Logo of jester cap with thought bubble.

Image source: The Motley Fool.

ACCO Brands Corp  (NYSE:ACCO)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to the ACCO Brands Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions). As a reminder this call is being recorded.

I would now like to introduce your host for today's conference, Jennifer Rice, Vice President Investor Relations. Ma'am you may begin.

Jennifer Rice -- Vice President of Investor Relations

Good morning and welcome to our fourth quarter and full year 2018 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. We also posted a newly refreshed investor overview presentation to our Investor Relations website this morning. When speaking to quarterly results, we may refer to adjusted results. Adjusted results exclude transaction, integration and restructuring costs, and apply a tax rate of 32% for the current quarter and 30% for the current year. This is a change from our previous assumption.

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 this morning's earnings release and the 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 normalized tax rate guidance.

Forward-looking statements made during the call are based on certain risks and uncertainties and our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of certain of these risk factors and assumptions. Our forward-looking statements statements are made as of today's date, and we assume no obligation to update them going forward. Following our prepared remarks, we will hold a Q&A session.

Now it is my pleasure to turn the call over to Boris Elisman.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning everyone. Our fourth quarter results were somewhat mixed. Our free cash flow was higher than our revised expectations, but our sales and earnings were lower. The softer sales resulted from lower-than-expected orders in December, especially in the last two weeks of the month. Our adjusted earnings were lower than anticipated, due to the adverse impact from the higher tax rate, which reduced EPS by $0.02.

Our results were also mixed for the year in total. Sales and profits were down in the U.S. and International, but we had an excellent year in EMEA. My comments this morning will focus on the main drivers behind our performance in 2018, and describe the actions we have taken and will take in response. I will also comment on our strategy for the new year.

I will begin with and spent most of my time on the U.S., since this is where we saw a significant degradation on our financial performance, which was disappointing to me and to my management team. Prior to 2018, our business in the U.S. had four straight years of profit improvements with moderate sales declines, largely caused by the office superstore consolidation. Our team did a great job managing the consolidation, and associated channel transitions, with growth in mass and e-tail channels, largely offsetting reduced sales to office superstores, as they closed retail locations and distribution centers. Office wholesalers and independents were relatively stable over those years.

On the cost side, U.S. inflation was mild during these years and we were able to drive significant profitability improvements in our U.S. business, through cost reductions and better productivity. It is largely the U.S. improvements that drove organic profit improvements in our total business prior to 2018.

But what was so different about 2018 than the preceding four years? On the revenue side the major difference can be explained by the two office wholesalers. They were in merger planning throughout most of the year and their actions to prepare for their merger, as well as the uncertainty the merger created in the independent dealer community, significantly affected sales. U.S. sales declined 7% in 2018, and roughly 4% of that was due to a sales decline with the two office wholesalers. Without that, our U.S. sales decline would have been around 3%, consistent with the range that we have seen in recent years.

Two other factors that impacted our U.S. sales and global sales, especially in Q4, were lost share in planning products and no end of year buying ahead of price increases, especially in December, as I mentioned earlier. Our U.S. gross margin was also impacted by lower sales to office wholesalers and independents, especially in the second half of the year, and higher sales to dollar stores or back-to-school, as well as lower sales of planning products, especially in Q4.

On the cost side, we saw major increases in the raw materials and logistics costs beginning in the spring of 2018 with paper, steel, transportation and fuel, up double digits from 2017 levels. In addition, beginning in April we began to experience a progressive increase in tariffs and Chinese imports that continued through the year. All in, inflation and tariffs added approximately $15 million, one five, to our cost for the year.

It is normal in our industry to give notice to customers for price increases, so there's typically a three to six months lag time between our decision to increase prices, and our ability to implement. As a result, in a rapidly rising inflationary environment, such as the one we experienced in 2018 in the U.S., it was not possible to implement price increases fast enough to fully offset the increased costs.

We raised prices in the U.S. in October, but that was based on the latest cost information available at the time of the pricing notification. As costs kept rising and new tariffs went into place at the end of September, October increases weren't enough to recover margins. We are raising prices again beginning in January of this year in the U.S. and in most other countries. And if the U.S. tariffs stay as they are today, and commodities oscillate within the expected ranges, we should fully recover last year's cost increases.

As you know, there's a possibility that the U.S. will further raise tariffs on Chinese imports beginning in March. And if that happens, we have already notified our customers that we plan to immediately increase prices on effective products in the U.S.

We have also taken several actions to reduce our operating costs in the U.S. In addition to ongoing productivity initiatives, last quarter, we communicated $5 million in cost reductions associated with reducing our U.S. headcount. We are now expanding our plans to reduce structural costs in the U.S. by another $6 million, which includes both headcount, as well as improved manufacturing efficiencies. This brings the total of new structural cost reductions to $11 million, which we expect to realize mostly in 2019.

In the U.S., we expect these and other actions will deliver flat to moderate sales declines and improved profitability in 2019. In terms of sales, we expect the U.S. channel environment to remain difficult. We expect wholesaler and independent dealers sales to be roughly flat. A few months ago, we launched a program to incentivize independent dealers to buy directly from us. The purpose of the program, is to make independent dealers more price competitive with e-tailers and superstores. The initial results from the program are very positive, and we plan to continue this activation (ph) with dealers in 2019.

We expect office superstores to continue to decline, but their decline is expected to be mostly offset by growth in mass, e-tail, and tech channels. We grew back-to-school sales 2% last year and based on early customer information, we expect 2019 back-to-school sales growth to be comparable to 2018. We continue to reorient our portfolio toward consumer-centric categories and the brands, and back-to-school is an increasingly important part of our U.S. results. In addition, Kensington computer accessories grew 6% last year in the U.S., and we believe their growth, through the tech channel, will continue this year.

Turning now to EMEA; we had great results in that segment in 2018. Comparable sales were up approximately 2%, with broad growth of branded products throughout the region, offsetting declines in private label sales, and the insolvency of a significant customer. We had especially strong growth with Rexel shredders, Kensington computer accessories, and Derwent art pencils. We have expanded product listings in EMEA for 2019, which we expect to drive continued positive sales momentum. Beyond sales growth, we realized substantial cost synergies from the merger with Esselte and margins for the year were up significantly.

I'm very pleased with our results in EMEA. We are positioned well strategically throughout the region. Our execution is very strong, and I'm optimistic to have another year of low single digit organic sales growth and further profit expansion. Our international performance was mixed, but we saw sequential comparable sales improvement every quarter throughout the year. We had another outstanding year in Brazil, with sales up high-single digits, despite a difficult economy. Selling (ph) for this back-to-school season was very strong, and we are hoping for a solid sellout season. Business confidence in Brazil has improved post-election, and GDP growth is forecasted to increase.

Australia had a slow start to the year, as two large customers merged, but comparable sales trends improved throughout the year, despite the environment remaining challenging. Mexico had a difficult year, especially in the first half, with our major customer implementing a more conservative inventory management strategy.

On the other hand, we were very pleased with the initial six months from the GOBA acquisition, and believe our combined Mexican business is positioned for strong growth in 2019. Asia also had a difficult first half, but stronger growth in Q3 and Q4. There is improving momentum in international, and altogether, we expect mid-single digit growth in 2019.

Now to review our strategy; over the last several years, we have been shifting our business through organic initiatives and acquisitions toward stronger brands, more value-added products, faster-growing geographies and a more diversified customer base. We have complemented these investments with the ongoing cost reductions and productivity improvements initiatives, especially in more mature countries, and with declining channels. As a result of the strategy, we were able to grow our free cash flow from $146 million in 2014, to $161 million in 2018, and return to some of this cash to our shareholders, initiating a share repurchase program in 2014 and a dividend last year. In total, we returned $216 million to shareholders over the last four and a half years, including $100 million in 2018.

We believe we have the right strategy for our company. We'll continue to reorient our business toward faster-growing product categories and geographies, stronger brands, and complementary channels, both organically and through acquisitions. We'll continue to drive aggressive productivity initiatives and scale our cost with revenues as appropriate, and we'll continue to use our free cash flow in a balanced way to reposition our business and reward our shareholders.

Neal will discuss our 2019 guidance, but I will review our longer-term business expectations. Beyond 2019, based on the strategies we have in place today, we expect our company to deliver top line growth in the range of 0% to 2% compounded annually. We expect this growth to be driven by 0% to 2% growth in EMEA, and a 3% to 5% growth in international. This will offset North America, which should be flat to down 2%. We anticipate our gross margin being in the 33% to 34% range, and SG&A in the mid-19% range.

In summary, despite a challenging year in 2018, we remain confident about our future and continue to position the company for growth. As Jennifer mentioned at the beginning of this call, we have developed an updated investor presentation available in the IR section of our website, that provides more granularity into our business and strategy and long-term targets, which we hope you will find helpful.

With that, I will hand it over to Neal, to give you more details on our quarter.

Neal V. Fenwick -- Executive Vice President and Chief Financial Officer

Thank you, Boris, and good morning everyone. Fourth quarter sales decreased 7% and comparable sales decreased 5%, primarily due to lower sales in the U.S. Reported EPS decreased 50% to $0.34 per share, due primarily to the non-repeat of a $25.7 million tax benefit and lower operating income. Adjusted EPS decreased 15% to $0.41 in the quarter. We had a higher-than-anticipated tax rate in the year, which had to true-up in the quarter, primarily due to our lower U.S. earnings. Our gross profit was lower in the quarter, primarily due to the U.S. business.

Overall, our reported an adjusted gross margin declined 170 basis points to 33.5%, as detailed on page 10 of our slide deck. The decline was mainly attributable to adverse customer mix, product mix, and obsolete inventory, which together accounted for 160 basis points of the decline. Inflation, net of price increases, drove a further 50 basis point reduction year-over-year. These factors offset costs and synergy savings of $5.4 million, which were favorable by 50 basis points. We expect to continue to offset higher costs currently and in the future quarters, with price increases and cost reductions.

We were able to deliver an improvement in SG&A in the quarter. As a percent of sales, reported SG&A was lower by 40 basis points and adjusted SG&A was lower by 20 basis points. The improvement in adjusted SG&A was enabled by a 120 basis points benefits from lower incentive compensation expense, and 10 basis points from cost reductions and synergy savings. These benefits more than offset the negative effect of lower sales volume, which was 110 basis points. All in reported and adjusted operating income and margin both decreased due to the lower sales in gross profit, partially offset by cost reductions.

Turning now to the full year results; sales decreased 0.4% and comparable sales decreased 3%, due to lower sales in the U.S. and international. Reported EPS declined 16%, primarily due to the non-repeat of a $25.7 million one-time tax benefit related to the new U.S. tax code in the prior year. Adjusted EPS declined 4% for the year, driven by lower sales and gross profit in the U.S. Foreign currency had a $0.02 adverse impact on the year, while share repurchase was a benefit of $0.04, and lower full year tax rate was a benefit of $0.03. Reported an adjusted gross margin declined 140 and 150 basis points respectively for the 12 month period as shown on slide 12, driven by largely adverse mix and $15 million of inflation, including tariffs. SG&A however showed improvement year-over-year.

On a reported basis, SG&A was lower by 110 basis points, and on an adjusted basis, was lower by 60 basis points. The improvement in SG&A for the year was driven by lower cost, including $20.8 million or 100 basis points from lower incentive compensation expense, and 50 basis points from cost savings and synergies.

For the year, we realized a total of $32 million savings, of which $19 million was from productivity initiatives, and $13 million was from acquisition synergy savings. For 2019, we have higher cost saving targets, and will also offset cost of reinstating our incentive compensation.

All in, reported operating income was slightly up and margins were flat. Adjusted operating income declined, and margin was down 90 basis points, primarily due to lower profit in the U.S. Reported and adjusted net income were down year-over-year, due to the lower sales and gross margin.

Since Boris provided a lot of commentary on our segment results, I will just hit the highlights. In North America, fourth quarter sales decreased 9.6%, primarily due to the U.S., where we had lower sales to wholesalers, and lower sales of calendar products, due to lost market share. We did start to see the benefits of our October price increases, which added 2.5%.

For the full year, North America sales decreased 6%, as market share gains in back-to-school were more than offset by lower sales in the wholesaler channel and in calendar product. North America reported an adjusted operating income and margin were both down in the quarter and the year.

Margins declined due to unfavorable customer and product mix, specifically lower sales to the wholesaler channel, and increased sales to the dollar store channel, and lower sales of calendar products, along with more sales of competition notebooks. We also experienced inflation from higher material and transportation costs and tariffs. These impacts were partially offset by price increases and lower incentive compensation expense.

Fourth quarter results, includes a $3 million charge we noted last quarter related to actions to reduce our U.S. headcount, driving savings of $5 million, mostly in 2019. We will incur additional restructuring charges in Q1, related to the cost reduction initiatives Boris has noted.

In our EMEA segment, sales decreased 6% or 2% on a comparable basis in Q4. The decline was primarily due to lower sales to our wholesale customers that became insolvent in some countries during the quarter. It's important to note that EMEA returned to growth this January.

For the year, EMEA comparable sales increased 2%, driven by expended distribution of legacy ACCO products, the Esselte customer base, with strong growth in shredders and computer accessories.

For EMEA operating income improved in the quarter due to lower charges. Adjusted operating income and margin declined slightly, due to lower sales and higher costs and the business has now increased prices in January to offset inflation. For the year, EMEA delivered a strong growth and profitability with adjusted margins up 200 basis points due to cost synergies, favorable product mix, and higher volume.

In our International segment, fourth quarter comparable sales were flat. We continue to see growth in Brazil and Asia, offset by declines in Australia and our legacy business in Mexico, where we continue to recover from the effects of substantial inventory reductions by one large customer, earlier in the year.

For the year international sales declined approximately 3% on a reported and comparable basis, due to declines in Australia and in Mexico, particularly during the first half of the year, which offset strong growth in Brazil. International reported an adjusted operating income, both decreased for the quarter and the year, primarily due to adverse foreign exchange. Our normalized tax rate for 2018 was 30%, a point higher than what we previously estimated. The increase primarily results from lower U.S. earnings and finalization of the U.S. tax reform act.

Turning now to our cash flow and balance sheet; we continue to generate strong operating cash flow, allowing us to consistently invest in the business and return cash to shareholders. For the full year, we generated $160 million in free cash flow, and we paid $25 million in dividends, purchased 6 million shares for $75 million, and repaid $62 million in debt. We paid $38 million for the GOBA acquisition from increased debt and we ended the year with 2.8x net leverage.

In terms of working capital, our inventory balance was up year-over-year by $86 million, funded by payables which were up $96 million. While both are impacted by FX and the GOBA acquisition, the predominant reasons for the increases were the strategic decisions we made to increase inventory, to secure paper for the 2019 back-to-school season, and to buy ahead of anticipated inflation, tariff-related increases and anticipated port disruption.

We also increased inventory to support new product launches and stronger sales of our computer accessories and shredders; because of these decisions, the cadence of our cash flow in 2019 will be different year-over-year in Q1 and Q2. We anticipate a large outflow in Q1, as payables unwind, and less-than-usual outflow in Q2, as we won't need to build as much inventory for back-to-school. Our full year 2019 cash flow should not be impacted.

Turning now to our 2019 guidance. We expect sales to be flat to down 3%, including an adverse 2% impact from foreign currency translation using recent spot rates. We expect earnings per share of $1.10 to $1.20, assuming a $0.03 impact from adverse foreign exchange, and assuming a 30% to 31% normalized tax rate. We estimate free cash flow to be in the range, $165 million to $175 million. At the segment level, we are expecting North America sales to be flat to down low single digits for the year, including a high single digit contribution from pricing. We are expecting EMEA to be down low single digits because of foreign currency. Excluding currency, we expect EMEA sales to increase low single-digits.

And for international, we are expecting sales to be up high single digits with currency. Excluding currency, we expect international sales to increase low double digits, due to the GOBA acquisition. By quarter for sales, we estimate adverse foreign currency will be most pronounced in Q1, an approximate 5% to 6% adverse impact, lessening to about 2% in Q2, and 1% in Q3, and then a marginal impact in Q4. Based on current foreign currency spot rates, EPS will be adversely impacted in the first half of the year by $0.02 in Q1 and $0.01 in Q2.

The quarterly cadence of our earnings should be somewhat similar to 2018, with acquisitions offsetting the negative effects of FX in Q1 and Q2. In Q3, we have a tough comp, as we lack the substantial release of incentive compensation accruals, that had a $0.07 benefit in Q3 of 2018. As usual, we don't yet know if back-to-school shipments will fall more into June or July, but this timing could result in the shift of sales and earnings between Q2 and Q3. We have provided numerous additional modeling assumptions on page 18 of our slide presentation.

With that I'll conclude my remarks and move on to Q&A where Boris and I will be happy to take your questions. Operator?

Questions and Answers:

Operator

(Operator Instructions). Your first question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Yeah, hi good morning, Boris, Neal and Jennifer.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning Brad.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Wanted to ask first about the North America market and hoping Boris, you could give us a little bit more color about how you're thinking about the run rate of the trends here in North America, to what degree is there, may be, some destocking that's going on, as a result of some of the consolidation. How much might that pressure you, as we start into 2019? And what do you think kind of the underlying run rate of the market looks like?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes. We look at that 2018 as a reset year for North America. There was a lot of inventory that came out, especially from the two wholesalers in 2018, and it was just a lot of uncertainty, given merger planning that happened between the two of them initially, and then one of them in another company. So the whole environment on the commercial side was uncertain. As a result of that, the dealers were also sitting on the fence a little bit and not making significant investments in inventory.

We have seen sales rebound in January, so the people are now buying to sell through. We think the inventory has pretty much come out, and we do expect normalization in 2019. So what that normalization means, is we think that the wholesale and independent sales will be roughly flat. Office superstores will continue to decline, as they continue to rationalize their store base, and especially in the retail end of their business, they are shifting more to private label and focusing more on services on the commercial end. So we do expect decline with superstores. And then the growth that's going to come from major mass and e-tail channels, and we saw similar growth in 2018. So the big change between 2018 and 2019 is really the inventory -- significant inventory coming out of the two wholesalers.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's very helpful. Thank you, Boris. And then if I could add a follow-up on the topic of acquisitions? I guess, could you give us any color on how the landscape seems to you for potential acquisitions, and is there any change positive or negative in light of some of the underlying trends around the world?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes. The trends look similar Brad. We did three acquisitions in the last three years. The funnel is still very robust. We're still being judicious in the decisions we make. The strategy is still to -- through (ph) acquisitions to reorient our business to more attractive categories, in more attractive markets, as we've done over the last three years. And my hope that we'll continue -- be able to continue to do that. As Neal mentioned in his prepared remarks, we generate a lot of free cash flow, and we certainly would like to use part of that for acquisitions. So the strategy remains the same.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. Thank you very much Boris.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Brad.

Operator

Thank you. Your next question comes from Bill Chappell with SunTrust. Your line is open.

Grant O'Brien -- SunTrust Robinson Humphrey -- Analyst

Hi, good morning. This is actually Grant on for Bill. Thanks for taking the question. First one is just on EMEA and the customer that became insolvent in the quarter. I don't know if you guys would quantify the impact on the top line in the quarter and then, is there any potential impact going forward, as maybe that customer liquidates inventory or any other impact on that market there?

Neal V. Fenwick -- Executive Vice President and Chief Financial Officer

Certainly. It's about a $3 million impact, and it was largely caused by them liquidating inventory in the fourth quarter. And so what we saw in January was a return to normal rates of business, as either the channel or directly or the wholesaler is actually in certain countries operating under bankruptcy protection, and is able to order in paper goods.

Grant O'Brien -- SunTrust Robinson Humphrey -- Analyst

Got it. Thank you. And then actually one clarifying and question on the potential pricing actions in the U.S. If the tariffs do come through, will you be able to basically get that pricing through immediately, or will there be that three to six month lag time to pass that through to customers?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes, it will be something in between. Just the execution time will take probably 30 to 90 days for us to be able to execute a price increase. But we don't have to go through a three to six months notification process anymore. So it won't be in March, but it also will not have to wait until the fall timeframe.

Grant O'Brien -- SunTrust Robinson Humphrey -- Analyst

Got it. Thank you. I will pass it along.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Hamed Khorsand with BWS Financial. Your line is open.

Hamed Khorsand -- BWS Financial -- Analyst

Hey, good morning. So first off, could you just talk about your paper supply in 2019, you were talking about last quarter, and then what you're doing for 2020, given that Georgia-Pacific is now exiting the industry?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes. Paper supply for 2019 remains tight and to avoid the issues that we had in back-to-school 2018, we actually pre-bought paper in the fall of 2018, in order to secure our supply for back-to-school, to guarantee the supply for back-to-school. So we're fine for 2019 back-to-school. What we are looking to do in 2020, is actually source -- potentially source product from abroad to supply the U.S. back-to-school, so that we don't have this issue and we are initiating that process very early. Given the exchange rates we think that foreign sourced paper could be competitive, with domestic paper for our needs, and that's the path that we're pursuing.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And then just talking about the U.S. size, as far as the wholesalers go, is the entire industry shrinking, or has this purely been a wholesaler driven issue?

Boris Elisman -- Chairman, President and Chief Executive Officer

This is a wholesaler driven issue. If you look at sellout; sellout is roughly flat to minus 1%, minus 2%, in the categories. And as we mentioned in the prepared remarks, our sales in the U.S. were down 7%. So sales are significantly more affected than the sellout is, and that's because of the inventory coming out of the wholesale channel.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. Thank you.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Hamed.

Operator

Thank you. Your next question comes from William Reuter with Bank of America. Your line is open.

William Reuter -- Bank of America -- Analyst

Hi. A couple of questions. First, your guidance for a high single digit contribution from pricing in North America, however sales are going to be flat to down low single-digits, that implies a pretty big decline in terms of units. I guess I would have been surprised that the unit declines in these categories would have been this great. Can you talk a little bit about those unit declines and whether it's due to share losses on your part, or whether the units are declining that much?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes Bill, this is the assumptions we are making on price elasticity for our products. We're assuming that everything that's going up in price, will be offset in volume, and then there's going to be additional declines from just channel shifts, as we mentioned office superstores are expected to decline, and not be fully offset with the growth in mass and e-tail and flat sales in wholesale independent. So it's the assumption that we are making. We hope we are wrong, but we think it's the right assumption under the circumstances.

William Reuter -- Bank of America -- Analyst

Okay. And then your expectation, international sales grow high single digits longer-term kind of mid-single digits, are these due to share gains or are the categories in these regions growing this much in terms of units?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes. The guidance that Neal has provided, the color that was for 2019, and a lot of it is driven by the acquisitions that we made mid-year and a little tuck-in that we made earlier this year. So that's what's driving the high single digit growth, including currency and low double-digit growth, excluding currency. If you remove the acquisition, the growth will be more in the 3% to 5% range, which is our long-term view for that particular region.

William Reuter -- Bank of America -- Analyst

Okay. And is this basically because some of these developing countries are actually continuing to consume more units, or use more units than they have been?

Boris Elisman -- Chairman, President and Chief Executive Officer

That's correct. There is just positive demographics there with more people being educated, more people staying in school longer, and a shift from blue-collar to white-collar workforce, all of that is beneficial for our categories.

William Reuter -- Bank of America -- Analyst

Okay. And then just lastly for me, you've repurchased bonds in the second quarter of 2018. Will you consider bond repurchases with your free cash flow in 2019? How do you think about that?

Neal V. Fenwick -- Executive Vice President and Chief Financial Officer

Please understand, we don't give the right to comment on what we intend to do going forward. We look at all things opportunistically, and make decisions from time-to-time. And that's all (inaudible).

William Reuter -- Bank of America -- Analyst

Okay. I will pass to others. Thank you.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thanks Bill.

Operator

Thank you. Your next question comes from Hale Holden with Barclays. Your line is open.

Hale Holden -- Barclays -- Analyst

Hi. Thank you for taking the call. I just had two quick ones. Boris, why do you think you didn't see any orders over the last two weeks of December, because you guys were very vocal about taking price increases on January, who would've thought some guys would've bought ahead of that?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes Hale, we believe it's a combination of things. If you remember, the market environment in December, there are a lot of concerns about trade and U.S. Fed raising rates. So we think that played into it.

Neal V. Fenwick -- Executive Vice President and Chief Financial Officer

Government shutdown as well.

Boris Elisman -- Chairman, President and Chief Executive Officer

And the Government shutdown coming in at the end of December, exactly. And then the other thing is the inventory levels of our big customers, as they brought in additional inventory ahead of tariffs, everybody thought that tariffs will go up to 25% and all of those decisions were made probably in the September timeframe. So when the U.S. government made the decision to keep the tariffs at 10% in December, it was too late, that inventory was already coming in, and we think there was just not enough space to take in additional products. So we think that played into it.

And then the other thing that we think played into it, is just the change in metrics for some of our customers, who are -- have undergone an ownership transition, and are just operating to different metrics or they either made their numbers and decided to delay until next year, or they didn't make their numbers and have no reason to chase. So I think it's a combination of all those things that affected December.

Hale Holden -- Barclays -- Analyst

Great. Thank you. And then the second question is, you called out source (ph) sales on planning products in December, and just wondering, if you've seen that catch up in January or if that was just products that probably weren't going to sell through this year, or if it's even meaningful?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes. Our big planning selling season is November, December and January. And from a compare standpoint, we had placement of a lot of SKUs with one of the major retailers in the U.S. in 2017, and we didn't have that placement in 2018. So sales were down in December, and sales at wholesale were down a little bit in January as well.

Hale Holden -- Barclays -- Analyst

Got it. But it's not inventory that you are getting stuck with necessarily? It's just a comparable issue?

Boris Elisman -- Chairman, President and Chief Executive Officer

It's not an inventory issue. Right. Placement issue.

Hale Holden -- Barclays -- Analyst

Great. Thank you so much for the time. I appreciate it.

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. Your next question comes from Karru Martinson with Jefferies. Your line is open.

Karru Martinson -- Jefferies -- Analyst

Good morning. In terms of the long-term two times to two and a half times target, we're kind of close to that on leverage today. I mean what's the timetable that you guys see yourself getting there and kind of maintaining that level?

Boris Elisman -- Chairman, President and Chief Executive Officer

We believe that with -- under normal conditions, we should get there in the next 12 to 18 months. But of course, how we perform is going to influence that, and if we do any acquisitions, are going to influence that. It is a priority for us to try to get to at least 2.5x, because we will be able to have complete flexibility on when we do what, including share repurchases. But we also are not going to hold off on a strategic acquisition, in order to get to that 2.5x level. We're very comfortable with where we are today at 2.8x. We'd like to get to 2.5x in the near term. But we will apply business judgment to that, as we go to it.

Karru Martinson -- Jefferies -- Analyst

Okay. When you guys talk about having a pipeline of acquisitions; I mean, it seems like the industry, every couple of years goes through a major consolidation. Are these -- is this pipeline kind of tuck-in varieties, or are we due for another wave of that industry consolidation?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. The industry consolidation that we've been seeing, is more on the channel side. So we don't really participate in that. The acquisitions that we have done recently, is really expanding in the international markets, where the industry conditions and market conditions are more attractive. So we see a lot of opportunity still on that end, getting bigger and faster-growing markets. There could be some consolidating acquisitions, but those for us would have to be very meaningful and very accretive. I think the chances of that are lower than just expanding in the international markets. And then, we still continue to look at adjacencies. But as I mentioned, on prior quarters, the evaluation there is a little bit too high to make it meaningful for our shareholders.

Karru Martinson -- Jefferies -- Analyst

Okay. And I realize that it's early days, but wholesale had -- wholesale disruption had been a stable category, now, one of the big players being taken over, how does that change the dynamics in that segment of the market?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes. Karru, to your point, it's too early to tell. We kind of expect a continued normal behavior from the customers at least in the first few quarters. Over the long term, we certainly do expect that there'll be some shift of purchasing from dealers, from one wholesaler to the other. We think net-net, it will probably be neutral for us. But there could be some quarter-to-quarter variations that may impact our sales. But in the near term, we expect normal behavior.

Karru Martinson -- Jefferies -- Analyst

Thank you very much guys. Appreciate it.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Kevin Steinke with Barrington. Your line is open.

Kevin Steinke -- Barrington -- Analyst

Good morning. What were you able to find, that enabled you to increase your target for the (inaudible) synergies?

Boris Elisman -- Chairman, President and Chief Executive Officer

We just -- we had -- I don't want to say conservative, but we had realistic synergy plans, and we executed broadly at the high-end of the top end of, really of our expectations. I think it was all -- it wasn't any new initiatives that we uncovered. But I would say, our execution has been outstanding for the last two years, whether it's facilities' consolidation, or removing duplicate functions or duplicate costs in the business. Our European team has done a really outstanding job delivering and obviously over-delivering to synergies. So that's really what drove the overperformance for the last two years, and we have raised our expectations for synergies now from $23 million that we had at the time of the acquisition to now $32 million that we'll deliver by the end of this year.

Kevin Steinke -- Barrington -- Analyst

Okay. Good. And on the small acquisition you did in Australia, could you offer any more detail in terms of size or what it brings to you strategically?

Boris Elisman -- Chairman, President and Chief Executive Officer

It's a small tuck-in. It's not really material to our results. We bought inventory, customer list and brands from a small company in Australia, and it allows us to get a little bit bigger in the categories where we are present, and leverage scale and it also allows us to increase our share in (inaudible), which is an attractive category in Australia, as well as a bigger participation in some of the higher margin calendar products, which is also a new category for us in Australia. So we look at it as just a small tuck-in that's very-very accretive for our shareholders.

Kevin Steinke -- Barrington -- Analyst

Okay, good. And lastly, as we think about incentive compensation, how much of a headwind is that to your 2019 guidance versus 2018? Just the assumption I guess that it's restored, I guess, on an EPS basis?

Neal V. Fenwick -- Executive Vice President and Chief Financial Officer

Yes. So it's about a $21 million impact in terms of costs that we didn't pay in 2018, and we hope to pay it in 2019. So if you just look at it in pure EPS, it will be about $0.14.

Kevin Steinke -- Barrington -- Analyst

Okay. Thanks. That's very helpful. Thanks for taking the questions.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thanks Kevin.

Operator

Thank you. Your next question comes from Joe Gomes with Noble Capital Market. Your line is open.

Joe Gomes -- Noble Capital Market -- Analyst

Good morning. And I apologize in advance if I repeat some questions here, I had little phone issues here earlier. But just on the competitive environment, that you guys have raised prices here twice. And just wondering, what are you seeing the competitors doing, so where -- on a relative basis, are you still, vis-a-vis your competitors, in terms of pricing and everything?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes Joe. We always look at competition when we adjust prices. We believe we are very price competitive with companies that we compete with. If they weren't, we wouldn't be adjusting prices. Everybody is using the same commodities, everybody is seeing the same cost increases on steel and aluminum and paper and transportation and tariffs, right? So we think from a competitive standpoint, where we need to be. Raising prices is never easy, customers never like price increases, regardless of whether there is high inflation or low inflation, so there's always a challenging process, but this is something we absolutely have to do, given the rising costs that we see, in the U. S. and Canada and in many other countries of the world. So we have to recover costs and our team historically has done a great job of adjusting our prices to make sure that we recover costs.

Joe Gomes -- Noble Capital Market -- Analyst

Okay great. And then on the dollar store channel. Over the last two quarters, you've mentioned it as having a impact on profitability. But just wondering, what is the differential currently with dollar store channel margins vis-a -vis, the overall corporate margins, when do you expect the dollar store channel margins to kind of migrate, hopefully up, toward the corporate overall margin area? How big is the dollar store channel today as a percent of revenues?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes the dollar store channel is very small for us the U.S. It's something that is growing. It's something that we believe we need to become more successful. We are not happy with the balance we had between revenues and profitability in 2018 in that channel. So we're going to be more balanced between revenues and profitability and margin in 2019. But it is still an important channel for us, because more and more consumers shop in that channel and we want to go and we have to be where the consumers shop. So it's a small part of our business. We're talking about single digits in terms of millions of sales. But we'd like to grow it more and we'd like it to be more profitable than it is.

Joe Gomes -- Noble Capital Market -- Analyst

Okay, great. Thank you very much.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Joe.

Operator

Thank you. And this concludes our question-and-answer session. I'd like to turn the call back over to Boris Elisman, Chairman President and CEO, for closing remarks.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Heather. In closing, despite several near-term factors outside of our control, including higher inflation and tariffs, and ongoing U.S. industry consolidation, we remain confident about our future and continue to position the company for growth and strong returns for our shareholders. Our team is committed to executing through the current challenging environment in the U.S., and is excited about the international opportunity. Thank you for your continued interest in ACCO Brands, and we'll talk to in a quarter. Bye-bye.

Jennifer Rice -- Vice President of Investor Relations

Heather, thank you for your help.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may disconnect. Everyone have a wonderful day.

Duration: 51 minutes

Call participants:

Jennifer Rice -- Vice President of Investor Relations

Boris Elisman -- Chairman, President and Chief Executive Officer

Neal V. Fenwick -- Executive Vice President and Chief Financial Officer

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Grant O'Brien -- SunTrust Robinson Humphrey -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

William Reuter -- Bank of America -- Analyst

Hale Holden -- Barclays -- Analyst

Karru Martinson -- Jefferies -- Analyst

Kevin Steinke -- Barrington -- Analyst

Joe Gomes -- Noble Capital Market -- Analyst

More ACCO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.