ACCO Brands (ACCO) Boris Elisman on Q4 2015 Results - Earnings Call Transcript

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ACCO Brands Corporation (NYSE:ACCO)

Q4 2015 Results Earnings Conference Call

February 10 2016, 08:30 AM ET

Executives

Jennifer Rice - Vice President, Investor Relations

Boris Elisman - President and Chief Executive Officer

Neal Fenwick - Executive Vice President and Chief Financial Officer

Analysts

Bill Chappell - SunTrust

Brad Thomas - KeyBanc

Chris McGinnis - Sidoti & Company

Kevin Steinke - Barrington Research

Karru Martinson - Deutsche Bank

Kevin Ziets - Citi

Operator

Good day, ladies and gentlemen, and welcome to Q4 2015 ACCO Brands Corp Earnings Conference Call. My name is Sandra and I am your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And now I'd like to hand over to Jennifer Rice, Vice President, Investor Relations. Please proceed.

Jennifer Rice

Good morning and welcome to our fourth quarter and full year 2015 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 quarterly results, we may refer to adjusted results. Adjusted results exclude restructuring, and apply a normalized effective tax rate of 35%. 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 press release.

Forward-looking statements made during the call are based on certain risk 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.

Boris Elisman

Thank you, Jennifer, and good morning, everyone. This morning we reported our fourth quarter and year end 2015 results. I am pleased with our overall operational performance in the quarter and I am especially pleased that we grew organic sales in several geographies, including the US.

Total company sales came in at $412 million for the quarter, and $1.5 billion for the full year, and adjusted net income was $0.30 per share for the quarter and $0.78 for the year. Both sales and earnings were greatly affected by foreign currency headwinds. In fact, our 2015 earnings would have come in at $0.90 per share, absent foreign exchange.

We met or exceeded many of our business objectives during the year, including increasing operating margins, generating $147 million in free cash flow, gaining share with key customers and in strategic categories, generating $33 million in productivity improvements, completing 60 million in share repurchases, which was the maximum allowable by our bank covenants and further reducing net leverage to 2.8 times adjusted EBITDA.

In North America, Q4 US sales grew year-on-year for the first time in five quarters. We grew sales in both school and office categories and we continue to gain share and grow most of our key customers.

Sales were particularly strong in Quartet, Dry Erase Boards, Swingline stapling and Mead, Five Star, Notebook categories. For the year, US sales were down 2% as growth with key customers and in key product categories was offset by a decline with one consolidating customer. Our US team improved in most of their operating metrics and I am very pleased with their performance in 2015.

Canada had a soft quarter and year spurred by currency, their economy and targets exit from the Canadian markets. Our international segment performed mostly well in a difficult environment. Q4 organic sales and operating profits grew in Australia and Asia Pacific despite continued macroeconomic weakness.

Our European business improved operating profits on a low single digit reduction in organic sales. Business was weak in Latin America, however, and especially in Brazil, where organic sales were down low double-digits during the quarter, as customers bought lest for back-to-school.

We are reducing structural costs in Brazil on the expectation that consumer and business demand will continue to decline in the short to medium term. We expect overall business conditions in our international markets to remain challenging in 2016.

In Computer Products, positive momentum continued to build in the fourth quarter. Sales declined slightly excluding currency largely because of our exit from commodity tablet and smartphone accessories which was partially offset by growth in higher margin desktop accessories.

We have largely completed the shift out of low margin tablet and smartphone accessories. Operating profits were up, and operating margins grew for the fifth consecutive quarter.

Last month, at the consumer products show, we received an innovation award and many positive reviews for a suite of new products including a Wireless Trackball, Lockable Travel Laptop Bags and Rugged Cases for Microsoft Surface Pro devices. Before discussing 2016 guidance, I'd like to make a few comments about our strategy as I usually do at this time of the year.

There are three pillars to our strategies of profitable growth. The first is to defend our core business of school and office products in mature geographies where we our number one or number two market share leaders in categories where we compete.

We will do that by introducing consumer oven [ph] products, investing in our key brands and allocating resources to growing channels, while improving the efficiencies and productivity of our assets.

We will also look at consolidating acquisition opportunities in our core categories in markets if we can strengthen our market position and realize significant cost synergies to benefit shareholders.

The second pillar is to expand our business into adjacent categories where we can leverage our core competencies of category and supply chain management, introduce new categories with better growth and margin prospects. Some of these adjacencies are more appropriate for organic expansion while others are better through acquisitions.

Finally, our third pillar of growth is emerging geographies where we believe demographic trends for our products are more favorable than in developed markets. While we still believe in this pillar, with recent emerging market weakness and increased uncertainty, we will continue to be prudent and expect high returns from these types of investments. We executed well on strategy of defending the core business, and I expect to continue to make progress on all three pillars in 2016.

On to guidance. In 2016, on average, we expect a similar economic environment as in 2015. In North America, we expect share gains in the mass merchant and e-tail [ph] channels to be offset by store closures in office products superstores and negative effects from the weaker Canadian dollar. We believe the economic environment in international markets will remain challenging with weak local currencies adding to headwinds.

All in, we expect sales to decline in the mid to high single digits inclusive of a 4% negative impact from currency. We expect 2016 adjusted earnings per share of $0.73 to $0.77 inclusive of a $0.03 negative impact from currency and $30 million of benefit from productivity improvements. We continue to expect strong free cash flow of around $135 million and plan to use that for share repurchase, debt reduction and acquisitions.

With that, I'll let Neal to provide some additional color on the quarter and the year. Neal?

Neal Fenwick

Thank you, Boris, and good morning, everyone. Our fourth quarter performance is recapped on page two of our slide deck. Fourth quarter sales decreased 10% or 2% at constant currency. The 2% decline was driven by lower volume primarily in Brazil.

Adjusted net income was $32.5 million or $0.30 per share. This compared to $0.36 in the prior year quarter, adverse [ph] currency and lower sales drove the decline. Foreign exchange reduced EPS by $0.04 while share repurchase added $0.02 year-over-year.

In terms of gross margin, which is shown on page three of the slide deck, the negative impact of mix in product costs offset benefits from our cost savings and productivity initiatives. As a result, fourth quarter gross margin decreased 70 basis points in the quarter to 33.4%.

SG&A expenses were down 4% in the quarter entirely due to FX. Underlying expenses were up 2% as increased incentive compensation was only partly offset by cost savings. SG&A as a percentage of sales increased 130 basis points, 18.5%. In all, adjusted operating income was down $15.6 million of which $6.1 million was due to foreign exchange.

Turning to the full year results, sales decreased 10.6% as foreign exchange translation reduced sales by $124 million or 7%. At constant currency sales declined 3%. Compared to our expectations going into the year, foreign exchange was 2% worse than we had expected, but the underlying business performed 2% better. Total sales were about the same. We were able to offset a more significant currency impact, declines with a large consolidating customer and economic recession concessions in Brazil with better sales in the US.

Overall for the year, as a result of managing the sales decline well, we improved our operating income margin 20 basis points. Gross margin increased 30 basis points, more than offsetting a 10 basis points increase in SG&A.

Adjusted net income was $86.4 million or $0.78 per share. As referenced on slide five, underlying EPS actually grew $0.03 per share and was further helped by $0.03 from lower interest expense, due to debt reduction and $0.04 from share repurchases. Unfortunately these factors were completely offset by $0.12 adverse impact from foreign exchange translation.

Turning to an overview of our segments. In North America, fourth quarter sales decreased 2% or 0.4% at constant currency due to volume declines in Canada. Volumes in the US were up slightly.

North America adjusted operating income was down $2.6 million and segment operating income margin decreased 60 basis points to 17.5% primarily due to product mix. For the year, North America's sales declined 4% or 2% at constant currency.

The decline was primarily due to the effects from the Office Depot, OfficeMax merger which reduced our global sales by $38 million mostly in North America from a combination of reduced product placement in both the store and distribution center closures.

North America operating income margin increased 100 basis points for the year up to 15.3% primarily due to cost savings and productivity improvements.

In our international segment, fourth quarter sales decreased 23% largely due to foreign exchange translation which reduced sales by 18%. Sales decreased 5% at constant currency.

Brazil drove most of the underlying decline. We saw slight growth in Asia and Australia and a slight decline in Europe and Mexico. As a result of the declines in Brazil and adverse currency, international operating income decreased $11.5 million to $20 million, and segment operating margin declined 330 basis points to 15.2%. $5 million of the decline was due to foreign exchange translation, Brazil alone declined $7 million, which included $1.3 million of severance to align our costs to lower volume.

Even with lower volume and severance charges, Brazil remained profitable and delivered double-digit operating margins in the quarter.

For the year, international sales decreased 22% or 5% at constant currency. Foreign exchange reduced our international segment sales by $94 million. In local currency, Brazil declined 14%, and Europe had a small decline, but we grew sales in Australia, Asia Pacific and Mexico for the year.

International segment operating income decreased $23 million to $41 million and margin declined 220 basis points to 9.5%. $12 million of the decline was from foreign exchange translation, and another $11 million was in Brazil and attributed to the recession.

Computer Products fourth quarter sales decreased 9% or 1% at constant currency, as a result of the decision to exit commoditized tablet accessory products. Computer Products adjusted operating income increased 10% and margin increased 170 basis points.

For the year, Computer Products net sales decreased 12% or 4% at constant currency and margins increased 200 basis points to 8.8% as we refocus the business on its core.

Turning to our cash flow and balance sheet. Despite strong currency headwinds which reduced our 2015 EBITDA by $22 million, we generated significant annual cash flow of $147 million. We paid down $71 million of debt, repurchased $60 million of stock and retired 6 million shares that were withheld for taxes under our incentive compensation plans.

We exceeded our cash flow objective despite the significant headwind from foreign currency exchange because the sales decline in Brazil reduced its year end working capital need. We finished the year with a net debt to EBITDA ratio of 2.8 times based on our bank covenant definition.

Looking into 2016, currency continues to be a headwind given that 40% of our sales come from outside the US. Using recent spot rates, FX is likely to have an adverse $0.04 [ph] impact on sales and an adverse $0.03 impact on EPS.

We do hedge our inventory purchases in order to allow time to adjust our selling prices in international markets to largely offset the currency impact on margins, but we cannot hedge against the translation effect on our results.

While we do not provide quarterly guidance, I would like to point out that we expect a similar seasonal pattern to last year where our first quarter will have negative earnings. Just using the current spot rates, the most significant drag from foreign currency would be in the first three quarters and to a lesser extent in the fourth quarter.

Our cash flow is also seasonal with almost all of it coming in Q3 and Q4. Our cash flow generation in Q1 will be essentially offset by the working capital investments for back-to-school in Q2. And Q2 will again be cash outflow quarter due to the seasonality of the North American back-to-school cycle.

In terms of our guidance for free cash flow, over the past three years, we have generated approximately $450 million of free cash flow. In 2016, we are expecting approximately $135 million of annual free cash flow, down slightly from prior year due to the full adverse impacts from foreign exchange.

Page seven of our slide deck contains a number of other modeling assumptions that factor into our earnings and free cash flow guidance. Cash taxes will increase slightly from 2015 levels, but will continue to be lower than book taxes in 2016, as we utilize our last year of NOLs from the Mead merger. We also do not anticipate the same sales reduction in Brazil and therefore less cash benefit from working capital.

With that, I'll conclude my remarks and move to Q&A where Boris and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from Bill Chappell, SunTrust. Please go ahead. You're live in the call.

Bill Chappell

Thanks. Boris, can you talk a little bit more on just kind of overall pricing and the environment in terms of both what you're doing in the US, if anything, I don't know if you're having to roll back prices with lower commodity costs and then internationally, like what you've done in 2015 and what the outlook in 2016 to kind of offset the adverse FX?

Boris Elisman

Yes, Bill. In the US, pricing is benign. Commodity costs are flat to down slightly, but they are offset by labor inflation and actually some increases in some logistics cost. So, in the US, a lot of pricing is just driven by bids as opposed to anything else.

If you look at the international, we're still in the inflationary environment and we still have a environment where we have to raise prices to offset the local currency weakness in the increasing costs locally in US dollars. So that happen throughout 2015 and we still need to adjust prices somewhat in some of the geographies in 2016.

Bill Chappell

So are we talking about mid single digit internationally or double-digit? I mean, I'm just trying to understand how that impacted the full sales number?

Boris Elisman

I think for the full year it would be in the mid single-digit range, mid single digit range for the year.

Bill Chappell

Okay. And then, secondly, just kind of - as you look at the various businesses, particularly in Brazil, I mean, are things stabilizing, I mean, how are you - what's kind of the go to market plan for this year in terms of as it's in a recession, are you continuing to build out or is it just kind of status quo until we see what happens?

Boris Elisman

Just to remind everyone, we have a very, very strong business in Brazil. Our brand there, to Libra [ph] is one of the most popular national brands overall, not just for school and office products but overall in the country of Brazil. So we're in a very, very strong position.

And as Neal mentioned in his prepared remarks, despite some of the challenges that Brazil has overall, we still have a good business there with double-digit operating profits in Q4.

We are preparing for a long-term, slow or recessionary environment there. That's why we are adjusting our cost structure to make sure that we can sustain a good business there. We think that most of the impact from the recession is behind us.

There was a fairly significant reset that happened over the last 18 months from really starting in Q3 of '14 during the World Cup or right after the World Cup through really this back-to-school. So while as we don't expect 2016 to be a recovery year there, we do think it's going to be more stable.

In addition to just adjusting our cost structure, we're also are introducing new products and new categories that are focused at more mainstream price points. And also it's an opportunity for us to take additional share in the market.

As you can imagine, if we have the strongest there are and we should be able to take share away from some of the weakest players who are hurting even more than we are.

So, we are appropriately cautious in Brazil but its still good business and I'm sure someday it will recover and when it does it will be in a stronger position.

Bill Chappell

Got it. And last one for me. Just can you remind us what you're assuming in 2016 in terms of revenue hit from the potential or Staples/Office Depot merger and if that's changed?

Boris Elisman

Yes. We assumed status quo for 2016. We assume they will continue to operate as independent companies. We have assumed that they will continue to close stores. So there is a negative drag in our assumptions associated with just regular store closings. But not to due to the merger and obviously we have contingency plans prepared if they do come together.

Bill Chappell

Great. Thanks so much.

Boris Elisman

Thanks, Bill.

Operator

Thank you. We have another question for you. This one is from Brad Thomas, KeyBanc. Please go ahead. You're live in the call.

Brad Thomas

Boris, Neal and Jennifer. First question about trends in the US. Congratulations on the growth that you posted here this quarter. I know you're winning more shelf space and delivering good results for some of your partners, particularly on the mass [ph] side. Could you maybe talk about a little bit about what the outlook here is in the US for this year?

Boris Elisman

Yes. I mean, US had a good year as I mentioned during my prepared remarks. And the trends have been actually accelerating throughout the year in the US, and we did have growth in Q4.

We have no reason to believe that that's going to change in 2016. We think that we are well prepared for back-to-school and we think we should be building on our successes over the last two years in back-to-school placement and share.

There is obviously a little bit of [Technical Difficulty] given what's been happening with the markets recently and maybe a little bit hit to business and consumer confidence as a result. So there is some uncertainty. I just want to be open about that.

But, from our perspective, 2016 in the US should be a good year, which allows us to maintain our momentum from last year. You mentioned mass and e-tail specifically, look good. But even if I look at independence and wholesalers, we did well in 2015 and that momentum should continue in 2016. And even some of the office product superstores, I think we have an opportunity to do good business with. So I'm optimistic for the US in 2016.

Brad Thomas

Great. And as we get started here in 2016 and you think about the cost savings opportunities that you have and the productivity opportunities that you have. Could you maybe quantify for us or help us think about directionally what the opportunity is this year versus what you just completed last year?

Boris Elisman

Sure. So, last year we delivered $33 million in productivity improvements and some of that was due to the prior restructuring programs that we undertook and some of that was due to Lean Six Sigma initiatives that we have in place.

This is the sixth year of the Lean Six Sigma program that we have in the company and for this year our plan is to deliver $30 million of productivity improvements. There will be more skewed toward Lean Six Sigma, as opposed to restructuring. I have full confidence that we will be able to achieve that.

We have not missed our goals in getting the productivity improvements yet. It's now a fully global, broad based program and we have really hundreds of people working on hundreds of projects in order to deliver that. So $30 million is the goal for 2016.

Brad Thomas

Great. And if I could sneak one more in on cash flow and the uses of cash. Obviously you're projecting cash flow to be a little bit lower here in 2016, 2017. Presumably it could be lower as you wrap up utilizing some of the NOLs that you have.

I guess just at a high level, how, if at all, does that affect how you think about the uses of your excess cash?

Boris Elisman

You know, Brad, I don't think it's going to be a significant change. Obviously, 2017 is far away and hopefully there will be things happening with our strategy and execution that will allow us to enhance the cash flow. But the plan is really to have a balanced view between share repurchases, debt reductions and acquisition.

We've been executing on that for a couple of years now. I mean, I think for the near term that's going to - that approach will stay consistent.

Brad Thomas

Very helpful. Thank you so much, Boris.

Boris Elisman

Thanks, Brad.

Operator

Thank you. We have another question for you. This one is from – apologies for pronunciation, Chris McGinnis from Sidoti & Company. Please go ahead.

Chris McGinnis

Good morning. Thanks for taking my questions and nice quarter.

Boris Elisman

Hi, Chris. Thank you.

Chris McGinnis

I just was thinking about you know, you touched on it a little bit, just kind of the economic conditions that are out there. What's the biggest risk that you have that you think going forward to the guidance and maybe just the confidence behind that?

Boris Elisman

You know, I think we give, I think, prudent guidance. We look at all the potential issues that could come up and all the positives and we give something that's roughly middle of the road. For us the last couple of years, we've been executing exceedingly well and really been exceeding our initial expectations for the year that was both in 2014 and 2015.

So I think that, obviously not all the possible things, I'm not a future teller, but I think most of the things that we could we built the guidance. To answer the question more specifically in refer to something that Bill has asked before, what's not built into our guidance is Staples/Office Depot merger.

So if that happens, there will be potential additional implications that we will have to review and revisit. We do have contingency plans put in place for that, but it will obviously have some effect on our guidance.

The other thing that's not built into our guidance, Chris, is any additional share repurchases in 2016. Just to remind everybody, last year we repurchased $60 million worth of shares, so if we continue to execute on the strategy in 2016, that will also have an impact, obviously, on our share count and EPS. So those are probably the two big things.

Chris McGinnis

Great…

Boris Elisman

The FX can always be better or worse.

Chris McGinnis

Sure, of course. And then I guess just a follow-up on the North America or the US business specifically…

Boris Elisman

Yes.

Chris McGinnis

When you're talking about the growth, is that backing out the impact from the office superstores or is that including?

Boris Elisman

The growth in Q4 was including everything. So despite the store closures and despite the declines in office product superstores, there was growth in the US in Q4, all inclusive.

Chris McGinnis

Great. Congrats.

Boris Elisman

Thank you.

Operator

Thank you. We have another question for you. Apologies for pronunciation. This one is from Kevin Steinke, and he is from Barrington Research. Please go ahead.

Kevin Steinke

Good morning. Kevin Steinke from Barrington. I wonder, you touched on the fact that you are optimistic for the US in 2016. Wondering if you could touch on your assumptions for each of the segments that are incorporated in your overall 2016 outlook?

Boris Elisman

You mean North America international in Computer Products?

Kevin Steinke

Yes.

Boris Elisman

Sure. So, for North America, as I mentioned, I'm optimistic on the US. Canada should do okay in local currency, but we do expect that they will be a fairly significant drag from FX in Canada. So overall for North America within combined, it’s going to be a low to mid single digit decline including the FX.

For international, that's where the FX drag is going to be the strongest, probably low double-digit drag from FX. So international all in should be down, high single to low double-digits, including the FX.

And then for Computer Products, we are planning for low to mid single-digit decline strictly because of FX. And overall that comes together to mid to high single digits decline including the FX.

Kevin Steinke

Okay. Thanks. Very helpful. On Computer Products, excluding the currency impact, do you think you can get back to modest growth or what's the outlook there now that you are past the tablet transition?

Boris Elisman

Sure. That’s our plan. So as I mentioned, tablet transition is pretty much behind us right now. It's less than 10% of our sales and the products that are still there are more value-added products that we think have a place in our future and our roadmap.

The desktop accessory business is doing very well and has grown nicely in 2015 and we expect that to continue in 2016 with introduction of new products. And security business has been - was down a little bit in 2015, primarily affected by what's happening with the OEMs, and the PC market in general.

But we're introducing new products there and we have some key wins there that we are hoping to - that will change the trend that we see in security. So overall we certainly are planning to moderate growth in the products if you back out FX.

Kevin Steinke

Okay. Great. Do you think there's still room for gross margin expansion in 2016 given the ongoing productivity improvements?

Boris Elisman

Yes. We do plan for moderate gross margin expansion in 2016. Similar, we did 30 basis points this year in '15, something of a similar nature in 2016 that’s our plan.

Kevin Steinke

Okay. Great. Lastly, you touched on your plans to move into adjacent categories and you mentioned not only acquisitions, but organic efforts. Just wondering how far along you are on the organic side moving into adjacent categories and when that might start being a contributor to growth?

Boris Elisman

We are pretty far along in our planning. We do have plans to launch something in 2016. But it's going to be small. So I'm not sure it's going to have a material effect on our numbers this year or next year, but it certainly something that we can build on.

And remember, the whole idea, the whole reason of going to adjacencies is that something that has a better growth in margin profile. So over time it should add absolutely to our enterprise, but it will be a small and gradual.

Kevin Steinke

Okay. Thank you very much for taking my questions.

Boris Elisman

Thinks, Kevin.

Operator

Thank you. We have another question for you. Apologies for pronunciation again. This one is from William Reuter and his from Bank of America. Please go ahead.

Unidentified Analyst

Hi. This is Jenny Huang [ph] for Bill today. Thanks for taking my questions. So on the last call you mentioned if the course of business remains the same you should be below 2.5 times levered in early 2017. Is this still your long-term leverage target and do you have any near term targets for fiscal year '16?

Boris Elisman

That is still our long-term leverage target and we still on that trajectory if nothing changes. Obviously, if we do acquisitions or if we do more share repurchases that could potentially affect that. But longer term, the goal is still to be 2 to 2.5 times levered and we still are on that trajectory.

Unidentified Analyst

Great. Thanks. And then you mentioned you are going to focus on acquisitions to fuel growth in fiscal year '16. Can you give us more color on what's currently in the pipeline and perhaps what markets in categories you're seeing opportunities in?

Boris Elisman

Obviously I cannot give you more color on any of that stuff. The pipeline is robust. We have a fairly broad efforts on that front. But they happen when they happen and if they don't happen we still have opportunities to deploy our cash to repurchase shares, to delever the business, to invest back in the business. So, I mean, that's pretty much all I can say about acquisitions.

Unidentified Analyst

Okay. Great. And then lastly for me. How do you feel about the current health and position of your inventory given it was down around $26 million year-over-year?

Boris Elisman

I think we're in good position. We worked very, very hard to become more efficient in our working capital deployment. In 2015 we made significant progress by the end of the year.

I think we have opportunities to do even better in 2016 and then obviously foreign exchange translation has a substantial effect on the US dollar carrying value of our inventory. But we're definitely not too low in my expectation is we can become more efficient.

Unidentified Analyst

Great. Thanks so much.

Boris Elisman

Thank you.

Operator

Thank you. We have another question for you. Apologies for pronunciation. This is from Karru Martinson from Deutsche Bank. Please go ahead.

Karru Martinson

Good morning. Just a follow-up on acquisitions. I mean, you guys have done some truly transformative acquisitions in consolidating the industry in the past decade. When we think of acquisitions, are we - should we be thinking about kind of those tuck-ins, perhaps broadening our international footprint or is the opportunity out there really to kind of drive further industry consolidation?

Boris Elisman

I think it's both. I think it's both. As I mentioned, that we're looking at consolidation opportunities. We're looking at adjacencies and we're looking at emerging market expansion. So, our horizon is pretty broad, but, there's nothing additional to report on that until something happens.

Karru Martinson

Okay. And you guys have been successful in paying down your debt, bringing leverage down. What leverage, do you have a leverage target in mind that you're comfortable with going back up to for the right acquisition?

Boris Elisman

We certainly are comfortable levering the company back up to anything below four for the right acquisitions. I don't envision that we'll have to go that high. But, we're comfortable given our track record and given the amount of free cash flow that we generate and will generate in the future to lever us up a little bit more.

Neal Fenwick

And you remember the Mead transaction, the cyclical nature of the cash flow in this industry, means that sometimes you can look like you have a higher leverage when you close an acquisition then you really have on ongoing basis and as we did with Mead we very rapidly paid down that high leverage.

Karru Martinson

Absolutely. And just in terms of cash flow, for next year, the $60 million in share repurchases, is that still the maximum allowed, correct?

Neal Fenwick

For 2016 it is. As long as our net debt leverage is above 2.5, but below 3.75 we can purchase $60 million worth of shares.

Karru Martinson

Thank you very much, guys. I appreciate it.

Operator

Thank you. We have another question for you. Apologies for pronunciation. This one is from Kevin Ziets from Citi. Please go ahead.

Kevin Ziets

Hi, good morning and thanks for taking my call.

Boris Elisman

Good morning, Kevin.

Kevin Ziets

I guess, my first question was on the distribution gains that you've gotten in the US. I know a lot of that was sort of expanding out the variety of price points. I'm curious how much room there is still to push on sort of shelf space and price points with existing relationships or if the share gains from here are really going to come from new relationships and new customer wins?

Boris Elisman

There is definitely an opportunity for expansion, Kevin. Success breeds success, when we're successful with a customer they want to do more with us in they want to give us more opportunities in their assortment. And their competitors come to us and say we see you guys have been successful with such and such we want also to put you in.

So what we're seeing over the last couple of years is expanding presence in most of our resellers due to the success that we've had, especially for back-to-school, but also in 2015 we've had success in the regular office assortment as well. And then with the changing channel landscape and much heavier participation from e-tail, we're also having tremendous success there.

So I think there's still opportunity in the US for share gains with our existing customers and does not need to – we don’t need to be involved in getting new customers. And just further, along that line, we are very, very broadly distributed in the US. There's hardly a customer that we don't sell through though it's hard for me to imagine, there is a lot of new, truly new customers out there that don't sell our brands.

Kevin Ziets

That's fair. I was thinking whether there are new e-tail relationships perhaps to pick up, but yes, I appreciate that. I guess, within the mass channel, is any of the consolidation that's happening there bringing contracts up for renewal?

Boris Elisman

No. We haven’t seen anything extraordinary in the mass channel. If you're referring to Walmarts announcement that they will be closing some stores, most of those are smaller footprints stores that don't really carry a large assortment of school and office products. So we don't really see that as impacting our business.

Kevin Ziets

Okay. Great. And then, I guess, most of my other questions were covered already. So thanks for taking them.

Boris Elisman

Thank you, Kevin.

Operator

Thank you. I'll now hand the call over to Boris Elisman, President and CEO for closing remarks.

Boris Elisman

Think you, Sandra. In closing I'd like to thank you for being on the call this morning. We are pleased with our results for the fourth quarter and the year. And even though foreign exchange translation and economic conditions around the world will continue to pose challenges throughout 2016, I'm confident in our ability to deliver strong results despite these headwinds. I look forward to speaking with you on our next call. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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