ACCO Brands' Q3 2025 Earnings Call: Contradictions Emerge on Back-to-School Performance, Price Hikes, International Struggles, Brazil Outlook, and Gaming Strategy

Date of Call: None provided

Financials Results

• Revenue: Reported sales decreased 9% in Q3 (favorable FX benefit ~+2%)
• Gross Margin: 33%, improved 50 basis points versus prior year (gross profit $127M, down 8%)
• Operating Margin: Adjusted operating income $39M, down from $45M prior year; Americas adjusted operating margin 14.4%, International adjusted operating margin 10.2%

Guidance:

• Reaffirming full-year reported sales decline of 7.0% to 8.5%.
• Reaffirming adjusted EPS for full year of $0.83 to $0.90.
• Adjusted free cash flow expected approx. $90M to $100M (includes $17M from asset sales).
• Expect Q4 improvement driven by pricing realization, FX tailwind, and growth in technology accessories (Switch 2 momentum).
• Anticipate net leverage of ~3.9x at year-end; no debt maturities until 2029.

Business Commentary:

* Sales Performance and Market Challenges: - ACCO Brands reported third-quarter sales that were slightly below their third-quarter outlook. - The decline in sales was driven by softer demand globally, trade-down in some categories, slower implementation of tariff-related price increases, and the timing of forecasted revenue that moved out of the third quarter.

• Cost Reduction Initiatives:
• The company realized an additional $10 million in savings in the third quarter, bringing the cumulative program total to approximately $50 million.

• The cost reduction is part of a multi-year program aimed at improving profitability and cash flow.

• Regional Sales Variation:

• In the Americas segment, sales for the back-to-school season in the U.S. and Canada finished in line with expectations, down mid-single digits.

• In Latin America, sales were weaker than expected due to a constrained consumer and trade down, particularly in Brazil and Mexico.

• Gaming Accessories and New Product Launches:

• PowerA sales declined in the quarter due to a combination of reduced demand for legacy consoles and timing for Nintendo Switch 2 accessories.

• The company expects solid growth in the fourth quarter for the gaming accessories category, supported by the launch of the Nintendo Switch 2 wireless controller.

• Strategic Initiatives and Product Development:

• ACCO Brands is focused on pivoting its business to higher growth categories, streamlining operations, and enhancing its product portfolio inorganically.
• The company is introducing new products, such as the West Village line by Mead and ergonomic solutions in EMEA, to appeal to value-conscious consumers and capitalize on growth opportunities.

Sentiment Analysis:

Overall Tone: Neutral

• Management noted Q3 sales were below outlook and reported sales fell 9%, but gross margin rose 50 bps to 33% due to cost reductions and realized ~$50M of a $100M cost program. They reaffirmed full-year sales and EPS guidance and expect Q4 improvement from pricing realization, FX, and tech-accessory momentum (Switch 2).

Q&A:

• Question from Joe Gomes (Noble Capital): You mentioned that you’re confident to see improvement in the fourth quarter. What underpins your confidence for fourth quarter?
  Response: Expect Q4 improvement driven by technology accessories (Switch 2 momentum and stronger Kensington product launches), delayed tariff-related price realization shifting from Q3 into Q4, and timing of orders that moved into Q4.

• Question from Joe Gomes (Noble Capital): You mentioned trade down in some categories. Are we seeing heightened competition, or just consumers trading down because of the economy? Any color?
  Response: Seeing consumer trade-down across geographies; ACCO has brands across price points to capture lower-price demand, but trade-down pressures top-line and modestly impacts profitability.

• Question from Joe Gomes (Noble Capital): You discussed new product launches and evaluating strategic opportunities—are you referring to additional acquisitions?
  Response: Open to accretive, highly synergistic M&A, plus licensing and OEM expansions that reposition the portfolio into faster-growing categories, channels, or markets.

• Question from Greg Burns (Fidelity & Co.): The back-to-school season got off to a slow start in Brazil. Have you seen any pickup there as we’ve moved into this quarter?
  Response: Season remains early; start was slower as expected with customers deferring purchases later into the season—consistent with internal expectations.

• Question from Greg Burns (Fidelity & Co.): With trade-down dynamics and new Mead product line, how do you manage cannibalization of higher-end lines?
  Response: New product introductions are generally above company gross-margin averages and intended to be incremental; both premium (Five Star) and value (Mead) brands gained share in U.S. back-to-school, which mitigates cannibalization.

• Question from Greg Burns (Fidelity & Co.): Do you have the right syndication/distribution footprint, or opportunities to expand/optimize to stimulate sales growth?
  Response: Channel/geographic expansion and verticals (e.g., healthcare) are opportunities; leveraging Kensington's end-user salesforce and pursuing targeted channel growth are priorities.

• Question from Kevin Steinke (Barrington Research): For North America back-to-school, was sell-through softer and how meaningful was product trade-down?
  Response: Sell-through met or exceeded customer targets; inventory and supply-chain execution were strong, with minimal replenishment but solid on-shelf performance.

• Question from Kevin Steinke (Barrington Research): How meaningful was the revenue that shifted from Q3 to Q4, and what were the price increase magnitudes tied to tariffs?
  Response: Company declined to quantify the exact shift publicly; price increases taken to market were mid-single-digit on average, implementation is negotiated with customers and rolled into Q4.

• Question from William Reuter (Bank of America): Are you overexposed to channels like pharmacies that are under pressure and contributing to North America revenue headwinds?
  Response: Exposure to that channel is small; e-commerce is the largest channel and overall channel mix is balanced; focus is on verticals and end-user deals for growth.

• Question from William Reuter (Bank of America): Did you pass tariff-related cost increases through dollar-for-dollar, and what drove the gross margin improvement in Q3?
  Response: Goal was to pass through tariff costs, but not all pricing was implemented in Q3; majority of Q3 margin improvement came from footprint rationalization and cost-reduction actions (savings roughly split between COGS and SG&A).

• Question from William Reuter (Bank of America): Given challenging macro in Brazil, have you seen acceleration or improvement recently?
  Response: Order entry and trends have modestly improved over the last 4–5 weeks, but season is early and management remains cautious about concluding a recovery.

Contradiction Point 1

Back-to-School Season Performance

It reflects differing views on the performance of the back-to-school season, which is a critical sales period for ACCO Brands, impacting investor expectations and market share analysis.

Can you elaborate on the trade down you mentioned? - Joe Gomes(Noble Capital)

2025Q3: We are seeing trade down across most geographies, but our brand portfolio is well-positioned to capture sales at different price points. The consumer choice is important, and we offer value in our products. - Tom Tedford(CEO)

Can you quantify how much of the back-to-school season's decline is due to first-quarter prebuying, tariff demand dynamics, and declining demand for product categories? - Gregory John Burns(Sidoti & Company, LLC)

2025Q2: It's early in the season, and inventory positions are good, but demand replenishment is uncertain. Customers are managing inventory tightly, and expectations for replenishment are low, but expectations could change positively. - Tom Tedford(CEO)

Contradiction Point 2

Price Increases and Revenue Impact

It involves differing expectations on the impact of price increases, which are crucial for managing revenue and customer perceptions.

How significant is the deferred revenue from the third quarter? - Kevin Steinke(Barrington Research)

2025Q3: We have a good understanding of the shifted revenue. It's sizable enough to call out as a factor contributing to the miss of the guidance range. The specific size isn't disclosed due to possible other dynamics in the quarter. - Tom Tedford(CEO)

Will your price increases fully offset Q2 tariff costs and how will this affect gross margin? - William Michael Reuter(BofA Securities, Research Division)

2025Q2: Price increases are intended to cover tariff costs and maintain gross margins. ACCO Brands expects a modest improvement in gross margin in the second half of the year. - Deborah A. O'Connor(CFO)

Contradiction Point 3

International Segment Performance and Expectations

It highlights differing expectations and performance of the international segment, which affects overall business strategy and investor expectations.

Is the softer consumer sell-through an indication of trade-down during the back-to-school season? - Kevin Steinke(Barrington Research)

2025Q3: International segment had a slow start due to customers pulling in inventory earlier and softness in Germany. Other regions performed closer to expectations. We expect international to perform better in Q2 but off a lower base due to North America challenges. - Thomas Tedford(CEO)

How did the segments perform against expectations, specifically in international markets? - Greg Burns(Sidoti)

2025Q1: International segment had a slow start due to customers pulling in inventory earlier and softness in Germany. - Thomas Tedford(CEO)

Contradiction Point 4

Macro Economic Conditions in Brazil

It reflects differing views on the macroeconomic conditions in Brazil, which can impact ACCO Brands' operations and revenue projections in the region.

Have you seen an increase in sales in Brazil for the back-to-school season? - Greg Burns(Fidelity and Co.)

2025Q3: We monitor trends closely and see modest improvements in order input over the last four to five weeks. It's still early, and we remain cautious with production and inventory. - Tom Tedford(CEO)

Can you clarify the relationship between Switch 2 and PowerA? - Joseph Anthony Gomes(Noble Capital Markets, Inc., Research Division)

2025Q2: Results are consistent with expectations, and it's still early in the season. We expected a slow start with deferred purchases. The season is playing out as expected. - Tom Tedford(CEO)

Contradiction Point 5

Gaming Accessory Market Participation and Strategy

It reflects differing views on the company's strategy and expectations within the gaming accessories market, which could impact revenue and competitive positioning.

Are you referring to additional acquisitions in the strategic opportunities mentioned? - Joe Gomes (Noble Capital)

2025Q3: We are constantly evaluating accretive acquisitions, licensing agreements, and expansion of OEM relationships to reposition our product portfolio into faster-growing categories, channels, or markets... We remain confident in our strategic plan, even as we continue to adapt and respond to the ever-changing market conditions. - Tom Tedford(CEO)

Can you provide an update on the partnerships with Epic Games and the distribution in Japan for Nintendo and Sony? - Joe Gomez (Noble Capital)

2024Q4: Gaming was strong in 2024 due to new product introductions and international expansion. The licensing agreements opened doors in markets like Japan, leading to positive Q4 results. However, headwinds are expected in 2025, particularly in the first half, due to Nintendo's upcoming next-gen Switch launch. - Tom Tedford(CEO)