ACCO Brands Corporation Q3 FY2025 earnings call

• Tariff-related price increases timing impacted third quarter sales, but confidence in improvement for fourth quarter due to factors like technology accessories growth, pricing strategy benefits, and order timing shifts.
• $100 million multiyear cost reduction program realized an additional $10 million in savings in Q3, cumulative $50 million.
• Americas segment: Back-to-school in US/Canada in line with expectations, Latin America weaker, Mexico sales trends improved.
• International segment: Demand mixed, Europe soft, Australia/Asia up.
• Technology businesses: Kensington to grow in Q4 due to new product launches and end-user pipeline; PowerA expects growth in Q4.
• New products: West Village line by Mead introduced, Buro Seating acquisition integrated, EMEA ergonomic products expanding.

In the Americas segment, comparable sales in the back-to-school season in the U.S. and Canada finished in line with expectations, down mid-single digits; Latin America sales were weaker than expected due to a constrained consumer; Mexico sales trends improved during the quarter. In the International segment, demand was mixed with Europe being soft, partially offset by increases in Australia and Asia; office categories sales declined but maintained market position. In global technology businesses, Kensington computer accessories sales declined modestly in the quarter, while PowerA gaming accessories sales declined but expected growth in Q4. In Office Essentials and Learning & Creative, global demand was challenged, but new products like the West Village line by Mead and Buro Seating acquisition integration were highlighted. Revenue contribution details were not explicitly provided in absolute terms with percentages.

• Reaffirmed full-year sales and adjusted EPS guidance.
• Expect sales trends to improve in Q4 led by positive foreign exchange and growth in technology accessories categories.
• Full-year reported sales expected to be down 7% to 8.5%, adjusted EPS within $0.83 to $0.90 range, adjusted free cash flow within $90 million to $100 million range (including $17 million from asset sales), and net leverage ratio expected to be approximately 3.9x at year-end.

• Global macroeconomic factors constraining demand.
• Fluctuating tariff policies impacting sales and profitability.
• Consumer and business spending uncertainty affecting demand.

Q: Thomas, the first question I want to ask here is, you mentioned that you're confident see improvement in the fourth quarter. And just seeing what's going on here, you read the headlines. I just want to know what underpins your confidence for fourth quarter?

A: Yes, Joe, that's a good question. So there are a number of data points that we've reviewed and are improving confidence is because of those. So let's start with, first, our technology accessories business. It represents roughly 20% of our total portfolio, and it has been modestly down in the quarter in aggregate, and we expect that to return to growth driven by 2 things. First is the holiday season and our support of the Switch 2 launch from Nintendo. We're seeing really good momentum in that business as we transition from Q3 to Q4 and feel confident that it will grow in the quarter. Secondly, our end user pipeline and our new product development product launches from our Kensington business is far more robust in Q4 than it has been in Q3 and previous quarters this year. So those 2 pieces of business, again, represent roughly 20% of our total, and we feel confident that both will return to growth in the quarter. The second point I'd like to just make sure you understand is our pricing actions took longer to implement than we had anticipated. And so whatever that we thought was going to happen in Q3 has simply just shift from a timing perspective. The quantification of that is a little difficult to nail down, but we do believe that there was a significant shift into Q4 from Q3 from price. And then finally, we had some timing of orders that shifted from Q3 into Q4. Those aren't immaterial. And those 3 things give us confidence that we can improve the rate of decline in the quarter.

Q: Joseph Gomes asked about trade down in some categories.

A: Joe, sorry about the disconnect. I'm not sure what happened, but I just want to make sure that I address your question. You had mentioned that we're seeing trade down and that is a true statement. We are seeing some trade down really across most of the geographies that we compete in. The good thing is, is we are well positioned from a brand portfolio perspective to capitalize sales as the consumer trades down. We have brands that serve the consumer in most of our categories that service each of the price points but it does impact top line sales and has a modest impact on profitability as well.

Q: Joseph Gomes asked about strategic opportunities.

A: Yes. So it's another good question. We're always looking for accretive acquisitions, highly synergistic opportunities that present themselves that reposition our product portfolio into faster-growing either categories or channels or markets, right? Those are things that we're constantly evaluating. We also look at other things like licensing agreements with key licensors, expansion of OEM relationships. So each of those are important, and each of those are under review, and we're using all of our tools that we can to accelerate sales.

Q: Gregory Burns asked about back-to-school in Brazil.

A: Yes. So our results are -- it's still early in the season. I would say they're fairly consistent with our expectations. We expected the season to start slow. We expected customers to defer purchases later into the quarter, and that's basically what we're seeing play out.

Q: Gregory Burns asked about trade down and cannibalization.

A: Yes. So it's important to note that when we introduce new products, we do so that are mostly at greater than fleet gross margin averages. Now that's not always the case, but in most instances, that is. And so as we introduce these new product lines, they should be incremental gross margin rates to the company. Cannibalization is a difficult thing to avoid when consumers are trading down and you have such a broad product portfolio. We believe that we offer tremendous value in our price points and in our products. And the consumer choice is obviously dependent on a lot of different things. But we're there, and it's great to have an ACCO Brands presence for that consumer on shelf when they are making their choice.

Q: Gregory Burns asked about distribution.

A: Yes, Kevin, good question. We do. We think there's opportunities outside our current channels. We actually like certain verticals, and so we're shifting some of our product focus to verticals like health care, for example. Our Kensington business has a good, strong end-user selling organization that we think we can better leverage in the future. But certainly, channel expansion, geographic expansion is an important part of our go-to-market strategy.

Q: Kevin Steinke asked about North America back-to-school and sell-through.

A: Sure, Kevin. That's a really good question. So our products sold through at or better than our customer targets. So from that perspective, we had a really strong season. Our supply chain responded incredibly well through all the disruptions of country of origin and tariffs. We supported our customers throughout. So we were in stock on time, and we supported them with modest late season demand as well. So we think we're well positioned as we transition into 2026 because of the strong supply chain management and sell-through of our product this back-to-school.

Q: Kevin Steinke asked about revenue pushed out of Q3.

A: Yes, I don't know that that's something that's easily defined for us publicly. I think we have a fairly good understanding of it internally. But there's also other dynamics that could come into play. But we do see the orders. They were sizable enough for us to call them out, obviously. But I think we would refer commenting on the specific size because of the other things that may happen in the quarter.

Q: Kevin Steinke asked about tariff-related price increases.

A: So we went to market with roughly mid-single-digit price increases. So each of those get negotiated with our customers, the implementation gets negotiated, et cetera. We want to ensure that our products are fairly priced on shelf that we don't do anything inadvertently to the demand of our products. But the price increases that we took to market and then have been accepted or mid-single-digit increases.

Q: Kevin Steinke asked about Kensington product launches.

A: Yes. Product launches are slow to adapt. That's more of a longer-term benefit. What gives me great enthusiasm is the strength of our pipeline. Our pipeline is large. Our close rate is good. We get a significant amount of our revenue in the Kensington business from end-user deals that our salespeople partner with the trade and channel to develop, and that pipeline is extremely robust. So the new products are being launched in conjunction with a very robust pipeline in Q4.

Q: William Reuter asked about new channels.

A: No. First of all, our business in the channel that you mentioned is relatively small. In fact, it's small on a total percentage basis. But we do see opportunities, as I mentioned, in verticals more so than channels. We think that developing businesses in growing verticals is an important part of our strategy. Developing relationships with the end user is an important part of our strategy. From a channel perspective, I think we've got the appropriate balance for the business here in North America. We have a keen focus on e-commerce, and that is our largest channel, mass retail and then specialty superstores, kind of follow-up behind that. And then you've got the office independent dealers and wholesale channels. So those are kind of the key channels for us in the North American market that we sell product through. And on the tech side, obviously, we sell through tech distributors. So we think we have a fairly balanced channel approach. Where we see opportunities is, frankly, in value in user deals, and that's where our focus is at the moment.

Q: William Reuter asked about tariff-related price increases and gross margin.

A: That was the goal, Bill. I will tell you, though, like we said in the third quarter, we didn't get all the pricing in. So the majority of that improvement in the margin in the quarter really relates to our footprint rationalization and some other cost reductions that we did up in COGS as well. This time, this year, about half of our savings are in COGS and about half are in SG&A. So we're really seeing a benefit from the cost takeout.

Q: William Reuter asked about Brazil macro conditions.

A: Yes. If that came across, then that's not the case. Obviously, we are closely monitoring the developments in Brazil. We watch our order entry, our order input from the market. It's improved slightly from the third quarter, but it's still early in our back-to-school season, and we're predominantly a back-to-school business there. And so we don't want to draw any conclusions on the season, but we certainly see all the things that everybody else is speaking of and are cautious in terms of our spending there, in terms of our production and inventory there. Our customers are being cautious with their inventory purchases. But we have seen some modest improvements in trend over the last 4 to 5 weeks.