ACCO Brands Corporation Q1 2008 Earnings Call Transcript

May. 7.08 | About: ACCO Brands (ACCO)

ACCO Brands Corporation (ABD) Q1 2008 Earnings Call May 7, 2008 8:30 AM ET

Executives

Jennifer Rice - Vice President, Investor Relations

David Campbell - Chairman and Chief Executive Officer

Neal Fenwick - Executive Vice President and Chief Financial Officer

Analysts

Reza Vahabzadeh – Lehman Brothers

Arny Ursaner – CJS Securities

William Chappell – Suntrust Robinson

Seth Basham – Credit Suisse

Derek Leckow – Barrington Research

Bill Schmitz – Deutsche Bank

Rick Weinhart – BMO Capital Markets

Operator

(Operator Instructions) Welcome to the First Quarter 2008 ACCO Brands Earnings Conference Call. I would now like to turn the presentation over to our host for today’s call, Ms. Jennifer Rice, Vice President of Investor Relations.

Jennifer Rice

Welcome to our First Quarter 2008 Conference Call. On the call today are David Campbell, Chairman and Chief Executive Officer of ACCO Brands, and Neal Fenwick, Executive Vice President and Chief Financial Officer. We have posted a set of slides to accompany this call to the Investor Relations section of ACCOBrands.com. These slides give a lot of detailed information to supplement this call.

Our discussion this morning will refer to our results on an adjusted basis, excluding restructuring and nonrecurring items. A reconciliation of these results to GAAP can be found in this morning’s press release. 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 a Q&A session. Out of courtesy to others we ask that you please limit yourself to one question. Now I’ll turn the call over to Mr. Campbell.

David Campbell

It should come as no surprise that this quarter’s top line growth is very challenging. Across our industry US and UK sales trends have been down reflecting weak demand and escalating customer inventory reductions. First quarter sales declined 5%, pricing was positive adding two points but volume declined 10%. Our synergy savings continued to grow during this challenging period. As a result our adjusted operating income declined only 2% and our adjusted margin improved by 10 basis points.

EBITDA and earnings per share were down as a result of lower sales volume, making our fixed costs a further drag on earnings. Our cash flow is lowest during the first quarter due to the timing of customer rebates and employee incentive payments. The first quarter is also seasonally our slowest period for sales. Having said that, free cash flow will ramp up significantly later in the year. We anticipate generating $90 to $110 million of free cash flow for the full year which will be available for debt reduction.

Slide four recaps some of the quarters highlights. In addition to holding our operating margins we have now completed all of our major Office Products integration projects. Synergy savings will continue to flow to the bottom line through 2008. In April we hosted the grand opening ceremonies of our Booneville, Mississippi distribution and manufacturing center. Our US and European distribution centers are now fully operational and functioning at expected fill rate levels.

We remain on track to deliver incremental $25 million in synergy related cost savings in 2008 for a total of $40 million in cumulative synergies. With these integration projects behind us we can now intensify our focus to drive growth. Late last month we announced an organizational realignment intended to give enhanced focus on growth, innovation and operational effectiveness. Our senior management team is now squarely focused on winning in the marketplace and propelling us to the next phase of growth.

The strategic review of our Commercial Laminating business continues. We expect to provide an update as planned, midyear. In the meantime, we have seen the marketplace for high speed laminating films begin to stabilize while at the same time we have reduced capacity and pass through price increases as raw material costs continue to rise. On slide five we provided a breakdown of our Q1 year over year sales changes.

We are still cycling through a $7 million impact from the planned $20 million business exits. Mainly the sale of our MACO label business in 2007. We are also working through the $45 million product placement loss in 2007 which had a $17 million impact on the quarter. The first quarter Easter holiday particularly affected Europe and Australia having a $5 million negative impact that we have seen reversed in the second quarter.

Once you isolate all these items you can see the underlying sales were still down $24 million driven by lower demand in the US and UK markets. This lower demand was coupled with inventory reductions in the indirect channel in these markets. These negative demand trends offset the growth that we are seeing in the rest of the world.

Notwithstanding the uncertainty regarding near term economic trends, my confidence in the strength of each of our businesses remains high. We expect the harshness we are experiencing right now to ease over the next few quarters as customer inventories come to balance and we are able to launch new products that will help in the second half. Slide six speaks of this in greater detail.

Today we are in very uncertain economic times. As a result, we are now expecting demands to remain weak through 2008. However, our year over year sales comparisons will become less negative as the year progresses for a variety of reasons. The second quarter growth rate will remain below that of the full year. We will continue to have the impact of approximately $5 million of planned exits and $11 million of lost product placements.

We anticipate approximately $10 million additional customer inventory reductions and will not yet have the benefit of new product development introductions. However, our comparisons will be helped by a $5 million impact of Easter having been a second quarter holiday last year. Moving into the second half of the year headwinds should be less. First our comparisons become easier as we anniversary the US business downturn in July of 2007 and the UK decline in September.

While we will still have to cycle through $8 million of planned exist and $19 million of lost products placements in the second half we do expect to recover about $20 million of this through new product introductions mainly in document finishing and computer products. Furthermore, we expect customer inventory reductions to be complete, although we do not expect a repeat of the $10 million buy forward seen last year from our customers in the coming fourth quarter.

Slide seven highlights why I am confident in our ability to deliver synergies. This chart shows the specific facilities that we have closed or are scheduled to close in given year. Facility closures and their related expenses are the largest single contributor to our synergies. The work done in 2007 and in the first quarter 2008 provides the majority of the flow through savings anticipated this year hence our confidence in achieving our targets.

When we provided full year guidance in February we anticipated a tough start in 2008. We now foresee the economic downturn impacting the second half as well. However, foreign exchange has provided us an unexpected upside. As a consequence I am comfortable affirming our expectations for 2008 as outlined in slide eight.

As originally stated in February our growth in 2008 will still be bottom line driven, this is the result of several factors. The amount of uncertainty in consumer and business spending, the completion of $20 million of business exits, the $45 million full year impact from 2007 share loss and the timing of new product introductions. Therefore we are assuming top line will be flat with currency but down mid single digit on a cost and currency basis.

The first half of the year will be the most challenging with sales at least two points lower than the full year rate. We anticipate 150 basis points in positive price effect and see the share recovery in the back half of the year with new product launches and customer inventory reductions abating. Operating income is expected to be up low single digit to low double digit, a wide range reflecting the economic uncertainty.

If consumer demand continues to deteriorate beyond our current expectations we remain confident that we can achieve our bottom line increases for the following reasons. We expect to realize $25 million in additional synergies, we have been vigilant in raising prices to match raw material inflation and we’ll continue to implement price increases when necessary and cost justified. We have previously invested in product development and streamlining our operations. We have also put the right structures in place to capitalize on opportunities to gain share.

We are working through pulling forward some 2009 synergies; we are carefully reviewing ongoing headcount and marketing investments in light of anticipated demand levels. With lower tax rates now anticipated we are expecting earnings per share growth between flat and low double digit. To sum up, we believe we have a number of factors within our control that will allow us to achieve our full year guidance.

As I noted earlier our cash flow will remain strong at $90 to $110 million for the full year. Our capital expenditure level and cash restructuring expenses will be $45 to $50 million lower than last year. Two thousand eight is turning out to be a challenging economic environment. Our key focus is to complete the repositioning of the business through restructuring, new product development, and reduced costs so that we can gain share and benefit when the economy turns.

I would like to close by stressing that we are pleased with our ability to achieve a bottom line increase through our strategic initiatives to improve the business despite this weak economy. We recognize the current industry challenges and are successfully managing through them while positioning ACCO Brands for the next phase of growth. At this point I would like to turn the call over to Neal to walk through more of the financial details.

Neal Fenwick

As noted on slide nine comparable sales in the quarter were down 8% year over year driven by 2007 lost product placement and planned business exits, as well as lower continued demand and related inventory reductions with major customers. Despite this operating income decline only 2% and margins increased 10 basis points.

Adjusted gross margin increased 40 basis points. Improvement was driven by price increases and integration synergies. SG&A margin increase slightly as a result of the lower sales volume. We did see a reduction of $2.8 million in equity incentive accruals related to our performance share plan; go to market expenditures also down $1.3 million for the quarter.

Adjusted earnings per share for the quarter was down 8% to $0.11. Our adjusted tax rate for the quarter came in at 26.8% this was slightly lower than our now anticipated full year rate of 30% due largely to the timing of deductions. As expected we had some one time charges in the quarter. Pre tax restructuring charges were $5.2 million and associated non-recurring charges were $5.6 million. Slide 10 shows the drivers of our margin improvement for the year in more detail. Notably price less material inflation was a healthy 70 basis points and overall synergy contributions were 120 basis points or $5 million.

Moving on to a discussion of our business segments in the quarter on slide 11, beginning with Office Products. Sales in the Office Products channel decreased 8% with underlying volumes down 13%. Previously reported share loss represented 5% and slower end user demand and related inventory reduction represented 7%.

Sales reductions were all in the US and UK. As a result of lower volume and high input costs adjusted operating income decreased 29% and margin contracted 180 basis points. We do anticipate more future inflationary pressures and have a mid year price increase going through in some categories.

Now turning to Document finishing where sales decreased 2% with underlying volumes down 9%. Once gain sales were down in the US and the UK. The majority of the decline was in the indirect channel where previously reported share loss represented 4% with slower demand and resellers reduced inventory adding another 4%. Declines in the indirect channel was similar to those reported for the Office Products segment. The direct channel was less affected as there was no added channel inventory reduction.

Despite the volume decline adjusted operating income increased a strong 24% and margins expanded 120 basis points. Improvement was due to lower product costs resulting from synergy related outsource manufacturing together with favorable mix.

Moving on to Computer Products. Sales decreased 3% and volumes decline 8%. As a repeating theme 5% of the sales decline was from the US and UK. In addition, the declines of CompUSA was the primary cause of the remaining decline. The US and UK weaker demand included related customer inventory reductions and weaker demand included lower consumer demand from the iPod accessory category that represented about 8% of our 2007 sales.

Adjusted operating income increased a strong 17% and margin expanded 270 basis points to 16%. The improvement was due to $800,000 income from the completion of the prior period royalty claims, favorable mix, and expense management.

Finally, looking at Commercial Laminating. Comparable sales decline 1% with volumes down 2%. While market pricing has begun to stabilize volume declined as a result of increased back orders in Europe related to our supply chain transition to Korea. Volume is expected to recover in the second quarter with the benefits of both major industry exhibition and shipping order backlog. Adjusted operating income decline slightly to $500,000 from $800,000 and margins declined to 1.1% from 1.9% principally due to severance costs.

Before moving on to Q&A slide 12 provides some more details to help you model future years. We have updated certain modeling assumptions mainly impacting lower cash taxes and a lower effective tax rate as we not anticipate relief from previously disallowed UK holding company interests and have also received a tax refund from prior periods.

We expect to have a significant reduction from 2007 levels for both capital expenditure and cash restructuring needs in 2008 which along with improved operating performance will drive very strong and improving free cash flow particularly in the second half. We still expect full year free cash flow to be $90 to $110 million in 2008.

Now David and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Reza Vahabzadeh – Lehman Brothers.

Reza Vahabzadeh – Lehman Brothers

On the cost front do you have visibility on input costs that might be rising and can you lock costs and so you can price it according to those lock costs or is this going to be your best guess pricing increases?

David Campbell

To me this an excellent area, lots of change going on. Certainly we see, particularly with our China based products that we bring in there’s ambiguity as to exactly what the effects will be in terms of our raw material cost increases. We told you the past 12 months had a long sense of this that there could be significant increases. What we have done is we have been fairly progressive in putting through price increases certainly in January and mid year last year.

This is an area we are monitoring very closely; we’ve had people located in China working with our vendors directly. We are putting through price increases mid year this year. We are still also in the process of evaluating some further price increases that we might put through. I think its one of these situations where you’ve got a weak economy; you don’t want to be positioning yourself from a price perspective too far above competitive areas or competitors.

On the other hand you want to make sure you recover your costs. I think there’s a real sensitivity, this is something in the business is almost discussed weekly as we review our businesses. Right on top of it again we’ve talked in earlier conversations about having a natural hedge of having about three months of inventory and then having an arrangement with customers where we communicate price increases about three months ahead of time. There’s a natural hedge here. We believe that we’re well protected.

Reza Vahabzadeh – Lehman Brothers

As far as sales of branded products versus store brands and private label products have you seen any change in share in the first quarter or in recent months given the fact that we are in a slower economy or do you anticipate brands losing more share than in the past to private label?

David Campbell

In difficult economic times I think one would naturally assume that a consumer or a business would really pay attention to their cost of goods and buying supplies, I think it’s a good sensitivity. I would say that first of all we’re paying a great deal of attention to the spread between our pricing and private brand pricing. We pay a lot of attention to that to the consumer. It’s a little bit difficult, the nature of your questions was one where you were saying in the last several months do we have a sense of it. I’m not sure that we, in our industry, have the quality of PLS information to give you a precise answer to that.

I would say that from what we have seen in our business that generally hasn’t been a problem. The real sensitivity to the whole pricing issue, it really almost goes back to the first question you asked about raw materials as we’re monitoring very closely raw materials. We are also monitoring our pricing, we don’t want the spreads to be too large and I also think that the raw material price increases that we are seeing not only affect our cost of goods but they would affect private label cost of goods.

This is an economic issue that raises all boats. It’s really the spread between the two that we’re looking at and keeping that in check rather than the actual prices, the relative spread.

Operator

Your next question comes from Arny Ursaner – CJS Securities.

Arny Ursaner – CJS Securities

I’m looking at your modeling assumption slide, the thing that’s glaringly obvious is you’re not using your free cash flow to either buy back shares or reduce interest expense. Should we assume that somewhere in there are acquisition opportunities or you just can’t quantify the benefit in terms of reducing debt?

Neal Fenwick

Seasonally what you find in our business is that most of our cash flow is generated in the third and the fourth quarter and that’s a tradition that you see in our business ordinarily particularly cash flow is very strong in Q4 for us. What I’ve built into my model is really the assumption that the cash that we generate happens very much at the end of this year as opposed to happening ratably through it given the timing of things.

From the point of view of what happens on why don’t we repurchase shares, etc. Our bank covenants prevent us from doing so until our bank calculated EBITDA to debt ratio falls below 2.75% and that would tend not to happen until the beginning of next year or the end of this year depending on whether we hit the top end or the bottom end of the range. We have to get through the banking restrictions we have which we should be through as we press through at the end of 2008 before we’re in a position to think of repurchasing shares.

Arny Ursaner – CJS Securities

You spent a great deal of time and effort through a re-branding process in Europe and a cost reduction in Europe, perhaps you could take a step back and highlight how you’ve consolidated Europe, what sort of savings you now believe you’ll achieve and additional steps you may need to take to reach those goals.

David Campbell

Just to recap so folks understand some of what’s gone on there. There was a major consolidation of multiple distribution centers around Europe 10, 12, 15 distribution centers depending upon how you define a distribution center some of them were fairly small. We’ve consolidated the bulk of that now into one facility in Born. That now is going very well; we’ve got our fill rates up to where they expect we’re taking costs as our performance is up to speed now we’re taking costs.

We feel very good about some of the benefits of that. We believe that when we talk with our large customers they’re feeling good and comfortable we’ve gone through that transition as well as an IT transition we’re now beginning to have discussions with those folks about additional business capturing additional volumes. From that perspective we feel very good about it.

We’re still working through over the course of 2008 maybe over the next two quarters to get the cost of operations of that facility to a point where we like it. We see yet the opportunity to improve the cost of operations. We will still do some additional activity in terms of consolidations. There’s a German facility the German distribution facility we have that will be further consolidating the benefits should flow through there. Italy as well is an area that we will be improving our operations.

We believe that the benefits from a cost perspective are flowing through, we really now see that the operational benefits which we think will be much more pan European allow our business to be pan European and allow for further product consolidation. Consolidating distribution and consolidating products or SKUs are linked. What you really want to do is you really want to simplify your SKU offering and then that allows you to put into one central activity across Europe.

Europe still has some regional taste. With the introduction of this distribution center that we have in Born that’s a pan European Distribution Center I think we can now accelerate some of the work that we wanted to do with consolidating brands and SKUs. We’ve taken an initial traunch, now that we have our distribution facility working and working well we’ll see over the back half of this year and into 2009 yet some further simplification.

I would hope and believe that will lead to a de-investment, a better management of inventories and working capital in Europe. Things on that scale are going well, we’re pleased, the process should continue through 2008 and into 2009.

Neal Fenwick

In parallel with the distribution consolidation we’ve also moved our sales force in Europe. We now run on a European basis. When we went through this time last year running with the duplicate infrastructure both at a country level and also on the pan European level we’ve been able to eliminate all that duplicate infrastructure. The result of that is you saw a strong return to profitability in Q1 of this year in Europe compared to last year which was fortunately timed given the downturn that occurred in the United States.

David Campbell

To quantify that for you, that’s probably something like 85 to 95 headcount reduction of sales folks across Europe.

Operator

Your next question comes from William Chappell – Suntrust Robinson

William Chappell – Suntrust Robinson

First on Computer Products business can you give us a little more color around the continued weakness there? It was a fairly easy comp and I guess due to de-stocking last year so I was under the assumption that business would start to grow again. Are you expecting any growth there as we move through the rest of the year? Is the iPod business pretty much done, is it due to iPods is more just competitive entries. How are you looking at that business as we move through the year?

Neal Fenwick

First of all we had CompUSA which as finally rolled out at the end of Q1 that was still an impact during Q1. The second issue is we do expect growth as the year goes ahead. In fact, we would expect that business for the year as a whole to look like it’s up mid single digits. It is a business where sometimes the way that orders fall can be different.

One of the things we saw in Q1 last year which actually made this a difficult comp in Q1 was a significant amount of load in for iPod accessories in Europe which were able to play radio signals. We didn’t see that same benefit this year in Q1 and fundamentally what you did see was the same affect that you saw across the rest of the business which was significant amount of inventory de-stocking in the channel in Q1 together with a slow down in consumer demand.

Q1 for all of our segments with the exception of the Laminating segment was heavily influenced by de-stocking in the channels. It doesn’t give you a good view of what the run rate is for the year in any of the three segments.

David Campbell

We have new product introduction plan that is pretty aggressive at Kennsington this year in the first quarter of this year we did not introduce any new SKUs. In the second quarter we have 25 SKUs planned, a similar number in Q3 and about 10 in Q4. These are products we feel good about. We’ve had some early exposure with merchant and buying people at some of our major customers. It focuses on the input device area and also docking stations. We feel pretty good that we’ll be able to introduce some exciting new products in the back half of the year.

William Chappell – Suntrust Robinson

How much was CompUSA in terms of impact on the quarter?

Neal Fenwick

From memory it was about $1.5 million.

William Chappell – Suntrust Robinson

Within the Office Products category were there any products that were stronger or weaker or was it just in general the whole thing was down that high single digit range?

Neal Fenwick

We saw the weakness across every single product category we have. It was very uniform from an overall point of view. Very spasmodic from a customer point of view with some of them working their inventory down in the first quarter and some of them still carrying inventory out of the first quarter.

David Campbell

A broad general statement is that it is the US indirect business, UK as well, but it’s basically the US indirect business that to me is at the heart of the issue here. If we take a look at the rest of our business in other channels or the rest of our business from other parts of the world we are not seeing what we’re seeing in the US. The US is really accounting for like 85% of all of the negativeness we’ve seen this quarter.

William Chappell – Suntrust Robinson

On the tax rate, the new number is 30% of the year but this quarter was about 27%. Is there a catch up next quarter or it should just be flat 30% for the rest of the year and a little bit lower than 30 for the full year base?

Neal Fenwick

The quarter that will actually be Q4 which will bring the average to 30%. You’ll see below 30% for the other three quarters and the other reason for that is the vagaries we have now of how you deal with the tax consequences of equity expensing when your equity is now a lower level. I don’t want to get into the details but that’s the issue.

William Chappell – Suntrust Robinson

It should be 27% to 28% until Q4 and then Q4 should be above 30%?

Neal Fenwick

It will be above 30% correct.

Operator

Your next question comes from Seth Basham – Credit Suisse.

Seth Basham – Credit Suisse

I would like to focus on the sales to date and the outlook for 2008. Following on that last comment you made with the US indirect business and office supply being the weakest. You said it was 85% of the decline we saw there. What is that in numbers, that’s down on a comparable basis more than double digits?

Neal Fenwick

If you look at where we are versus the rest of the world what you see is that from a US point of view our competitors will come out. You’ve had [inaudible] reporting being down 8% to 9%, 3M down about 9%, Avery down about 12%. If you look at our US and UK business we’re down about 10%. We’re in the same position as everybody else and that includes the impact of inventory de-stocking as well as the market.

If you ask me to pass that between what I think the market is down and what inventory is I think the market is down about 6% on an ongoing basis and the inventory accounts for about 4% of that. That corresponds to what our customers said. If you look at Depot and Max for example what you see is that they’re talking about their retail business being down on a same store basis by about 9% and that the contract business being down about 5%.

If you take our weighted average of those two which would be about 75% in contract and about 25% in retail that will give you a weighted average of minus six. It correlates to what I would correspond to our market decline as well.

Seth Basham – Credit Suisse

In April you talked about the Easter shift coming back and helping $5 million but excluding that particularly in the US business have you seen the sales trends that you just talked about for the first quarter persist or any sign of a change?

Neal Fenwick

Easter has not impact in my opinion on the US market, it’s the European and Australian phenomenon and it’s to do when people take spring break but they don’t get a February spring break like you do in the US. That doesn’t impact the US and so if you look at the US business we’ve pretty much seen a continuation in April of what we saw through March particularly with inventory de-stocking at customers who have a different quarterly close to the March close.

David Campbell

The one think I will say you would know this as well as we. If you take a look at the job losses that occurred in the first quarter they were 75,000 a month, something like that, and obviously in April we saw a reduction of that to about 25,000. From a macro indictor perspective that’s a positive sign, still down but a positive sign indicating not so much. The point I’m trying to make is the real market we’re watching is principally the US indirect market to a smaller degree the UK.

Seth Basham – Credit Suisse

That brings me to my last question regarding the balance of the year. You have a forecast which expects improvement in the back half based on EBIT comparisons and so many other factors impacted you last back half. As we think about the outlook here for 2008 is there a chance that we’re still on the verge of seeing much greater job losses and thinking about historically what’s happened we’ve seen more than six quarters of negative comps out of most retailers in this space.

Neal Fenwick

The channel inventory de-stocking can’t go on indefinitely and so we saw that $10 or $11 million of that impact in Q1. We would expect $9 or $10 million to impact still in Q2 as we see the level of inventory come right for the lower levels of demand in the channel. Things can always get worse but if you look at the run rate as you know I do track it tends to get revised retroactively. The data they’re currently showing is that the rate of decline during April has actually slowed down which I find slightly surprising but that’s what the data actually shows.

I don’t know where the rest of the economy is going. We’ve changed our opinion which was originally we had thought the second half would see an economic revival. We now are forecasting that the economy is going to remain at these depressed levels throughout the rest of the year and our forecast has been adjusted accordingly.

David Campbell

It’s an issue we’ve talked about as we talk through our position on our guidance. It is broad, we understand its broad, it’s broader than we would like to be providing but with the economic uncertainties I just don’t how we do anything better and provide something this meaningful.

Operator

Your next question comes from Derek Leckow – Barrington Research.

Derek Leckow – Barrington Research

I wanted to touch on the consolidation among your customers, the weakness we’ve seen with CompUSA for example. How would you characterize your exposure to any additional consolidation or market share shifting going on among your customers?

Neal Fenwick

The big potential consolidation is obviously the publicly announced hostile takeover bid of Corporate Express by Staples. That fundamentally has two issues that we have to be aware of. The first one is that there would be a best terms price harmonization impact on us which is very similar to the kind of effects we saw where for example Depot bought [Gilbare] or where Boise and Max came together. That would be around about a $5 million impact on us.

Typcially what happens is the year after what you tend to see is back end consolidation and therefore further round of inventory evaporation at the channel. However, what we also would anticipate is gaining better placement as a result of such a combination. By the second year we would actually begin to take share out of the combined entity as well.

The second potential acquisition out there is in the computer products channel and relates to Circuit City and obviously in that context we view that as a potential positive outcome for us from the point of view it would put in place a secure future for Circuit City.

David Campbell

As we talk about these possible events both Circuit City and Corporate Express I don’t think that we see anything dramatic and rapid happening. We believe that this will be a transition, we believe that fundamentally consumer demand continues to shift channel. While as Neal indicated it can have a short term effect that’s relatively minor and it really speaks to the further consolidation of the business.

Derek Leckow – Barrington Research

You said $20 million of expected new product revenue. Can you discuss how that’s split between direct and indirect and what are the key new products within that group?

David Campbell

I can certainly try to speak to some of our new product development if you’d like and chat about that.

Derek Leckow – Barrington Research

Also about the split between direct and indirect, it’s kind of important given the fact that we’ve got different dynamics in each category.

David Campbell

In the direct area the part of the business that I think is affected there is mainly our DFG business. There’s really a number of projects going on there that are new product development projects we are going to be introducing late in 2008 and into 2009. The first thing I would talk about is the jam free shredder that we introduced in the first half of 2008. We’re pleased with our progress there; we believe that the volumes will ramp up. That is a product that is largely sold through the direct channel. We feel good about introducing products there.

There’s a new bindery product that we really aren’t speaking of yet and there are some proprietary elements we need to work out so we’re not being too vocal about it. We believe that we’ll significantly improve our binding system, our Pro Click Binding system that we have. We believe that it’s a terrific improvement to the machine that can provide high speed service. That is a focus for our direct sales organization.

I would also mention, before I go on, in Document Finishing we are dramatically increasing the number of folks we have in our direct sales force in Europe. By the end of the year we expect to employ about 30 people. That will about triple the number of people that we have in our direct sales organization. Right now we are looking to bring in a head of total sales for the DFG business in Europe.

Not only are we bringing products on stream that we think will not only sell in North America and Europe through the direct channel but we’re also dramatically enhancing the size of our direct sales force in Europe. This is on top of a call center that we’ve put in place over 2008 which is a direct sales organization. We believe that’s good.

A third product area that we’re focusing on in DFG is our Laminating area. We are focusing on the education market, that’s a product that will be brought in this fall and it will provide automatic feed, trim, and cut as well as stack. Those are a set of products that really are predominantly focused on the direct sale area as well as the expansion of our direct sale organization.

Another part where we’re adding additional new products is in our work space tools, our Springline business in three areas, the manual stapling both the light touch and the more traditional staplers were we’re introducing rolling out new products first in North America and then in Europe. To be honest, that will go through the indirect channel. However we’ve got what we believe is a pretty exciting line of electrics that we’ll be introducing both in North America and then in Europe.

Additional products will follow with the trimmer category in Europe. I point to Europe because it’s really the mainland European indirect channels that still seem to be resilient and strong. We’ll have new merchandising programs around these in category management programs around these. Even though that’s in the direct channel we feel pretty good that we’ve got a good reason to change out. Does that give you a flavor in a sense?

Derek Leckow – Barrington Research

Yes, it really does. It sounds like more of this revenue is coming in your indirect channel so you’ve got more control over that and it sounds like that’s your estimate of the amount of revenue is reasonable based on that.

David Campbell

We believe it’s the left hand washing the right hand and the right hand washing the left hand. We believe the success in the direct channel introduces platforms and introduces technology to people that will flow down more into the indirect channel. We think there’s a linkage, you probably lead with direct and then if flows through into indirect.

Neal Fenwick

We already talked about the timing of the Kensington product launches which is part of why you’ll see our growth in Q2, Q3, and Q4 there.

Operator

Your next question comes from Bill Schmitz – Deutsche Bank.

Bill Schmitz – Deutsche Bank

Do you have any indication of what the inventory levels are at retail now and how that’s going to trend over the last couple of years?

Neal Fenwick

I spend a lot of time trying to get a handle on that which is part of why I called out that I believe there’s another $9 to $10 million of inventory reduction still to flow through. Very much you have to look at this by customer. You saw some of the customers address their excess inventory very aggressively in Q1; you’ve seen others who are taking a more measured approach doing it over a couple of quarters. Some of them are really driven by when their own quarter ends. For example, in April I’ve seen one of our customers take a lot of inventory out.

I believe if you look at what they’re trying to do with their inventory, they’re basically giving their inventory into line with what they think is a lower demand level which each of them has called out independently and if you look at their responses its very much in line with what they’re talking about as their sales reductions.

Bill Schmitz – Deutsche Bank

Do you know what it is in terms of weeks or is that too specific quarter to quarter?

Neal Fenwick

I do know but its proprietary data and I’m not allowed to issue that.

David Campbell

Depending upon the category it can swing quite dramatically. There are some categories where the velocity that takes place throughout the channel is very, very high, others not so high at all.

Bill Schmitz – Deutsche Bank

In terms of all the private label growth, in other categories in other businesses once someone goes to private label its pretty impossible to get them back unless you have a steady stream of innovation. The reason I ask the question is I know you talked about the $20 million of incremental sales from new products.

Are these new products focused on the categories where private label is growing? The other question is it seems like you’re cutting some strategic spending in the advertising side like you did in the first quarter, how can you justify those two dynamics where private label is growing you need to fight back and take shift and innovate but you’re cutting ad spending.

David Campbell

I think over 2007 and 2008 what we really tried to do is exit areas that we believe are commodity areas where it will be tough to compete against private label, that would be step one. Step two is then on the categories remaining that you believe that will be a balanced blend between private label and branded going forward that’s where we’ve made our investments. That’s really the areas we’re making our investments.

We still have a category, our storage and organization area is a category where there is limited new product development going on simply because that’s just a very commodity kind of category. Still things going on but our improvements there, our focus there is much more on supply chain and asset management. As I talked earlier about increasing the velocity that products go through there so there’s a good return on assets.

The new product development that is going on is going on in the balance of our categories where we have good return and we believe there will be balance struck, there will be an equilibrium between private brand and branded products. Our objective clearly is to be the lead dog in the branded areas in the categories that we’re in. One of the ways you have to do that is by continually innovating and providing new product development. We feel comfortable and good about that, that’s very consistent with our positioning all along

Neal Fenwick

We fundamentally believe product development is the long term key to positioning premium products versus private label products in the market. Its not that one directly competes with the other anyway, they really compete to trade up the consumer and so it’s providing consumer benefits that they’re prepared to pay more for that really drives the premium into the category. We haven’t backed off our long term investment spend at all on driving product development.

What you’re really seeing is short term market support spend which we’re deciding to spend later in the year particularly because that’s where we have a lot more product coming out.

Bill Schmitz – Deutsche Bank

If you look at your guidance you have your EBIT guidance of low to mid single digits in the deck but the low end of the EPS guidance if flat and everything else is kind of the same. The tax rate is the same, just a little bit lower. Why would EPS come in lighter than operating margin growth?

Neal Fenwick

Part of the issue you’ve got is you roll down the P&L is we fundamentally left our guidance in tact and obviously if you treat all of the moving parts you’ll understand that in some areas we’ve got more wiggle room than others because of having a lower tax rate. You’d be right to focus on EPS could come in slightly higher than we indicated. It really depends on how the business progresses during the year and that’s why we didn’t think it was appropriate to change it.

David Campbell

As I said, wide ranges.

Operator

Your last question comes from Rick Weinhart – BMO Capital Markets.

Rick Weinhart – BMO Capital Markets

On the price increases in inflation you mentioned a couple times you’re obviously looking very closely at what private label is doing and trying to maintain that differential. I’m wondering what are you seeing amongst the various private label customers, your customers. Do these retailers and some of the distributors that have private label, do they tend to move in a similar fashion because if they don’t it might be difficult to adjust that differential?

David Campbell

Every customer we have has their own strategy, their own go to market plans and their own perception views as to where private brand versus branded fits into a category. I think you’ll find that some of our customers will offer private brand right across the category, good, better, best. Others will be more playing it at the good, better level. I think this is a point of differentiation that our customers have in their business.

Everybody wants to define their go to market positioning a little bit differently. Our customers are concerned that they don’t offer the same kind of SKU offering that consumer sees and perceives a difference in their offering than others.

Rick Weinhart – BMO Capital Markets

What I’m trying to get at is are you seeing similar price increases related to inflation in private label categories at different customers or are you in a situation where perhaps one customer is holding back on price increases while another one is moving along with inflation in which case what do you do with your price points. I’m assuming you can’t change it depending on the customer.

Neal Fenwick

In all the categories the premium products are the brand leaders, the market leaders and therefore private brand is always reference priced off of the premium products. If you think about this from the other way around what’s happening to cost of goods for the two relative products, the impact of inflation on cost of goods or private brand products is more significant than the impact of cost of goods inflation on premium products fundamentally because it has a higher cost of goods element.

Therefore they are undoubtedly seeing exactly the same inflation that we’re seeing on their private brand goods and so they may make a decision to hold prices for a month or two to try and gain some share but fundamentally its what every competitor does in every industry when they’re playing against the brand leader its no different.

Rick Weinhart – BMO Capital Markets

My second question is on the investments you made last year in terms of R&D and advertising. You mentioned it’s more of a shift in the last question in terms of what your go to market investments this year. Overall if you look at the year as a percentage of sales what should we expect in those items in terms of R&D, advertising and any other go to market?

Neal Fenwick

This is where accounting that we publish and accounting that I look at internally are different numbers. We tend to roll together what we spend in terms of product development and merchandising and marketing together and approximately it’s around 6% of sales, near that level. It used to be about 4% on a pro-forma level back in 2004. We would anticipate that being around 6% to 6.5% this year. Obviously we will tweak down the dollar slightly as the business is a bit smaller. We’re not looking to spend less in that area, we’re looking to cut our SG&A and other support costs so that we can continue to fund an aggressive level of support around our product development and marketing trends.

Operator

With no further questions in queue I would now like to turn the call back to David Campbell for closing remarks.

David Campbell

Thanks to everyone for the great questions. We appreciate that and I hope what we have said today continues to demonstrate that we’re on a course that we think is a very bright future for ACCO Brands. We can continue to execute and do and move ahead on areas of the business that we think are important and continue to do what we say and we expect this steady progress to continue through 2008 and beyond. I look forward to speaking to you next in August. Thank you for your attention.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your presentation you may now disconnect.

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