ACCO BRANDS (ACCO) Q2 2026 earnings call transcript

Thank you. Good morning, and welcome to the Echo Brand's conference call to review our second quarter results. Speaking on the call today, is Tom Teppert, President, Chief Executive Officer of Echo Brands, and Deb O'Connor, Executive Vice President and Chief Financial Officer.

Slides that accompany this call have been posted to the Investor Relations section of Echo Brands. com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude amortization and restructuring costs, non-cash, goodwill, and intangible asset impairment charges, bargain purchase gain, unusual tax items, and other non-recurring items, and include adjustments to reflect the estimated annual tax rate on quarterly earnings. Schedules of adjusted results and other non-gap financial measures in a reconciliation of these measures to the most directly comparable gap measures are in the earnings release and slides that accompany this call. Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking, non-gap financial measures.

Forward-looking statements made during the call are based on the beliefs and assumptions of management based on the information we have at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially. Please refer to our earnings release and SEC filings for an explanation of certain risk factors and assumptions. Our forward-looking statements are made as of today, and we assume no obligation to update them going forward. Now, I will turn the call over to Tom Tetford.

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

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

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

The difficult demand environment for peripherals reflects cautious spending in users due to elevated hardware costs, constrained memory chip availability, a soft console gaming market, and shifts in enterprise investments to AI. We expect these trends to continue in the second half of the year. In gaming accessories, second quarter comparisons were difficult due to last year's initial load-in of accessories for the Nintendo Switch to launch. We remain optimistic in our power agreement and believe we are well positioned to benefit when industry dynamics improve. We expect a fourth quarter release of Grand Theft Auto 6 to drive positive sales momentum in gaming accessories categories. In computer accessories, industry trends worsened as global PC shipments declined. Our computer accessory categories were directly impacted by lower hardware demand.

The EPOs integration remains on track with second quarter sales ahead of our expectations. We continue to expect approximately 80 million in sales in 2026 and 15 million dollars in cost energies in 18 months from the closing date of the acquisition. While the near-term demand environment is challenging, the targeted technology peripheral categories in which we compete offer attractive long-term growth opportunities. We continue to execute our strategy to expand our global market shares and enhance our technology peripheral's portfolio through organic and inorganic initiatives in these large and growing categories.

Turning to cost optimization and productivity, we continue to manage costs well and expect to realize our targeted $100 million cost reductions this year. In summary, I am pleased with the second quarter results and the execution against our value enhancing initiatives. We are making meaningful progress on our strategy to transform ACO brands into a more focused, efficient and growth-oriented company. I will return to answer your questions.

Now let me turn the call over to Deb.

Thank you, Tom, and good morning, everyone. We were pleased to deliver second quarter sales and adjusted EPS above our outlook. Reported sales in the second quarter increased 5 percent and comparable sales were down 2 percent. Growth in the quarter was driven by the Epos acquisition and favorable FX. Comparable sales reflect growth for back-to-school products in North America as well as strong performance in Mexico. This was partially offset by soft-demand in Brazil and in technology peripherals. Our international segment experienced a weak quarter in most markets.

Adjusted growth profit for the second quarter was $138 million and increase of 6 percent with the margin rate of 33.1 percent, which was up 20 basis points. The margin rate increase was mostly attributable to cost savings. Adjusted SG&A expense of $89 million is up compared to the prior year. What the increase is entirely due to the Epos acquisition. We continue to have strong cost mitigation in place with savings more than offsetting cost inflation. Adjusted operating income for the second quarter was $48 million up versus the prior year, reflecting cost savings partially offset by fixed cost deleveraging due to organic volume declines. The integration of Epos remains on track in our full-year outlook includes $80 million of 2026 sales.

As we previously mentioned, Epos has a higher gross profit rate than our consolidated average, but we expect it to be neutral to adjust the EPS for the year.

We remain on track to deliver the outlined $15 million in cost synergies within 18 months from the date of the acquisition. Before moving to the segment results, let me provide an update on the status of our tariff refunds. We recently submitted claims for $20 million of refunds related to Phase 2, which we expect to receive in 2026. We will submit an additional claim of $5 million expected to be received in 2027. Our actual results and our outlook does not assume any benefit from these two claims. We are accounting for this benefit as a gain contingency, which delays our recording of the refund until receipt is assured. Let's turn to our segment results for the second quarter.

In the America segment, sales were up 6%, with comparable sales up 2%. We had good growth in learning and creative in both North America and Mexico, which was partially offset by softer demand in Brazil and in our core office and technology peripheral products. We now expect sales of back-to-school products to be at mid-single digits for the full season. The America's adjusted operating income was $56 million in the second quarter, up approximately $13 million, with the margin rate improving 380 basis points to 21.2%.

The margin rate improvement was driven by stronger volume and cost savings. Remember that prior year results were impacted by tariff-related disruption, and the current year margin rate is comparable to the 2024 rate. In the international segment for the second quarter, sales were up 4%, with comparable sales down approximately 9%.

Demand in Amia and Australia was soft due to purchasing hesitancy related to geopolitical and economic factors. In addition, the planned Amia distribution system upgrade disrupted our supply chain and customer deliveries, which also negatively impacted sales. This disruption is behind us, and we saw improved performance in June. International adjusted operating income was $4 million with the margin rate at 2.4%, both down versus the prior year.

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

Just a reminder that the second quarter is our peak quarter for borrowing, and we anticipate leverage to be within the range of 3.7 to 3.9 times at year end.

Now let's move to the outlook. For 2026, we are raising our expectation for both full-year reported sales and adjusted EPS. We expect reported sales to be up with a range of 2-5% and adjusted EPS to be within the range of 87-91 cents. This outlook reflects a prudent sales expectation in the back half of the year, as we are forecasting weaker demand due to geopolitical and economic factors. In addition, the second half sales has a greater mix of lower growth traditional office products. We do anticipate a lower gross profit and operating income margin compared to prior year due to higher inflationary costs and the fact that our pricing efforts will lag cost increases. Free cash flow is expected to be within the range of $75 to $85 million with $24 million in restructuring payments and $15 million in CAPX.

Lastly, as I previously said, we anticipate a consolidated leverage ratio within a range of 3.7 to 3.9 times. For the third quarter, we expect reported sales to be within a range of down 1 to up 2%. We expect adjusted EPS to be within a range of 17 to 21 cents. While the current environment remains dynamic, we are confident in the future of our company.

We have no debt maturities until 2029 and a long history of productivity savings and cost management. Our strategy pivot is an exciting opportunity for Aco Brands to accelerate growth and potential value creation for our shareholders.

Now let's move on to Q&A where Tom and I will be happy to answer your questions.

Great. Good morning. This is Tom. We're pleased with the early reads that we see in back to school. Our sell-in was strong. We see the sell-through or sell-out of our products again early in the season to be in line or better than our plan. And our brands are taken share in the first few weeks of back to school. Our inventory positions are in a good spot. Our supply chain teams work very closely with our customers to ensure that we set on time. Our sell-through targets are consistent to prior year. And we came out of the season last year, fairly clean across most retailers.

So we're cautiously optimistic about the season. And we'll see. This is an important few weeks of selling for our brands in retail.

Is that like a something that you licensed? And what are the opportunities for you to leverage EPOS through Power-A and gaming? Good question. Lucid Sound is not a licensed brand. It's an own brand for Aco brands. It's largely dedicated to retail and it's exclusively supporting gaming consumers. EPOS has a bit of a different consumer set. It's predominantly focused on enterprise.

It is a brand that has unified certification certificates across most of the solutions that are in the market today, including things like Microsoft Teams, Google Meet. So it serves a different purpose. It serves a different consumer. It's typically higher quality sound and audio solutions. So there are opportunities for us to expand the EPOS brand to serve more customers, more consumers within our portfolio. We're early in the integration efforts. We have focused the initial integration efforts on ensuring that we're doing no damage to the company. So the IT infrastructure, getting the synergy conversations complete and behind us.

We just now are starting to focus on the growth opportunities and growth synergy. So we're excited about what the potential is for the EPOS product portfolio and capabilities within our organic product portfolio. But we're early in identifying those growth opportunities. As we said in our prepare remarks, we're very pleased with EPOS in the first few months of ownership. They've overachieved our expectations. We've inherited a great team, really strong capabilities, a great product portfolio. So we're excited about the future.

No, I think that's right, Kevin. I think we've had a strong first half and it flowed through to the full year. Our expectations for the back half are fairly consistent with what we've been saying all along. But I do think we've had a stronger first half than we had previously provided.

Yeah, good question, Kevin. So we continue to be optimistic about the future growth opportunities within our technology peripheral categories. You know, long term we see them as very attractive growth opportunities for the company. We think our brands have a strong position in the categories in which we compete in that we can leverage for growth. Our pipeline has been disrupted in the short term within our enterprise businesses, predominantly supported by our Kensington brand globally. Enterprise spend has slowed, particularly in the second quarter. The beginning of the year was consistent with our expectations in the planning process. But Q2 saw a significant slowdown in some of our end user demand and our pipeline while still robust. Our close rate is just slowing.

We think those deals are just getting trying to absorb the additional hardware expenses that they're experiencing and they're navigating a fairly dynamic AI environment that's taking up operating budgets that were probably initially focused on accessory spend. So there's a number of dynamics that in the short term are disrupting demand. But we do think long term these are very attractive categories for our company to compete in.

What was driving that strength there? Yeah, so last year we made some aggressive changes in how we went to market, including some aggressive price increases. We have really looked at that business very strategically, looked at how we go to market our pricing in our core categories, our sales and center plans, our product assortment. And I think it's just a combination of a number of changes that we've made strategically in the market. Our team there is doing a great job of executing against our strategies and you can see it in the results.

Thank you, Kevin.

The first one is you guys are doing really well with the integration of the EPOS acquisition. And I was wondering where that kind of leaves you in terms of future M&A pipeline or ability to integrate another acquisition that size soon or would you need more time? Yeah, it's it's a good question, Hale. So we certainly want to be careful about our pipeline. We're excited about opportunities we see in the market.

We are getting close to the completion of the internal integration of EPOS and starting to shift our efforts towards growth initiatives and growth synergies. But we do think the pipeline is attractive. We think in the near term there may be opportunities for us, but we obviously can't comment on any specifics, but we're close to the end of the integration efforts for EPOS and and should be in a position to do something again relatively shortly.

We're not really sure until things get back into balance. Yeah. So so you may have seen or you may start seeing hardware really being impacted by these shifts and these cost increases in disruptions, accessories, particularly our accessories tend to flow along with hardware deployments. And so with PC sales being down, it's impacting our accessories, attach rates.

So Deb, you mentioned some incremental inflationary impacts. How has that cost increased this year? And I guess how much greater cost do you expect versus your expectations at the beginning of the year?

Yeah. So we started seeing some in the second quarter that were a little bit greater. You know, I think as we look to the back half, there's a lot of factors that way into how much inflation will actually come through, how long the conflicts continue and how long fuel is questionable. So we've, again, as I said, kind of programmed the back half very comparably to what we've done in the past, our price increases generally lag. You know, when you're thinking of kind of our international segment and some of the global entities around the world. So we're kind of comparable to where we were, except for a little hesitant to, a little more hesitant as we see these conflicts going longer.

Are you having to meaningfully raise your prices as a result of these higher input costs? So our pricing strategy is different by market and geography and product category. So we're looking at each one of our categories, each one of our geographies, assessing the ability to pass through price. We don't want to farm demand and an environment that's already got a cautious consumer and business spending dynamic that we're trying to navigate through. But we do anticipate having to push through additional cost increases globally. And those will differ in by market and differ by product category.

Okay. Thank you.

I will now turn the call back to Tom Tedford for closing remarks. Thank you, everyone, for joining us. We are pleased with our second quarter results and expect the combination of the EPOS acquisition momentum from our growth initiatives and positive foreign exchange to drive revenue improvement in 2026. Our commitment to operational excellence through continued cost management and productivity programs position us to deliver improved profits and cash flow. With our optimized operational structure and momentum with leading brands, we have a strong platform to generate consistent free cash flow while strategically repositioning ACO brands towards faster growing technology peripheral categories.

I want to thank our ACO brands team for their dedication and good work this quarter. We appreciate your interest in ACO brands. And I look forward to talking with you when we report our third quarter results in October.

This concludes today's call. Thank you for attending. You may now disconnect.