ACCO Brands (ACCO) Memo

Analyst(s): Seena Honarvar, Calvin Yeh

College/School:College of A&S

Year: 2019 Date: 11/30/15

Business DescriptionACCO Brands is an international office supplies company that produces business and school supplies such as planners, organizers, calendars, presentation supplies, binding and laminating, boards and easels, stapling and punching, and computer accessories. ACCO operates through 28 brands, including Mead, Five Star, At-A-Glance, Tilibra, and Kensington. ACCO’s main competitors are other office supply firms such as Avery, owned by CCL Industires, Moleskine, House of Doolittle, Brownline, as well as the private label brands of Staples and Office Depot.Financial Information:Price (12/1/15): $7.77

P/E (ttm): 8.82

Cash: 70.90 mil Gross Profit (ttm): 497.5

EV/EBIDTA: 6.99x

52wk Range: 6.80-9.45

EPS (ttm): 0.88

Enterprise Value:1,582 mil

EBITDA: 222.4 Unlevered FCF (ttm): 210.8

Market Cap: 824.98 mil

Debt: $780 mil

Revenue (ttm): 1,558.2

EV/Revenue: 1.03x

EBITDA Margin: 14.3%

Proposed TradeAfter thorough research, we recommend a short of ACCO Brands.

Thesis PointsMature markets for paper office supplies, particularly calendars and planners, will lead to a decrease in ACCO’s sales and reduce their consumer base.

● ACCO’s 2014 10-K concedes, “The majority of our revenue is concentrated in geographies where demand for our product categories is in mature stages…” Indeed, ACCO’s North America branch accounted for 60% of total sales in 2014, while ACCO Brands International (primarily Brazil, Northern Europe, Australia, and Mexico) accounted for 32%. Nevertheless, ACCO Brands International is experiencing declining sales volume (explored later). Computer products group accounted for 8% (also experiencing declining sales).

● Paper calendars are being rendered obsolete by digital calendars on phones, computers, and tablets.

● Demand for paper is decreasing. The American Forest & Paper Association October 2015 Printing-Writing Paper Report said total printing-writing paper shipments decreased 8 percent in October compared to October 2014. China's paper industry is transitioning into a slow-growth phase, with growth decreasing to 3% per year, compared to 10.9% average growth in 2002-2012.

● Declining sales in all segments of ACCO Brands’ business illustrates fundamental weakness in demand for their products. Specifically, net sales were down 12% (4% constant currency), North America segment down 6% (4% constant currency), International segment down 26% (5% constant currency), and computer products segment down 13% (6% constant currency).

Emerging economies’ markets for ACCO’s products are more mature than the

ACCO Brands (ACCO) Memomarket perceives. Asian markets, for example, have strong domestic office supplies companies. Poor results from international and emerging markets demonstrate ACCO’s inability to capitalize on the global market.

● ACCO’s international expansion strategies do not account for existing domestic office supply companies in emerging/foriegn markets. Our comparable companies analysis demonstrates that existing foreign comparable companies operating in countries where ACCO is seeking to compete are currently very strong. One misperception is that ACCO will be entering virgin territory for office supplies in these emerging markets, but our comparables illustrate that there are existing foreign office supply companies that will complicate ACCO’s plans for expansion. Moleskine (Europe), King Jim (Japan), Navneet (India), and Shanghai M G Stationary (China) all have stronger EV/Revenues and EV/EBITDA multiples than ACCO. Underlining the misperception that ACCO can easily capitalize on foreign markets, we estimate that the global market for paper office supplies is actually more mature than investors believe, and therefore will lead to a faster decline in the market in the future.

● ACCO Brands International net sales decreased $19.7 million, or 3%, to $546.9 million from $566.6 million in the prior-year period. In the recent quarter, International sales decreased 26% (5% constant currency) compared to last year.

The consolidation of ACCO’s main customers, office supplies retailers, are increasing competition from their private label brands and increasing the customer leverage.

● ACCO’s customers are few but large retailers. ACCO’s top ten customers accounted for 53% of net sales in 2014. Staples, ACCO’s largest customer, accounted for 13% of net sales each year in 2014, 2013 and 2012. Office Depot, ACCO’s second largest customer, accounted for 11% of net sales in 2014. This limited number of large and sophisticated customers, with their own private label brands, increases the risk of a the impact of substantial reduction in sales to these customers on ACCO’s revenues.

● The office supplies industry is seeing significant customer consolidation. Customer consolidation has a negative impact on ACCO, since customers are incentivized to increase sales of their larger private label brands, as well as increasing customer’s leverage and share of ACCO’s shares. An example of the deleterious effect of customer consolidation is the 2013 merger of Office Depot and Office Max (see Exhibit). The period between the announcement and the completion of the merger saw a negative decline in the growth of ACCO’s shares.

● The recent attempt between Staples and Office Depot to merge, while expected to be blocked by regulators, is further evidence of ACCO’s customer consolidation. If the Staples/Office Depot merger is achieved in the future, the combined firm would account for nearly a quarter of ACCO’s total sales.

● Private label brands are highly similar to ACCO’s products. ACCO’s more expensive brand-name planners are not highly differentiated from private label planners. (See Exhibit). Brands by themselves are not true competitive advantages, unless customers are willing to pay more or actually buy the products more often. Unlike ACCO’s competitors such as Moleskine, which differentiates its products with sleek designs and high quality paper, ACCO’s products are remarkably similar in quality and design to private label brands, and yet, ACCO’s products are significantly more expensive. The ACCO’s planner in Exhibit, for example, costs $12 more than the nearly identical Staples brand planner. Thus, ACCOs brand recognition is not enough

ACCO Brands (ACCO) Memoto overcome price differentials.

● Both Office Depot and Staples are pushing sales of their own brands, as their own product brands offer lower costs and higher margins for these producers. These companies frequently have products to compete with those of ACCO Brands.

ACCO’s high debt and low cash lead to low capital expenditures and low cash flow due to high debt payments.

● ACCO’s debt of $780 million nearly equals its market cap of $824 million. This high level of debt eliminates the opportunity of acquisition by another company, since the acquirer would have to assume ACCO’s debt and essentially buy ACCO for twice its value.

● While ACCO holds debt of $780 million, it only has $71 million in cash/cash equivalents.

● ACCO says it needs to expand internationally to survive, but has very little cash to support growth. ACCO’s 10K states, “We plan to grow [in emerging economies] through organic growth supplemented by strategic acquisitions in both core and adjacent categories.” However, with ACCO’s extremely low amount of cash and high debt, it will be difficult, if not impossible, for ACCO to make significant strategic acquisitions.

● ACCO’s significant debt cuts into its cash flows and reduces its opportunity to reinvest in itself. For example, while cash flow from investing was $174 million (ttm), cash flow from financing was -$140 million, primarily due to debt repayments.

● Of ACCO’s $780 million in debt, $299 million is subject to floating interest rates; thus, with the impending rate increase, we expect ACCO to be liable for larger interest payments and cash outflows.

● Furthermore, with ACCOs planned stock buybacks, cash will continue to flow outwards, decreasing cash on hand and increasing the already very high debt/cash ratio.

● With these pressures on cash flows, ACCO Brands has been unable and will be unable to increase CapEx and fund innovative business processes.

The development and implementation of educational technology will increasingly reduce demand for ACCO’s paper school supplies products.

● Across the United States, school systems are accelerating their implementation of technology in the classroom through Bring Your Own Device and/or one-to-one computing. Underlying the state of mature markets for ACCO’s significant school supplies revenue is the increasing growth and integration of educational technology in the classroom, which is replacing the need for paper notebooks.

● Across the US, implementation of bring-your-own-device (BYOD) programs in school districts has exploded since 2013, spreading from 22 percent to 56 percent in 2014. BYOD is primarily concentrated in high school grades (84 percent), followed by middle school grades (74 percent). But even the majority of Pre-K through third grade schools also offers students opportunities to use personal mobile devices for class. Two thirds of districts provide mobile apps for student use.

● Case Study: In Montgomery County, Maryland, a relatively large and diverse suburban school district outside of Washington DC, the Board of Education adopted a blended approach of supporting Bring Your Own Device (BYOD) practices and also purchasing thousands of Chromebooks and tablets for use in the classroom. By 2017-2018, the board plans to have 100,000 devices for its 151,000 students, including

ACCO Brands (ACCO) MemoAndroid-based tablets for younger students in kindergarten through second grade. According to Board of Education Member Eric Guerci, “We are rapidly growing our use of instructional technology in the classroom, and this will decrease the extent to which students use notebooks in class.” (VAR, paraphrased).

● Classes are adapting to online systems for assignments, grades, forums, communication etc. 83% of school districts are embracing strategies for professional development for teachers on the use of mobile devices, 88% for instructional apps, and 83% for managing student-owned devices in the classroom.

● Total US e-learning market will increase from $40.6 billion in 2013 to $51.1 in 2016. E-learning platforms are inherently designed for digital lectures, note-taking, and submission of assignments.

Digital note-taking applications will increasingly offer students and professionals advanced productivity and design features with which paper note-books cannot compete.

● Note-taking apps, such as OneNote, Google Keep, ColorNote, Evernote, and Outline, do not simply offer a place to take notes, but also other features. Outline, for example, provides multitasking features, multi-touch gesture functionality, and takes advantage of iOS9 extensions. Cloud storage, backups, and search-tools make note-taking and studying much more flexible and accessible.

● Note-taking applications are developing features that attract paper-users. “Mobile notetaking applications such as Evernote…makes it easy to scan handwritten notes into a mobile system, and has developed partnerships with developers of smart pens such as Livescribe.” according to Dr. Glenn Bull, Curry School Professor of Instructional Technology. Outline’s Handwriting Mode allows users to write on a touchscreen with different pen widths, zoomed field, resizable protection panel for wrist comfort, and other features.

● Touchscreen accuracy is being refined and also innovated. Apple recently filed patents for a “Method and apparatus for localization of haptic feedback,” which would allow for the localized delivery of a vibration to one point on a touch screen in order to produce a more natural sensation of typing.

● It is more cost-effective for businesses to buy note-taking and/or calendar software than annual bulk purchases of paper notebooks for their employees. Paper office products are non-durable products which have a limited lifetime and need frequent resupply. This is contrasted by note-taking applications, such as Evernote, which are free for use or come with additional features for reasonable subscription fees.

Input prices for ACCO’s products, such as rubber and steel, are projected to increase in the next few years.

● Paper/wood prices are projected to increases by 1-3%.● Plastic (derivative of oil), projected to stabilize (stop declining), possibly increase.● Metals, including aluminium, lead zinc, copper, steel, are projected to increase (see

exhibits below).Currency changes will negatively impact ACCO’s international revenue, which is crucial for ACCO’s success.

● Foreign currency translation reduced sales by $24.1 million, or 4%.● US dollar projected has been appreciating and is projected to continue appreciating

against foreign currencies, especially with the expectation of the Federal Reserve to increase interest rates and the ECB to ease monetary policy.

ACCO Brands (ACCO) Memo● Evidence of the loss from currency changes can be seen in the significant differences

between constant currency sales changes and gross sales changes.ACCO’s product line continues to be very constrained to paper products and accessory products to paper products, contrary to ACCO’s declaration that they are engaging in high product innovation and diversification.

● ACCO’s other product lines include projectors and transparency films, art pens and pencils, greeting cards, binding and laminating products, whiteboards, shredders, and staplers. These are all writing/paper-based in some way and still sensitive to the mature markets that ACCO’s main products face. Some, such as transparency projectors, are particularly mature due to the rise of smart boards, such as Promethean boards.

● ACCO’s research and development expenses amounted to $20.2 million, $22.5 million and $20.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. As a percentage of sales, research and development expenses were only 1.2%, 1.3% and 1.2% for 2014, 2013 and 2012, respectively.

Since ACCO’s P/E and P/S have historically been steady and unchanging, as future earnings/sales decrease, the price will likely fall.

● P/S and P/E multiples have historically been quite steady, so as we expect earnings and sales to decline, we can also expect price to follow suit and decline in keeping the multiples relatively stable (see exhibit below).

MisperceptionsSignificant stock repurchases are supporting artificial price inflation, masking a decline in ACCO’s value.

● ACCO’s price has been relatively stagnant in the past few year, and yet there have been significant stock repurchases. Almost all repurchases during September, October, and some in November. The fall back-to-school season is when ACCO has the most to prove. This is further evidence of how ACCO masquerades their poor performances with stock repurchases.

● On August 21, 2014, ACCO announced it would buy back $100 million in shares in one year. Only 67.1 million have been purchased so far. In addition to the 32.9 million remaining, on October 28, 2015 ACCO announced another $100 million in shares, for a total of $132.9 million. Given that ACCO did not fully meet their buyback target last year, they will be even less likely to meet their larger target this year. ACCO has very limited cash of around $70 million, less than the amount of shares they want to repurchase. Indeed, ACCO's CEO stated in October 2015, “I expect that during this year, we will repurchase approximately $60 million in shares, the maximal allowable under our bank covenants. The remaining free cash flow will be used to pay down debt. We should have approximately $120 million of authorization remaining for future share repurchases as of the end of the year.” He provided no timeframe for completing the lion-share of stock repurchases. So ACCO may either be announcing more repurchases than they know they can actually afford in the near future in order to raise expectations and perceptions, leading to higher expectations of greater inflationary pressures on the price. If so, we can expect the inflationary pressure on the price to be less than the market may expect, and the price would fall more naturally. Alternatively, they may be understating their repurchases. Either way, their stock repurchases are squeezing cash and artificially

ACCO Brands (ACCO) Memoincreases the stock price.

There is a misperception that international countries will not be significantly exposed to educational technology, and thus create revenue opportunities for paper school supplies companies like ACCO.

● ACCO claims it can significantly profit from emerging markets, namely Latin America and parts of Asia, the Middle East and Eastern Europe, since increased educational opportunities will increase demand for paper school supplies. However, educational technology is rising quickly in developed and emerging markets around the world. Global funding for educational technology increased by 55% in 2014.

● In Brazil, the percentage of people using the Internet has grown from 9% in 2002 to 50% in 2012. In March 2014, Brazil’s Ministry of Education launched a partnership with Amazon to digitize more than 200 million textbooks and distribute them to hundreds of thousands of Brazilian teachers through Whispercast. Additionally, 20% of the funds from Start Up Brazil, the government’s start-up financing fund, went to educational technology. More established foreign companies are also moving into the Brazilian educational technology market.

● In India, educational technology industry has grown in recent years. Prime Minister Narendra Modi is advocating for “Digital India” and his government has supported SWAYAM web portal which provides access to MOOCs. MOOCs are extremely successful in India, and Indians have the second highest usage of the largest three MOOC portals in the world. The Indian government is also granting roughtly $80 thousand to school districts to invest in technology. In 2011, the government subsidized Aakash, an inexpensive educational tablet. India’s Internet usages doubled from 7.6% in 2010 to 15.1% in 2014.

● In China, the online education market is projected to be worth $20 billion in 2015. In 2014, Chinese educational technology companies raised $321 million in equity investment, including companies like online English language learning platform 51Talk online homework platform 17Zuoye, which has 10 million students across 415 cities.

ACCO Brands’ planned stock buybacks reflect high insider confidence. Nevertheless, a look at recent insider transactions shows overwhelming insider sell offs.

● In the last 12 months, of the 38 total insider sells 36 have been sells while only 2 have been buys. Thus, many insiders in ACCO Brands are exiting their position in the company.

● In terms of volume, 22,844 shares were bought by insiders while 1,305,205 shares were sold. This created a net sell of 1,282,361 shares by insiders. See the chart below for a visual representation provided by NASDAQ.

● Over the past 6 months, the net percent change held by insiders was -86.56%ACCO Brands’ stock price will not move very much, especially with institutional ownership above 90%.

● However, with many institutional investors, the stock price may move in blocks/clumps as institutional investors begin to sell off the stock and realize its declining potential.

Risk AnalysisWhat factors can affect the position? What are some concrete measures that can indicate we are wrong?

ACCO Brands (ACCO) Memo● ACCO’s multiples are lower than industry. These low multiples may attract investors

which would drive up price● ACCO’s international sales may rebound and experience growth if emerging

economies experience significant white collar growth. Nevertheless, we expect these markets to bypass a long period of paper products given the acceleration of educational technology.

● Expectations for ACCO’s recent quarters have been low. If expectations are too low, even if ACCO declines, it may not decline as fast as expectations. For example, ACCO beat Q3 expectations as they were already low, due to some cost cutting.

● ACCO Brands has the potential to see increased earnings per share. This is because even though revenue is decreasing, ACCO’s stock buybacks may decrease the number of shares outstanding. Furthermore, ACCO may be able to continue improving productivity and cutting costs. Moreover, ACCO has many costs between operating income and net income that it can reduce or remove, such as restructuring costs and income tax expense (ACCO Brands has exercised its deferred tax assets before).

● ACCO has gained share in an online market (Amazon), and it can continue to gain share in this market which may bolster sales. Nevertheless, we still believe overall demand is declining.

● If the dollar depreciates, ACCOs sales will increase around the globe, as many lost sales are due to currency changes. Nevertheless, we can hedge against this risk by shorting the dollar.

Value-added ResearchSchool systems moving to significantly expand educational technology, replacing notebooks: “We are rapidly growing our use of instructional technology in the classroom, and this will decrease the extent to which students use notebooks in class.” - Eric Guerci, Board of Education Member, Montgomery County, Maryland (paraphrased)Note-taking applications are developing features that attract paper-users: “Mobile notetaking applications such as Evernote…makes it easy to scan handwritten notes into a mobile system, and has developed partnerships with developers of smart pens such as Livescribe.” – Dr. Glenn Bull, Curry School Professor of Instructional Technology and Co-Director of the Center for Technology & Teacher Education.$299 million of ACCO’s debt is subject to floating interest rates, and will put pressure on ACCO with the impending rate increaseAs ACCO has $299 million in debt exposed to floating interest rates, they will experience greater interest expenses with the impending rate increase. Thus, we expect the impending rise in interest rates to eat into ACCOs cash flows.The prices of many commodities and inputs that ACCO uses are stabilizing or projected to increasePart of ACCOs success in cutting costs is due to the fact that many commodity prices have significantly decreased recently, such as oil and steel. Nevertheless, these commodities and many others that ACCO uses are expected to see increases in prices or at least stabilize their price.

ACCO Brands (ACCO) Memo(Valuation and other relevant information)(Page of Exhibit/s)

Exhibit: ACCO closely follows the price changes of its biggest customers.

Exhibit: 2013 Office Depot (ODP) and Office Max merger. Note the deleterious impact of customer consolidation on ACCO.

Exhibit: Private label brands are very similar to ACCO’s brand-name products, and are consistently less expensive.

ACCO Brands (ACCO) Memo

Exhibit: Survey of 32 UVa Students on preferred medium for planning and note-taking

ACCO Brands (ACCO) Memo

Exhibit: Input prices projections for metals, steel,

Exhibit: Steady multiples

ACCO Brands (ACCO) Memo

Exhibit: Insider sells

ACCO Brands (ACCO) Memo