profit, as detailed on Slide 4, gross margin declined 80 basis points to 27.5%. However, there were $6.5 million of one-time items between the 2 periods. Excluding these items, gross margin would have increased as cost savings more than offset deleveraging and adverse mix from both our Computer Products and International segments.

SG&A expenses were down in the quarter but, as a percentage of sales, increased 160 basis points to 25.1%. Even excluding $2.3 million of one-time items, sales deleveraging offset synergies and cost savings. In all, operating income margin decreased 260 basis points to 0.5%.

Turning to an overview of our pro forma segments. North America sales decreased 12%. Of this decline, $6 million was due to exiting low margin business, primarily ring binder products at some accounts. The remainder of the decline was due to lower point-of-sale demand but even more significantly, due to reductions in inventory by our customers.

As a result of the sales decline and the $8.8 million of one-time items, which all impacted this segment, North America adjusted operating income decreased to a loss of $2.5 million versus operating profit of $1.7 million in the prior year. Excluding the one-time items, North America operating profit would have increased more than 2% due to synergies and cost savings, which more than offset sales deleveraging.

International segment sales decreased 10% or 6% on a constant currency basis. The decline was driven mainly by softness in Europe, where the prior period also included $4 million of business we exited.

Mexico also experienced a sales decline, which we believe to be due entirely to inventory rebalancing and still anticipate this remaining as a growth market for the year as it was in 2012.

We had strong growth in Brazil and growth in Asia Pacific.

We had small declines in Australia, in both volume and price, as we have yet to lap the macro economic factors, which began affecting our results last year.

Adjusted operating income for International segment was $8.6 million versus $10.2 million, and operating margin declined 50 basis points to 6.8%, mainly due to lower pricing and margins in Australia.

Computer Products sales decreased 12%, with volume and mix down 8% due to weak demand for PC accessories, driven by a record level drop in PC sales. In addition, we had the last quarter where patent expiry and lost of royalty impacted the segment. The decline in PC accessories was first experienced in Q2 2012 and it remains difficult to forecast when the decline of our PC accessory business will bottom out.

We remain confident about the growth of our smartphone and tablet accessories, which included gaining initial placements in the Brazilian market.

Computer Products operating margins declined to 9.2% versus 18% in the prior year quarter, due to sales deleveraging, loss of royalty income and price.

Turning now to our balance sheet and cash flow. We generated $73 million of free cash flow, of which $21 million was used to reduce debt. Our strong cash flow was the result of seasonally strong collection of customer receivables and working capital management.

In 2013, we continue to expect free cash flow to be about $150 million, net of $30 million of restructuring-related cash expense. Q2 will be a seasonal cash outflow quarter due to the buildup of working capital for back-to-school and the timing of our bond interest payment. As we saw last year, the main quarters when cash generation can be used for debt reduction are Q3 and particularly, Q4.

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?

Question-and-Answer Session

Operator

[Operator Instructions] And please stand by for you first question, which is from the line of Arnold Ursaner from CJS Securities.

Arnold Ursaner - CJS Securities, Inc.

I guess my first question relates to your revenue growth guidance. Previously, you had said 0% to 2%. You're now highlighting flat. Embedded in that, though, are some price increases. So, I guess, one question is have you, in fact, realized those because I think you were supposed to get them in Q1. And then maybe more importantly, volume in your business model is driven by -- volume drives gross margin and I think you had been talking about 100 basis points of gross margin improvement for the year. Given the revenue challenges, is that still a realistic goal for you?

Boris Y. Elisman

The previous guidance that we gave was 0% to 4%, with the midpoint of 2%. Though we're saying now is we're going to the low end of that or close to 0 and, as you mentioned, that does include price. And we did price the -- put the price increases throw so that is incorporated in our guidance. And, in fact, in Q1, we already did see some benefits of that. I think that is on the slide that Neal shared with you on page -- what page is this? It's a 1/2 a point list price. Regarding the gross margin, we do think that the gross margin expansion is still realistic and it is definitely part of our plan. And the reason for that offsetting some of the softness in volume, we're seeing a more benign inflationary environment. So we do expect some benefit from that during the rest of the year.

Neal V. Fenwick

The one-time items impacted margins in the quarter by 140 basis points and the overall gross margin was only down 80. So without the one-time items, we would have been up 60 basis points. And without the deleveraging, we would have been up 120. Did I answer your question? We've lost him.

Operator

The next question is from the line of Brad Thomas from KeyBanc Capital Markets.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

I just wanted to ask -- just wanted to follow up about the question about the forecast on the revenue front. Obviously, a challenging backdrop in the U.S. seems to continue as well as the challenging backdrop in terms of PCs. Could you just talk a little bit about what you're expecting to have happen in those end market over the coming quarters?

Boris Y. Elisman

We're anticipating that the environment will continue to stay soft. When we spoke with you last, we were talking about U.S. being flattish to slightly positive. Right now, we expect U.S. to be negative for the year. We -- the international market is within our expectations. Europe was a little bit softer, Brazil was a little bit stronger. So net-net international is going to be -- continue to be a positive middle-single-digit growth for us for the year. And then we're still expecting the Computer Products business to be positive for the year. It'd be negative from the first half but we do expect some growth in the second half, driven by introduction of new Apple products and the introductions of our accessories to support those products. And obviously, there is some uncertainty associated with that, just given the product lifecycles and if some of the Apple platforms move out into, later in the year, into '14, that will affect that. And then in addition from a growth perspective, Q1 was our toughest quarter from a year-to-year compares because Q1 of last year was fairly strong. But as Neal mentioned, we do expect to lap those tough compares from Q2 on. And that will benefit the growth compares as well.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. And then just a follow-up on the computer security area, you now about anniversaried the expiration of patent. Can you just talk a little bit more about what's going on in that business? Or are you in a position where it can kind of build off space where it is, if we do get growth in PCs? Or is there some potential for margin erosion there, perhaps a mix down from more private label? Just a little bit more clarity now that you've anniversaried that expiration will be great.

Boris Y. Elisman

So as you mentioned, Q1, there was about $1 million in royalty that were lost compared to prior year and I think there's a little bit in Q2 as well that still got to go just tiny. But they pretty much anniversaried that. The security product line is actually doing okay because we're adding security products for tablets and for smartphones. So if I look at the overall revenue generated by our security products, it's a little bit below prior year but not too much if I exclude royalty. The real big decline that we saw in Q1 was nonsecurity PC accessories. As many of you read, IDC reported that the PC market was down 14% in the first quarter and that really affected keyboards, mice and other products that surround the traditional and notebook PCs. So the security has done okay. And we do expect it to continue to do okay for the rest of the year. We are launching a major initiative with one of our OEM partners in security. We're going to manage the whole security category for them. So we do expect some incremental benefit from that in the second half of the year. So it should hold up quite well.

Operator

The next question is from the line of Simeon Gutman from Crédit Suisse.

Boris Y. Elisman

Hello, Simeon. Operator, we seem to have lost the call.

[Technical Difficulty]

Simeon Gutman - Crédit Suisse AG, Research Division

We were unmuted but I figured it was not on our end. So I was going to ask on the industry softness, Boris, in your estimation, was it the industry getting worse in terms of demand perspective or are there shifts away from the branded side? I mean, I guess, that's another way to ask about market share. But I'm just curious what the dynamic is because it seems to have gotten -- I guess, the decline in the industry or at least in the backdrop got a little worse this quarter.

Boris Y. Elisman

Yes. I don't think it was the shift away from the branded side. I do think that January, especially, was soft. And I think January surprised folks how soft it was. You may know especially in the commercial market, January is the strongest month of the year. It's the back-to-business time. And typically, our customers bring in a lot of inventory at the end of December to be ready for that peak selling season. So when January was softer than expected, it surprised everybody and there was a lot of destocking as a result of that. So I do think that definitely, January, I mean, a little bit of February -- and March was better, except for the last week because the last week was the week before Easter. So that really was a weak week versus prior year. It was a -- continued to be a strong week. So March is a little funny, but I think the primary surprise for everybody was how weak January was and that add repercussions on the rest of the quarter.

Simeon Gutman - Crédit Suisse AG, Research Division

And you mentioned destocking and reduction of inventory. Which -- was it in any particular product category or was it across the board?

Boris Y. Elisman

It really was across the board. When our customers decide to reduce inventory, it's really more on a program basis and they just take a certain percentage off across the board. So it wasn't a rifle approach. It's more of a shotgun approach.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then second on the Computer Product margins. And I know some of this was mentioned and you mentioned the $1 million loss in royalty. But, I guess, the sense that we had gotten is that royalty was embedded in numbers. Margins were going to get a little worse, I guess, but not to the extreme that happened. So was that just additional sales deleverage into the operating margin rate, given what you said you saw on the PC side? And where does that margin rate -- where should we think about it normalizing?

Neal V. Fenwick

If you look at the business, you'll see that gross margin was down similar to the way it had been down in previous quarters, about 400 basis points. It was the additional PC accessory or the additional deleveraging that we saw because of SG&A that caused the additional difference. And that was really a combination of 2 things, where you're actually ramping up a lot of our PC accessory -- sorry, our iPad and smartphone business. And so there's a lot of expenditure around driving a large business in that area as we launched that off at the same time as you got fixed cost deleveraging from the lower sales volume that we've got in Q1.

Boris Y. Elisman

Yes. Simeon, just to add to what Neal said. The gross margin was actually okay in that space. Really, what we saw was the deleveraging of the SG&A because the revenue was much weaker than expected. And that's what drove the segment margins down to 9%.

Simeon Gutman - Crédit Suisse AG, Research Division

So, I guess, in putting some words in, I guess, into your mouth, then I guess the first half for Computer Products will continue to be weak. And I guess you're anticipating some product shifts there. So that means margins could still be under pressure. But as the product mix improves or as the product sell-through is improving, the back half should see a big improvement.

Boris Y. Elisman

That's roughly right.

Neal V. Fenwick

You shouldn't see the SG&A piece be such a drag in the second half. That's -- you're not going to get the gross margin back.

Simeon Gutman - Crédit Suisse AG, Research Division

Right. Okay. And if I can sneak in one last one. There was some mention of exiting unprofitable contracts, I believe, both in the U.S. and maybe in Europe. Can you just give us a sense of the distribution in terms of contract profitability? Is there a small percentage that you have that are what you would call maybe borderline or is it a big chunk? And what channels -- is it -- what channel is that product going to?

Boris Y. Elisman

Yes. We've been talking to you for, now, several quarters that in our -- especially in our bindery business, we think the market is a little bit dysfunctional due to some issues with our competitor. And we told you that we are not going to be standing by and just waiting that to correct. We're going to be taking action ourselves in order to improve the profitability of the bindery business. And some of that involved despeccing our products and some of that involved getting out of the business that didn't meet the returns that we've set for ourselves. So in line with that, in the first quarter, we exited about $6 million worth of business in bindery, specifically with a couple of customers that was just a low return business for us and we're better off not having it. That was the primary reason for that decline.

Neal V. Fenwick

It represented the last quarter of the decisions that they made last year.

Operator

That's from the line of Bill Chapelle.

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

I guess, just going back to Computer Products. I mean, what -- as you look at that business and as I think you said it's in decline of the PC that you don't know when it will stop, do you need to make a more dramatic shift in terms of the cost of that business and restructure or rework that entire business just for the new dynamic of that market?

Boris Y. Elisman

It's a good question, Bill, and it's definitely something that we're going to look at. Certainly, the decline in the PC space was more than we or, in fact, I think anybody has anticipated. So I think we do need to relook at our approach and where we're investing there. We are shifting the investments pretty radically to the tablet and smartphone space, but I think we will need to relook at the -- just the overall structure and strategy for the business. We brought Christopher Franey back from Europe to focus exclusively on that business, and I'm expecting us to fine tune our strategy there in the next quarter or so.

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

Okay. And then switching to the question on kind of customer exits and especially on the binder business, I think you said that equated to a $7 million of revenue in the quarter. Can you give us kind of an idea what that -- those exits you've done to date, what that means for the full year numbers? And how that relates to kind of the -- hitting the low end of the guidance?

Boris Y. Elisman

The exits were about $6 million in the bindery space, and the number that we gave the guidance for the quarter already incorporates all of that. We haven't really kind of broken that down, but it's embedded within the overall revenue and EPS guidance that we provided.

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

So -- but you mean, it's $6 million on an annual basis that you've exited?

Boris Y. Elisman

No, no, no. It was $6 million in the quarter. In Q1, it was $6 million.

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

I was just trying to figure out what the annual impact is.

Neal V. Fenwick

Because it's ring binders, it will obviously have a much bigger impact around the back-to-school period. And so it's largely an impact that will impact us in Q1, Q2 and Q3 and less so in Q4.

Boris Y. Elisman

But there was probably -- and I'm going to give you an estimate, it's probably in the $15 million to $20 million for the year.

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

Okay. So I'm just trying to look at -- do you see more exits coming? I mean, is this just the start of a trend as you try to rightsize that category?

Boris Y. Elisman

No. Those are -- there were 2 accounts, specifically, that were just not good business, very low margin for us, and we took action in that. The rest of it is looking okay, so I don't anticipate more reductions there.

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

Okay. And then last question. Just kind of looking at Brazil and certainly, I think the release says there's a 6% growth there, which is, I guess, good. I'm just trying to understand, can it get better with what you've been doing? Do you expect closer to high-single-digit or a double-digit growth in that market with everything you've done to invest behind it?

Boris Y. Elisman

Yes. I don't remember why we said 6% growth. The growth in Brazil was double digit. It was fairly significant. In local currency, there were some FX dilution, but it was strong double-digit growth in Brazil for back-to-school. We don't think that necessarily will continue for the whole year, but we do expect double-digit growth for the whole year. Q1 was a little bit stronger because some of the back-to-school in Brazil spends, Q4 and Q1, so some of the Q4 bled into Q1. But we are taking share. We're also realizing some sales synergies in Brazil as we're introducing both Kensington and office products into Brazil. So that's going really well. Their strongest season is back-to-school, which starts really in Q3 and until Q4 so we expect big things from there.

Operator

The next question is from the line of Chris McGinnis.

Christopher McGinnis - Sidoti & Company, LLC

I just want to ask, I guess, just on North America, you mentioned inventory destocking. I guess, how do you feel about the inventory levels through your channels now?

Boris Y. Elisman

They're in a good place. As we mentioned, April for us is tracking way ahead of what we saw in Q1. So if they needed to take more inventory out, they would've taken it out in April and we're not really seeing that. So I think we're in a good place. And plus, what happens in Q2 is, typically, we see actually a build-up on inventory as our resellers get ready for the back-to-school season. So we don't anticipate that affecting us in Q2.

Christopher McGinnis - Sidoti & Company, LLC

Sure. And then, I guess, just secondly in North America. You mentioned government a little bit. Just maybe give us a sense of how much that is of your business. And did that improve throughout the quarter as well?

Boris Y. Elisman

We don't have a breakdown of that. But we do have information. They did not improve throughout the quarter and, in fact, it was especially significant in March where we actually saw government customers not even renewing their warranty agreements, not taking -- I mean, they're just going hand-to-mouth as far as even supplies are concerned. So it's definitely continuing to affect the business.

Operator

The next question is from the line of Helen Pan.

Helen Pan - Barclays Capital, Research Division

I just wanted to follow up a little bit more on Brazil. So just given the strength that you've seen in sales and the sales synergies, are you now expecting more than the $20 million in total revenue synergies for '13 that you laid out on your last call?

Boris Y. Elisman

No. That $20 million is the number that we're expecting. A lot of the Brazilian growth is just from organic expansion. We added manufacturing capacity there last year to offer mid-tier notebooks and that's been very, very successful. We've taken a lot of share. So we don't consider that as part of sales synergies. It's more of an organic growth. Their sales synergies are on track, but $20 million is the number.

Helen Pan - Barclays Capital, Research Division

Okay. And then another question. Can you give us a little bit more detail on the extra productivity savings that you're expecting for the year? Is this coming from projects that are being pulled forward from '14 or just more cost cuts that you've been able to identify?

Neal V. Fenwick

We've launched a Lean Six Sigma initiative about 3 years ago and we generated about $5 million in savings the first year, $10 million the second. We had a goal of $15 million to $20 million for this year that we are now increasing by another $5 million. It's hundreds of projects, so it's not one thing specifically. It's hundreds of projects. What's really driving the realization of more productivity improvements is we have expanded the scope of the program to go after all of our facilities, especially the new facilities that we've acquired with the Mead acquisitions and they are generating the incremental productivity improvements. And through Q1, we are -- we feel confident that we have enough both realized and in the hopper to give us these incremental savings.

Operator

The next question comes from the line of Kevin Steinke from Barrington.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

The improved April trends that you're seeing, is that across all your geographies? Or is that specific to the U.S.?

Boris Y. Elisman

We're seeing improvement in U.S. We're also seeing improvement in Europe. As Neal mentioned, we are lapping some of the things that we did at the end of 2011. So Q1 was really the last quarter for that effect, so that we're seeing improvements there. And then the rest of it is continuing to be on track. Just a word of caution, Q2 is heavy for us -- heavily weighted towards June because June is when most of the major back-to-school loads happen. So while we are happy with what happened in April, I think it's pretty immature to draw conclusions yet. On Q2, we really won't be able to tell how that's going until we see what happens in June.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And the increase in productivity improvements that you're expecting, is that going to mostly benefit the second half of the year? Or how should we think about that?

Boris Y. Elisman

Yes. They build on each other so you will see most of the benefit in Q3 and Q4. That's correct.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Will those savings be distributed across SG&A as well as cost of revenue? Or are they more concentrated in one or the other?

Boris Y. Elisman

It's probably 60% in the COGS area and maybe 40% in SG&A.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And what percent of your revenue roughly is related to the government market?

Boris Y. Elisman

We don't really give that estimate. It's not a big number, but it's more significant in certain parts of our businesses. So for example, in the U.S., on the PFS business, the large commercial accounts, a significant part of their business is government. So it doesn't have to be huge to have an impact on our business. And if you listen to some of the comments from our customers, they also saw softness on the government side as well. So it's consistent. We're all seeing it in the industry.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Sure. And can you just remind us of the various headwinds that you'll begin to lap in 2Q aside from the Computer Products business?

Boris Y. Elisman

Computer Products, it's royalty. In Europe, there was a significant revenue decline a year ago in Q2. Some of the channel simplification and SKU rationalization initiatives were taking hold in 2012. We saw a decline in Australia last year in Q2 on as that economy saw a significant softness. I think those are the major ones, Neal, right?

Neal V. Fenwick

Yes.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. Last one for me. Can you just expand a little bit on the -- I believe you commented on success in Canada. Is that at all related to sales synergies in the Mead merger?

Boris Y. Elisman

It's a little bit with that. We started to ship to a large U.S. customer that's expanding in Canada, and that success is driven by the strong Mead relationships that we had in the U.S. that we're leveraging into our Canadian business. And in general, there were fairly significant synergies realized due to the merger of the 2 companies. If you remember, we were about the same size in Canada as we are in the U.S. So there's a significant profitability improvement as a result of that. And then finally on the sales side, the sales relative to U.S. were significantly stronger, and we didn't see the major destocking initiatives in Canada that we did see in the U.S.

Operator

The next question is from Karru Martinson from Deutsche Bank.

Karru Martinson - Deutsche Bank AG, Research Division

What's the potential impact or how are you guys approaching the potential merger with the 2 office superstores?

Boris Y. Elisman

We are obviously preparing for it. We do think there'll be a -- some impact on our U.S. business. We don't think it'll be an impact on our International business because of the lack of overlap between OfficeMax and Office Depot and our international entities in the U.S. We think that about 5% of our total business is the retail overlap between OfficeMax and Office Depot. And we do think that as a result of the merger, even when that happens, they will close some stores. So it will be a -- some destocking that will happen as a result of that. It's more of a one-time shift in nature for us because the underlying end-user demand is not going to change. It's just the -- how they will be fulfilled for the demand will change probably away from Office Depot, OfficeMax and to some, potentially, some other channels. So we are preparing for some destocking, and we are preparing for them leveraging their incremental volume for a little bit of extra margin for us. We do have a good model. We went through the Staples Corporate Express merger back in 2008 so we kind of understand the playbook and we are preparing for that. We don't think it'll be a big effect in 2013. There may be a little bit from a -- just the stocking perspective, but not big we think. More of the effect will be felt in 2014.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. And given the strong free cash flow that you guys generate here, you paid down some debt. When you look at your priorities, how should we think about cash -- free cash flow usage going forward?

Boris Y. Elisman

The priority will continue to be to pay down debt. We would like to get to about 2.5 debt to EBITDA ratio. If we see some highly accretive or highly attractive acquisitions, we'll take a look at them but the priority remains to pay down debt.

Operator

I would now like to turn the call over to Boris Elisman, President and CEO, for closing remarks.

Boris Y. Elisman

Thank you, everybody, for joining us this morning. We look forward to speaking with you at next quarter. Thank you very much. Bye-bye.

Operator

Thanks for joining today's conference. This concludes the presentation. You may now disconnect. And have a very good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ACCO Brands Management Discusses Q1 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts