Last week, Acco Brands Corporation reported its second set of quarterly results since its merger with GBC in August. And while there were some ‘negative synergies’ that impacted results, it’s all going pretty much to plan


Six months after Acco Brands Corporation was formed as a result of the merger between Fortune Brands’ spun off Acco World and GBC Corporation, its Q4 and full-year results announced last week reflect a period of transition and integration.


Overall Q4 net sales, including GBC’s business, increased 54 per cent to $513 million. When adjusted for the merger, however, net sales declined 2 per cent for the quarter but increased 3 per cent for the year. In the Office Products Group specifically, net sales increased 36 per cent to $340.7 million in Q4, a figure that, when adjusted for the merger, ended up as a decline in net sales of 4 per cent.


Net income for Q4 and the year declined by 6 per cent and 13 per cent respectively, including unusual items. Adjusted for the merger, net income declined 16 per cent for the quarter and 30 per cent for the year. Adjusted office products operating income for Q4 declined 28 per cent to $31.5 million and 20 per cent to $97.4 million for the year.
But overall, the merged company is moving in the right direction, as analyst Derek Leckow of Barrington Research told OPI+: "The business trends overall are positive for Acco Brands. There are some merger-related non-recurring items that will be washing out of the results over the next year. The most important of these is that the two companies were in pretty significant price competition with each other in the months leading up to the merger, and there were some long-term contracts that were put in place during that time that are now having somewhat of a negative result on profitability, especially since we had such a rapid rise in raw material cost and shipping and distribution costs."


He added: "Those contracts will be renegotiated over the next year – I see pretty strong indications that demand levels, especially in the US, for office products continue to rise in line with the growth in white collar employment. We see growth in white collar employment in the US of 2.2 per cent at the moment – that should help to drive continuing strong demand for office products generally. And with Acco Brands’ positioning at the premium end of the market, that will put the company in a very good position for the long term."


In addition to the high raw material, distribution and freight costs that compressed Acco Brands’ gross margins, the company is now also looking very carefully at its overall product portfolio. In the conference call that followed the results announcement, chairman/CEO David Campbell referred to the strong demand for private label products in some areas by customers and confirmed that Acco Brands will be ‘looking at all of its 8,000 products SKU by SKU" to determine how to proceed.


The result will be either cost reduction or product elimination. Leckow said: "Acco identified around $75 million in revenues that are related to lower margin products which the company will be looking at very carefully over the next year, and will decide whether to exit the business or try and change the way in which it manufactures those products, perhaps even use outsourcing to other businesses."


The tail end of 2005 and 2006 were always going to be periods of transition and adjustment, and some substantial investments have been – and will continue to be – made in terms of staff, systems infrastructure, relocation, cost, pricing, etc.


One of the highlights of Acco Brands’ results was its positive cash flow, as Campbell acknowledges: "Our cash flow was strong all year, enabling us to pre-pay $24 million of debt in January 2006 [the mandatory amount]. We continue to take actions in the first half of the year necessary to offset the effects of unfavourable pricing and higher costs – which may include reducing our exposure to low-margin business. In addition, we have made up-front investments to enable the integration of our two businesses. These combined efforts should start producing benefits in the second half of 2006, as integration synergies begin to drop to the bottom line and our overall cost position improves. Our longer-term expectations for this business have not changed."


In fact, the company continues to believe that the integration and repositioning of its Office Products Group will yield annual ongoing net cost synergies of $40 million over the next three years, a portion of which it plans to reinvest in the business.


Barrington Research’s outlook for the company is equally bright in the medium term. "We project 2006 EBITDA of $215 million," says Leckow, "so operating income should be around $155 million. The company will pay down debt as much as it can every quarter. At some stage you might even see them refinance at a better rate. Certainly at the moment they are quite leveraged – the total debt to capital ratio is 69 per cent. For the first half of 2006 we see some negative comparisons on earnings, because of the negative synergies. But then we see the year-over-year comparisons get better from Q3. And from there it’s a steady growth pattern."
And once the integration dust has settled, we may well see some more acquisition activity from Acco Brands. With its strong brands and the amount of cashflow it generates, in the medium term it may be in a good position to selectively acquire other businesses with good brands.


There’s still a fair bit of fragmentation out there…