ACCO (2020 - Q3)

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 ACCO Brands Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions] I will now hand the conference over to your speaker today, Christine Hanneman. You may begin. Christin

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands Third Quarter 2020 Conference Call. Speaking on the call today are Boris Elisman, Chairman, President and Chief Executive Officer of ACCO Brands Corporation; and Neal Fenwick, Executive Vice President and Chief Financial Officer. Slides that accompany this call have been posted to the Investor Relations section of accobrands.com. When speaking about our results, we may refer to adjusted results. Adjusted results exclude transaction, integration and restructuring costs and reflect an adjusted tax rate. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP 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 adjusted earnings per share, free cash flow, net leverage ratio or adjusted tax rate guidance. Forward-looking statements made during the call, including statements concerning the impacts of the COVID-19 pandemic on the company, are based on the beliefs and assumptions of management based on information available to us at the time the statements are made. Our forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially. Among the factors that could cause our results to differ materially from our forward-looking statements are the scope and duration of the COVID-19 pandemic, government actions and third-party responses to it, and the consequences for the global economy as well as the regional and local economies in which we operate, uncertainties regarding how geographies, distribution channels and consumer behavior will evolve over time in response to the pandemic and its impact on our business, operations, results of operations, financial condition and liquidity. Please refer to our earnings release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements are made as of today, and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session. Now I will turn the call over to Boris Elisman.

Good morning, everyone. Thank you for joining us. I will spend a few minutes reviewing the third quarter results, including the impact of COVID-19 on our business and implications for the fourth quarter. Neil will follow me with more color and details on the third quarter and provide additional comments on our cost reductions, balance sheet and cash outlook. Then we'll take your questions. I'm very pleased with our third quarter results. Net sales declined at a lesser rate than we expected, down 12% versus prior year to $444 million. That's a substantial improvement over the second quarter when sales declined 29%. Our adjusted EPS was $0.19 at the high end of our guidance as we benefited from relatively better sales and broad cost reduction actions we have taken worldwide. While the economic environment improved in the third quarter compared with the second quarter, we're still in the middle of the worst recession of our lifetimes with demand for our products being impacted in many geographies by remote education, working from home, high unemployment and low business confidence. This makes our third quarter results that much more impressive. They demonstrate the strength, breadth and balance of our global business and product portfolio. We are not dependent on any one area for success and have done a good job partially mitigating channel, customer or product line declines with growth somewhere else. The parts of our private portfolio that are focused on consumers, technology or home usage had strong demand. We saw good sales growth in Kensington computer accessories, especially laptop docking stations, TruSens air purifiers, DIY tools and Derwent Art supplies areas that are focused on in-office or in-school use have lower demand. Sales of large whiteboards, bulletin boards, large shredders and laminators, binding machines and binders were soft. Online and technology channels did really well. While traditional brick-and-mortar stores and resellers were impacted by weaker back-to-school demand, reduced store traffic and lower business demand. We also did an excellent job managing expenses reducing them by $20 million in the quarter and $63 million since the beginning of the year. Again I'm very pleased with our results. Overall EMEA had a strong quarter in North America, Asia and Australia and New Zealand did relatively well. During the third quarter more businesses reopened, some students returned to physical schools and many governments continue to provide economic support to consumers and companies. As more people return to schools and offices, our sales recovery increased. In Europe, we had the strongest sales recovery with comparable sales down only 2% in the quarter. Despite its current challenges, Europe managed the economic impact of the pandemic better than our other geographies. Most European countries have reopened, schools restarted in person on September 1, throughout the area, and many employees went to their offices at least for a few days a week. But it is not just the improved environment that is the reason for our strong performance in EMEA. Our teams did a great job servicing and calling our customers throughout the pandemic. We stayed open and supported them, when many of our competitors couldn't or wouldn't. As a result, we gained more business and took market share in the third quarter. We saw good growth in manual shredders, DIY tools, lamination and signage products, all categories that are seeing increased demand due to the pandemic. We also introduced new products such as partitions to meet demand for social distancing at the office. I'm very pleased with our results in EMEA. North America had a less robust, but still good quarter, especially when considering the environment. Third quarter sales were negatively impacted by remote back-to-school starts in the U.S. The industry estimates that 70% of K-12 students in the U.S. were not participating in in-person learning in the third quarter. That number in Canada was approximately 30%. And this situation reduced demand for school products in the quarter. As more students go back to in-person education in the fourth quarter, we believe the demand for school products will extend beyond this traditional summer season well into the fall and even the winter. While overall back-to-school sales were down, we believe we have maintained or taken share in the note-taking category led by our five Star brand. Kensington had an outstanding quarter in North America, growing over 100% year-on-year from the strength of a large deal and a strong demand for work from home products. Our third quarter was down significantly in Latin America, because schools are still closed in Brazil and operating remotely in Mexico. We expect difficulties in Latin America to continue in the fourth quarter and through the early part of next year. All of our production and warehouse facilities have remained open in the quarter to the extent necessary to meet customer demand. Most of our office employees worked from home during the third quarter and continue to do so now. While we have seen our business improve, there's still a lot of uncertainty around when offices and schools will fully reopen and when the virus will be contained enough for more normal economic activities to take place. We continue to adapt our strategy to respond to both challenges and opportunities in the current environment, as we expect the economic recovery to take quite some time. We are assuming a shift in consumer behavior post-recovery and we are changing product and channel portfolio investments as a result. We're increasing support of TruSens, our wellness products brand by launching specialty air filters to target flu, allergies, pet odors and smoke. You will see other TruSens wellness products launching later this year and next year to build upon our strong momentum. Our Kensington line is also adding new work from home items and has a solid pipeline of customer orders. We will be extending our line of personal shredders to appeal to increasing work from home needs and we're investing in our direct ecommerce capabilities to satisfy growing consumer demand for direct fulfillment. On the other side, we are reducing our investments in some of the commercial office products such as wide format laminators and large whiteboards, as we expect demand for such products to remain weak. We are confident we will withstand the current challenges. We also believe we need to take advantage of the opportunities the current environment creates, to accelerate our transition to a more brand and consumer-centric company. We are pleased with our progress thus far and we'll continue to work to accelerate the base of this transformation. We are a large diversified global company, with a strong balance sheet, and will deliver consistent strong free cash flow. Given our financial strength and the proactive steps we have taken to reduce costs, we expect to be able to maintain good liquidity as we manage through the current environment. Our management team has overcome difficult economic and industry conditions before, and we have made great strides over the years to create a more resilient and more profitable company. I expect that to continue. Now, I will turn the call over to Neil for a review of the segments, our outlook and other financial commentary, and then I'll join him in answering your questions. Neal?

Thank you, Boris, and good morning everyone. I'm going to discuss the impacts of COVID-19 throughout my comments. Those impacts include the operational, financial and other effects on ACCO Brands, its customers, end users of its products, school and business closures, work from home, remote and hybrid learning, government orders, manufacturing distribution, supply chain disruption, resulting from COVID-19. And the actions of ACCO Brands, its customers and end users have taken in response to the pandemic, including actions we have taken to manage our inventory and credit risk under the circumstances. Our third quarter reported net sales decreased 12%, due to lower demand from the impact of COVID-19. As Boris noted, we saw strong sales growth in product lines that focus on work and school from home such as our Kensington computer accessories and TruSens air purifiers, but North America back-to-school sales were sluggish and its commercial sales remain weak. Third quarter net income was $19 million or $0.20 per share. Adjusted net income was $18 million and adjusted EPS was $0.19. Adjusted EPS was at the high end of our outlook based on better relative sales and our cost reduction efforts. Our gross margin was almost 29% compared with 31% in 2019. And the decrease was largely the result of declines in North America and international from unfavorable product mix and lower fixed cost absorption, primarily because of lower demand. SG&A expenses were $84 million compared with $96 million last year. SG&A as a percent of sales was 19% flat with last year, primarily because of cost reduction efforts, offset by sales deleveraging. As we indicated in our first and second quarter earnings releases, we have taken many cost reduction actions in response to COVID-19 and participated in government assistance programs when we qualified so as to keep employees rather than implementing layoffs or furloughs. In February and March, we took early temporary actions to protect the health and safety of our employees and to aggressively reduce cost to protect our business in the near-term. In the second quarter, we announced a restructuring charge to take more permanent and structural changes to our business including headcount reductions which we initiated in North America and Mexico in the third quarter. The $7 million restructuring charge that we took in the second quarter is expected to produce an annualized run rate savings of $11 million. In the third quarter, we achieved $20 million in total for both normal productivity and additional cost reductions including one quarter of benefits from the second quarter restructuring actions. Moving on, adjusted operating income was $35 million compared to $52 million last year due to lower sales, lower fixed cost absorption, and additional provisions for bad debt expenses. Adjusted operating margin was 8% versus 10%. Our adjusted tax rate was 30%. The higher adjusted tax rate this quarter versus last year's third quarter reflects differences in the level and geographic location of the earnings. Now, let's turn to some details of our segment results. Net sales in North America decreased 12%. Sell-out of back-to-school products was hurt by learning in a fully remote or hybrid status. As noted earlier, the timing of purchases shifted to later in the third quarter and we expect back-to-school sales to continue throughout the fourth quarter as e-tailers and some retailers have retained their back-to-school in anticipation of student purchases continuing. Sales of Kensington computer accessories in North America were more than double the prior year third quarter because of the shipment of a large contract order. The strong sales of computer accessories helped to offset the weaker back-to-school sales. As expected, commercial sales remained weak as many offices in North America were closed or had limited opening. North America adjusted operating income was $23 million versus $36 million last year and adjusted operating margin was 10% compared with 13%. The decline was a result of lower sales, unfavorable mix, and unfavorable cost absorption. These factors were partially offset by cost reductions. Now, let's turn to EMEA, which had a strong quarter. Net sales increased 3% to $136 million as a result of favorable foreign exchange. Comparable sales were down approximately 2% due to the impacts of COVID-19. These reduced impacts were largely offset by growth in light personal shredders; TruSens air purifiers, DIY tools, and Kensington computer accessories. EMEA experienced a much stronger level of demand in the third quarter compared with the second quarter as commercial businesses and consumers were under significantly fewer COVID-19 restrictions and many offices and schools reopened throughout Europe. We have now seen several months of improvement with good recovery in our sales of commercial products. EMEA posted an adjusted operating profit of $17 million versus $14 million last year as a result of cost savings. Adjusted operating margin was 12% versus 10% last year. Moving to the International segment. Net sales declined significantly similar to the second quarter because of lower demand from the impact of COVID-19. And Mexico and Brazil continue to be significantly impacted by COVID-19 as many schools and offices in both countries remain closed. The current expectation is that this will continue throughout the rest of 2020 and into the first half of 2021. Australia sales decreased due to the lockdown of the state of Victoria due to COVID 19. The lockdown has now been rescinded and we expect to see improved demand in the fourth quarter. Leisure sales were down to a lesser extent than in the second quarter. International adjusted operating income was $4 million compared with $11 million last year as a result of the lower sales. Profits were also hurt by adverse customer and product mix, higher bad debt reserves and lower fixed cost absorption, partially offset by cost reductions and price increases. Let's move now to our balance sheet and cash flow. In the third quarter, we generated approximately $89 million in net cash from operating activities and had $86 million of free cash flow. We paid dividends of $6 million and CapEx was $3 million. As we noted in our first quarter release, we do not plan to repurchase shares for the remainder of the year. Longer term, we plan to use our free cash flow to fund our dividend, reduce debt, repurchase shares and make acquisitions. Our CapEx outlook for 2020 is less than $20 million and we have spent $12 million year-to-date. During the quarter, we repaid $124 million in debt. At quarter end, we had used $134 million of our $600 million revolving credit facility, primarily to seasonal borrowings and had $86 million in cash-on-hand. Our net leverage ratio was 3.45 times, which is well under our debt covenant. Now let's turn to our outlook. It continues to be difficult to forecast in this environment because there is much uncertainty related to the economy as well as the implications of new COVID-19 flare-ups. Our fourth quarter demand is expected to continue to be down compared to last year, especially in the commercial office products area in North America. Latin America continues to struggle and we expect Brazil's back-to-school season to be smaller and to ship later with normal December sales slipping into January. Australia is likely to improve now that the Victoria lockdown has been lifted, but we still anticipate international to be our most challenged segment. The recent increases in COVID-19 cases in Europe is making it the hardest segment to forecast. Nevertheless, we currently anticipate that year-over-year it will still be the least adversely impacted segment. We don't see a catalyst for additional economic improvement in the fourth quarter. Likewise, fourth quarter seasonality in our North American business is skewed toward commercial products, which remain weak. EMEA typically has seasonally strong fourth quarter commercial sales, which we anticipate will help offset some of the softness in North America and Latin America. We are cognizant of the rapidly developing situation of COVID-19 in EMEA and cannot guarantee that it could not also negatively impact our results. Our fourth quarter outlook is a sales decline in the range of 15% to 20%. Fourth quarter adjusted EPS are expected to be in the range of $0.26 to $0.32. The outlook includes an adverse foreign exchange impact of 2% on sales and $0.02 on adjusted EPS. We expect our cost reduction actions combined with our normal productivity programs will deliver approximately $15 million in additional fourth quarter expense savings compared with last year. With respect to achieving our cash flow outlook, we feel confident that we can generate at least $120 million of operating cash flow for the full year. And with CapEx expected to be below $20 million, we expect to generate above $100 million in free cash flow. We continue to experience an increased level of late payments from customers in certain international and export markets and have increased our bad debt reserves almost $3 million in the third quarter and $6 million year-to-date. Our South American and Mexican customers along with the wholesaler insolvency in EMEA are the main concerns. We are actively managing our receivables and we'll continue to restrict our own sales to mitigate our risk as necessary. In the third quarter, we took a $6 million provision for slow moving inventory, which is similar to last year's third quarter. On a year-to-date basis, it is almost $5 million higher than 2019 levels. Now let's move on to Q&A, where Boris and I will be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Chris McGinnis of Sidoti & Company. Your line is open.

Good morning. Thank you for taking my questions and nice quarter. Can we start off, Boris you mentioned some market share gains. Can you just talk about the competitive landscape in this environment and your ability to go out and continue to gain share and the strength of that position that you have in the marketplace? Thanks.

Sure, Chris. We saw market share gains in several areas. In Europe, we gained market share pretty much throughout as we mentioned. Our business declined about 2% organically, and certainly, the industry has done worse than that. And we have specific information in some countries on categories like shredders, where we've gained substantial market share during the quarter. If we look at our computer accessories business Kensington, which grew high double-digits globally and over 100% in North America. Again certainly we gained market share there as the industry has not grown by such a large amount. And based on our preliminary information, we don't have the final information yet. But based on our preliminary information, we also gained market share in note taking for our Five Star products in North America. So it's been pretty broad.

Great. And just one quick follow-up. Neil I think you mentioned -- you highlighted some of where you're worried about some payables. Anything in North America that you're seeing, just when you think about kind of the difficult environment here as well?

No generally North America Australia Asia EMEA with the one exception of the wholesaler insolvency in EMEA has returned to normal payables levels.

Great. I will jump back in queue. Thanks for taking my question.

Thanks Chris.

Our next question comes from Joe Gomes of Noble Capital. Your line is open.

Good morning and thanks for taking the question.

Good morning Joe.

I just wanted to jump to the guidance real quick. So for the fourth quarter you're talking about revenues down in the 15% to 20% range year-over-year which is good. The same you had for the third quarter guidance, but you also mentioned that back-to-school has been pushed you think into the fourth quarter here. So just wondering if we're seeing -- going to see some back-to-school sales in the fourth quarter which we normally don't why no improvement in the guidance. Are you just being conservative, or is there something else there that has you concerned?

Thanks for the question Joe. I think we're being fairly balanced in our guidance. We do expect back-to-school sales and sell-out to be stronger in the fourth quarter, but it's a relatively small part of the quarter. The commercial business in North America for example plays a much bigger weight and we expect that to be down because people are still working remotely. In addition we had a large deal with Kensington in the third quarter which added a lot to the sales in the quarter and we don't anticipate that will repeat in the fourth quarter. So we think net-net the minus 15% to minus 20% revenue guidance is fairly balanced as all of those things, as well as our anticipation of EMEA doing fairly well and some back-to-school weaknesses in international.

Okay. And one quick follow-up. Thanks for that. I think in last -- the second quarter you had mentioned that you had seen sequential monthly improvement in the top line. Did that continue into the third quarter in all the regions, or was that more region-specific in the third quarter about monthly sequential improvement? Thanks.

Neil?

Yes. So as a generalism, yes it did although some months were a little stronger than others just because of when back-to-school shipments occurred in North America. But EMEA improved every single month in a row. And again in international just the mix in different countries is a little different month-to-month. But if you look under the hood it was more similar to the second quarter, but a steady improvement. So generally in the two core markets we did see an improvement in international. It was more choppy, particularly because of the re-imposition of the lockdown in Australia for the third mid-quarter.

Okay, thank you. so I get back in queue.

Thanks Joe.

Our next question comes from Brad Thomas of KeyBanc Capital Markets. Your line is open.

Hi good morning Boris and Neal. Thanks for taking my question. I was hoping you could just share some insights about what you hear as you talk to your customers and they are talking to offices and employees about what it's like when they go back to work. What are you seeing in terms of reorders and restocking at the office? Are we starting to see offices place orders and restock inventory. How is it playing out as people have gone back to work really out in the field there?

Thanks Brad. We're not seeing much movement there. It's pretty much status quo. We still see the majority of employees in North America, white-collar employees in North America still working from home. And there were expectations of people coming back for example, in early September after Labor Day, but we haven't seen that. Things are seemingly being pushed out and pushed out. So in our guidance we assume that the environment stays as it is. It's similar trends internationally. Canada is very similar to the U.S. and in other countries it really depends on the circumstances. Certainly in Europe more people are going back to the offices at least a few days a week than we're seeing here in the U.S., Australia also has a lot of people working from home. So again our assumptions are things are how they are today.

Got you. And Boris just to come back to the question of guidance, obviously each quarter through the year you have sort of a different channel mix and geography mix that's going on that can influence how the enterprise performs. When you think about the different segments, are there any segments or channels where you're expecting a slowdown to occur in the fourth quarter, or is the slowdown in aggregate really just a function of how the mix plays out for the fourth quarter?

Yeah. It's really a function of the mix. As Neil mentioned in his prepared remarks, the most troubled channel for us is the commercial office channel in North America. And we generally see that being a larger part of our sales mix both in the first quarter and the fourth quarter. And just because of how the numbers come together that's really the influence that takes the number down from 12% that we saw in the third quarter down to 15% to 20%.

And Brad, there's also the Southern Hemisphere back-to-school, which occurs across basically our calendar year-end. And in Brazil, in particular, with the decision to delay school starts until after their own election in Brazil, we definitely will see back-to-school push back significantly later and that means it will push out our Q4 into Q1.

Yes. And if I could squeeze one more in here. As we think out to 2021, obviously, you'll have some pretty easy comparisons. And hopefully, the world starts to get back to normal. How should we think about the flow-through to the bottom line for you all as you hopefully start to grow sales again and the degree to which some of the costs that you've taken out can stay out? And again just what kind of a contribution margin you may be able to get from each point of sales growth you can generate next year?

Let me answer the first part of that and I'll let Neil comment on the contribution margin flow through. If you are correct and that's a big if, if you're correct if things start improving in 2021 then we still expect Q1 to be a tough comp given that last year -- or this year we did have COVID. And we certainly expect regardless of the improvement next year to have a COVID impact. So I think Q1 will be challenged. But then if things improve we certainly do expect some growth -- sales growth in the rest of the year. And I'll let Neil comment on the flow-through margin growth or contribution margin growth on sales.

Yes. I mean, clearly, Brad, there are various things going on within the business. Obviously, we're top line dependent. and the more our top line improves the more we will leverage the cost base that we have. We have though also had a year where some of our costs are temporarily reduced as opposed to permanently reduced. And so as we come out of this year there are a lot of puts and takes. I would anticipate having a lot less bad debt, and obviously, inventory reserves to take. They're $11 million after nine months year-to-date as a good example. But by contrast, I would anticipate hopefully, we will earn a management incentive next year, which we didn't earn this year. So, many ups and downs, but generally as Boris said, if our sales continue to improve particularly in Q2, Q3 and Q4, we would anticipate obviously leveraging through additional profits.

Very helpful. Thank you guys so much.

Thanks Brad.

Our next question comes from Kevin Steinke of Barrington Research. Your line is open.

Hey, good morning. Just wondering how you're thinking about as you look to 2021 incremental actions to reduce the cost base relative to what you've already done?

Yes. Thanks Kevin. I anticipate we will be reducing our costs further in 2021. Very pleased with the reductions we have done so far. But still in some of our geographies we have opportunities to realign our cost structure to the expected side of the business. Neil mentioned the difficulties we expect in Latin America. So that's an opportunity for us. And I also think we could continue to streamline how we manage things in North America as well in particular. So I do expect that there's further opportunities to reduce cost in 2021.

Okay. That's all I had for now. Thanks.

Thanks, Kevin.

Our next question comes from William Reuter of Bank of America. Your line is open.

Hi. In terms of the gross margin pressure you talked about mix. Was this just the large deal that you had with Kensington? And, I guess, does that mean that the outlook will be more favorable than what we saw on a year-over-year basis in the fourth quarter?

There are a combination of things. So, yes, within Kensington that was part of the drag on mix. Two reasons really. One, Kensington's various highest margin kind of commercial products sold less. And additionally, they sold a lot more of contract purchases, which as you would imagine are going to be lower than average margin. So that was one of the drivers, but also other things that impacted gross margin were just high obviously inventory charges and low absorption in the plants, as we need to kind of get our volumes and our cost structure aligned appropriately in those areas. And so there were more factors than just what was in the sales mix. which I think is important to understand. We do see higher gross margins typically in the fourth quarter and we do anticipate that the gross margins in the fourth quarter will be higher than what we saw in the third quarter.

Yes. That makes sense. And then, just one follow-up for me. With regard to the delayed sales sell-through of back-to-school products, it sounds like you believe that that 70% number of kids learning virtually has improved since then. I guess, when you talk to your retail customers, how have they dealt with the excess of supply? Do they think that they're able to sell-through at all this season? And I guess, do you think it might have impacts on 2021 back-to-school in North America?

It's a good question, Bill. The answer is, it's mix. It depends on the particular reseller. Obviously, etailers will continue to carry the full assortment and continue to sell as demand goes for the back-to-school products. And with brick-and-mortar stores some have taken their back-to-school assortments and put it in line, so they will be able to fulfill most of the demand throughout the fall and even winters. And others have put them in storage and that will reset it again next year. In those particular cases, we do expect that that will affect -- somewhat affect the demand next year for back-to-school products.

Great. All right. Thanks. I'll pass to others.

Thanks.

Our next question comes from Hale Holden of Barclays. Your line is open.

Thanks for taking my call. Boris, I had 2 I guess for you. The first one is you mentioned in your script talking about changes in go-to-market for when you get out of the pandemic period. And I was wondering if you could talk a little bit more further about what you're thinking and what potentially that could do to change the margin structure of the company?

Yes, sure. I mean we're continuing to invest in the channels that are preferred by consumers. And really that means working closer with online resellers, both obviously Amazon, but also a lot of the local and regional resellers online resellers we have throughout the world. And it also means developing our own internal D2C, direct-to-consumer capabilities to be able to fulfill directly for consumers. So those are the primary areas. We are going to continue to work with the independent dealers. That's a big channel for us in many countries. They are selling to small and local businesses and they're an important channel continue to do well. But some of the corporate and commercial resellers who we expect to still be challenged it means we have to be cautious how much we invest in those particular channels because we do believe that regardless their sales will still be down in the next few quarters.

Got it. And then my second question is with -- I mean when you guys mentioned that you were gaining share with Five-Star and Kensington. But with industry capacity now pretty high and volumes fairly low, would you expect to see capacity away from you potentially filled by more private label players or increased competition from private label players, or does just the lower sales volume preclude that?

I think it's a hard question to answer and it really depends on the state of the reseller in the channel. We find that in this environment brands really matter. And we think that one of the reasons we've done well with Five-Star, we've done well with Leitz and some of our other strong brands is that in times of distress and uncertainty, both consumers and resellers prefer well known tried and true brands that they're comfortable with, that they know will both sell and they know will be there tomorrow to support their needs. So that's a big plus for us given our portfolio of strong brands. On the other hand, we do have some retailers that are just managing for cash flow and margin that have no objectives of growing sales for their stores. They're just trying to service their debt. And those retailers I think will be putting in more private label just to manage for the short-term because they don't have any longer-term aspirations to participate in the market. So it really depends on the general partner that we're talking about. Overall, we're very pleased with how we performed. We think our brands are taking share and we think that given the strength of our brands that will continue to be the case as we go forward.

Great. Thank you so much.

Thank you.

Our next question comes from Bill Chappell of Truist Securities. Your line is open.

Thanks. Good morning.

Good morning, Bill.

Hey, Boris, just a kind of -- if I told you a year ago that 70% of the schools in the U.S. would going back -- were going to be virtual for the third quarter, would you have expected sales to only be down 12%?

No.

Is that fairly indicative of the category as well? Is it just the preparation, or is it just you feel like you were well prepared for it better than that?

I think we were well prepared for it. I think we have a very broad and diverse product line. We're not depending on any one category or any one geography. Certainly back-to-school is an important season for us, but it's not the only thing that we sell. And some of the back-to-school weakness was offset by our strong performance in Kensington, globally and particularly in North America, and very strong performance in EMEA. So, you're absolutely right. I mean, with such large numbers of students working from home, one would have expected a much bigger effect on the demand. But because of the diverse portfolio and the diverse geography of the products and channels that we sell to, we're able to offset some of those weaknesses with other categories and other countries.

Got it. And then, looking at the separate side of the business, I mean, I think you alluded to it on a prior question. But, as you look at kind of office space in the U.S. and in Europe to some extent, shrinking over time, as people go virtual forever or different kind of work methods. Are you re-looking at your -- that part of the business for the next few years in terms of how to go-to-market there? I know you talked about the next few quarters, but it would seem like some of that business will dramatically change -- sort of structurally change?

No, absolutely, Bill. I think that's an excellent question. And we are. We are looking at that. We think that there will be permanent structural changes in how end users buy products and which products they buy. And we're looking at addressing that both organically by investing in certain categories and certain channels that I already discussed, and investing less in certain others. And we're also continuing to look at acquisitions. We've talked about this with investors for several years now. We believe that acquisitions are an important part of our strategy to reshape our business to be more consumer-centric, be more end user driven. And as we think about the future, that's also part of our strategic mix.

Got it. And the last one for me. You might have talked about this, but what's kind of the percentage of, you would say, back-to-school in Europe was? Because, it seems at least at the end of the last year they were all largely back-to-school. And I think in September, I mean, I know it's a later start that we're getting back-to-school. So, I mean, how is that running -- obviously, the U.S. is much worse, but how does that compare versus expectations?

Europe was -- they all went to school. Everybody went back-to-school September 1. So it's -- in the U.S., it's 70% work remotely. In Europe, if I look at, certainly K through 8, it was 100%. Maybe some of the rephrase and kind of high schools were in a hybrid mode. And certainly college and universities are more in a hybrid mode. But if you look at primary, middle and most high schools, they went to school 100%. Right now, given the increased spike in COVID, I mean, certain countries are re-looking at that. But certainly as far as Q3 was concerned for us there was no impact for any back-to-school delays in Europe.

Great. Thank you so much.

Thanks, Bill.

Our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

Hi. Good morning. Boris, you have been talking about the change in the product scope of this past year ever since COVID. Do you think you have the right cost structure in place for the consumer-oriented products? And if you were to go back to more office centric products, what would the cost implications be? And could you make that switch quickly?

I do think that we have the right cost structure in place for either kind. I certainly do expect that as our mix shifts more to consumer, our gross margins will go up and our marketing spend will go up as well. But that's a lot easier position to be and to increase spend of our gross margins rise than to be in a position to constantly reduce costs. So I'm glad that we're doing all this work now to have an opportunity to incrementally add spend towards demand generation as we get into the consumer space. Did I answer your question, Hamed, or did you have a second part?

The second part as far as being able to, how quickly can you revert back to the commercial equipment?

We could. We are -- I don't believe we're making anything, any changes that are very, very permanent. Although, we do believe that the behavior is changing and we do believe that the demand for these sorts of products is not going to come back for at least a while. It's very difficult to predict what's going to happen a long time from now. But in the shorter to medium-term, we believe that there will be a residual effect from COVID in terms of many more people working on a hybrid or remote types of environment. So overall net-net demand for some of these in office products will be down.

Okay. That’s helpful. Thank you.

Thanks, Hamed.

There are no further questions. I'd like to turn the call back over to Boris Elisman for any closing remarks.

Thank you everybody for your interest in ACCO Brands. To summarize, the ramifications we're seeing from COVID-19 are disruptive to our business, but we're confident in our ability to withstand this crisis as a result of proactive approach we are taking. Looking longer-term, we also remain confident about our future and our ability to continue to position the company for growth and improving returns for our shareholders. We'll talk to you next time. Thank you. Bye-bye.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone have a great day.