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ACCO Brands Corp (NYSE:ACCO)
Q3 2019 Earnings Call
Oct 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 ACCO Brand's Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speakers, Christine Hanneman. Please go ahead Ma'am.

Christine Hanneman -- Senior Director of Investor Relations

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands Third Quarter 2019 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 quarterly 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 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 adjusted 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 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.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, everyone. And thank you for joining us. I will spend the next few minutes reviewing the highlights of the quarter and commenting on the progress we are making against our strategic imperatives. Neal will follow me with more color and details on the quarter and then we'll take your questions.

We reported good third quarter sales and adjusted EPS, achieving our objectives for the quarter and building on our strong performance of the first half. Third quarter sales were even with last year and organic sales were up 0.5% due to an outstanding back-to-school performance in North America. Our North America sales were up over 3% on top of a 9% growth in the second quarter. As we noted last quarter we had very strong back-to-school sell in. The actual consumer sales, which take place in the third quarter, and are the ultimate measure of the success of the back-to-school season, were also very strong. Our sales grew mid single-digits for the season, a strong improvement over last year's 2% growth. Based on preliminary industry information, overall back-to-school sales were roughly flat that we believe we took share. Our market share growth was led by the Five Star brand, which was the second largest national back-to-school brand in the US, and has the highest growth rate of the Top 10 brands during the season.

Another highlight of the quarter was our working capital management and cash generation. We entered the quarter with high inventories due to strategic pre buys associated with raw material shortages, anticipated increases in US tariffs on Chinese imports, and strong third quarter forecasts from our North America sales teams. Because of good North America sales and excellent global working capital management we reduced working capital $141 million sequentially and $20 million versus the same quarter last year.

We set a quarterly record with $183 million of free cash flow generation. We feel confident in our ability to reach our target free cash flow range for the year and to grow our free cash flow over the long term. Overall, I am very pleased with our performance year-to-date. Our results continue to show that our strategies are working.

Now I would like to give you an update on our progress against the six strategic imperatives that we've been working over the past few years to drive profitable growth and increased shareholder value. We discussed the strategic objectives last quarter and they include diversifying our geographies and channels, focusing on the end consumer, developing products with end user driven innovation, reducing unnecessary costs, executing with excellence and disciplined capital allocation.

During the quarter, we purchased Foroni, a leading provider of notebooks and school and office products in Brazil. Foroni expands our presence in the attractive Brazilian market and in faster growing school categories. We now have two leading school product brands in Brazil. The acquisition also further diversifies our customer base. The integration is going well and we expect Foroni to add $35 million to sales and be marginally accretive to EPS this year. Foroni is our fourth meaningful acquisition in four years, as we are successfully reorienting our portfolio of brands, channels and geographies to grow faster and with better margins.

Slides 6 and 7 in our deck gives you details on Foroni and the other three acquisitions. We will continue to look for additional acquisitions that will provide growth in geographic or category expansion at a reasonable price.

Last time we spoke about end user driven product innovation, and I mentioned several product ranges that we introduced in 2019. These products include air purifiers, an automatic laminator, a docking station for the Microsoft Surface Pro and high-end shredders. In the first nine months, we have generated over $7 million in sales for these new products and we're just beginning to ramp up.

Moving onto our productivity initiative, we will continue to generate substantial savings from our programs. Each year, we target approximately $30 million in productivity improvements, and in the third quarter, we're on track to deliver close to $40 million in savings, most of which have been reinvested in the business.

Finally, an update on capital allocation. Neal will go through the specifics, but in the quarter we significantly reduced our debt and continued with share repurchases. Yesterday, our Board of Directors approved an 8% increase in our quarterly dividend to $0.065 cents per share. The increase is payable effective in the fourth quarter.

With that I will turn the call over to Neal for a review of the segments, guidance and other financial commentary. And then, I'll join him in answering your questions. Neal?

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

Thank you, Boris. Good morning, everyone. Before I move to the quarterly results, I would like to start with a perspective on the North America back-to-school season, which covers both the second and third quarters. Taken as an entire season, we did well. As Boris already mentioned, second quarter sales rose 9% and third quarter sales rose 3% with our EPS change following the sales pattern. In total, the second quarter and the third quarter EPS are $0.02 over prior year. The third quarter is down $0.02, with the second quarter up $0.04 reflecting the relative share of back-to-school shift in each quarter respectively. This is a continuation of the trend seen last year with the second quarter now the stronger quarter for back-to-school.

Moving now to our third quarter. Comparable sales increased slightly based on solid growth in North America. Adjusted net income of $31 million or $0.32 per share was down from $36 million or $0.34 last year. The decline was from lower gross margins in EMEA and International. Our gross margin was 30.8%, down almost 2 percentage point as we had an unfavorable product mix in most areas, cost inflation in our international businesses from adverse foreign exchange and experienced lower cost absorption as we reduced inventory.

SG&A expenses as a percent of sales increased to 19.1% from 18.3%, the increase was relating to higher management incentive expenses based on better performance this year versus last year when we were releasing accruals. In addition, information technology spending increased from our building out of SAP in North America.

Reported operating income decreased to $49 million from $58 million and operating margin declined to 9.6% from 11.3% last year. On a reported and adjusted basis, operating income decreased due to the lower gross profit and higher SG&A expenses from the factors I just mentioned.

Our adjusted tax rate was 27.4% in the quarter as we change certain tax assumptions to reflect the change in our geographic earnings, stronger in the US and weaker in EMEA and international. For the full year we now expect our adjusted tax rate to be in the range of 29% to 30%.

Now, let's turn to some details of our segment results. Net sales in North America rose 3% with pricing offsetting input inflation, tariffs and lower volume. Back-to-school sell-through was strong and sales growth continued with the Kensington brand on the strength of new products. We saw a strong growth with many customers in the e-tail and mass merchant channels, but also had declines with some customers. On balance, it was an excellent back-to-school season.

North America operating margin decreased slightly to 12.4% from 12.8%, driven by lower cost absorption as we reduced inventory and a slightly unfavorable product mix. For the full year we now expect North America sales to be slightly up versus last year.

In EMEA, sales decreased 7%, currency translation reduced sales approximately $7 million or 5%, worse than anticipated. Comparable sales decreased 2%, primarily because of a softening economic environment. EMEA adjusted operating income of $14 million declined 17% due to lower volume and higher input costs, largely due to weakness of the euro and UK pound which increases the cost of US dollar sourced products that we purchased in Asia. Gross profit and gross profit margin also negatively impacted by an adverse sales mix and lower cost absorption, also due to reducing inventory levels as well as lower sales. On a comparable basis, we expect EMEA sales to be flat for the full year.

Moving to the International segment, comparable sales decreased almost 4%, the Foroni acquisition added approximately $6 million in August and September. Australia and Asia continue to be difficult markets and Mexico, on a comparable basis, is now flat year-to-date, as our third quarter back-to-school performance there was disappointing. Brazil continue to grow and is well positioned going into the start of its back-to-school season. International operating income declined on both the reported and adjusted basis from inflationary cost increases and lower volume, and exiting a commodity business in Asia. Foroni did not impact operating income for the segment in the third quarter. Going forward, we anticipate continuing good performance in Brazil as the fourth quarter is typically their strongest quarter and that should also be seasonally true for Foroni. We anticipate challenges in Australia and Asia will continue. Overall, we expect International sales to be flat on a comparable basis for the full year.

Let's move now to our balance sheet and cash flow. As we noted on our last call, we were pleased that our high inventory levels projected on the North America back-to-school margins, but our early purchases shifted the seasonality of cash flow. In the third quarter, we generated a record quarterly free cash flow of $183 million as we collected receivables on sales of inventory that had already been paid for earlier in the year. We have almost closed the gap with last year's nine months free cash flow, and we believe we are back to our normal seasonal pattern.

During the quarter, we repurchased 2.1 million shares for a net $16 million, and paid $6 million in dividends. Year-to-date, we have repurchased 7.5 million shares for $58 million and paid $18 million in dividends. More significantly, we repaid $174 million of seasonal borrowings. At quarter end, our pro forma bank net leverage ratio was 2.9 times. As mentioned earlier, we closed on the Foroni acquisition in the third quarter. This cost $42 million in cash, plus $8 million of acquired debt, and we expect to have a need for $7 million in additional seasonal working capital for this business.

Now let's turn to our outlook. We are updating our outlook for 2019 to include the Foroni acquisition, as well as the impact of a lower tax rate and adverse foreign exchange, which has become a stronger headwind as we saw in the third quarter. We estimate that sales will be flat to up 1%, including a 3% adverse foreign currency effect.

Our outlook for EPS for the year is in a range of $1.15 to $1.20, which includes $0.04 negative impact of foreign exchange, $0.03 year-to-date and another $0.01 expected in the fourth quarter. This is $0.01 worse than we anticipated when we gave our original outlook in February.

The US consumer channels still appear to be doing well for us. But our US commercial customers and the rest of the world are becoming more cautious. In addition, in last year's fourth quarter, we released additional incentive compensation accruals of almost $7 million. Given our forecast, performance this year, we do not anticipate releasing incentive compensation in the fourth quarter. The outlook for free cash flow remains unchanged at $165 to $175 million. We anticipate year-end net bank leverage will be down from last year. We have included certain modeling assumptions in our slide deck, on Page 13.

Now let's move on to Q&A, where Boris and I will be happy to take your question. Operator?

Questions and Answers:

Operator

Thank you [Operator Instruction] Our first question comes from Bill Chappell with SunTrust. Your line is open.

Bill Chappell -- SunTrust -- Analyst

Thanks, good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, Bill.

Bill Chappell -- SunTrust -- Analyst

Hey, Boris, can you talk a little bit more about the back-to-school season, just anything you can give us on kind of sell-through percentages versus sell-in growth that we see. And just was it more company-specific in terms of market share gains or just driven by a good overall kind of back-to-school season?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. Thanks, Bill, for the question. Back-to-school was very strong. It's in fact, it's from a sell-through standpoint, it's the strongest that I remember at my time here. The sell-through was up approximately 5% for the season, the overall industry back-to-school was roughly flat. So clearly, we did better than average. And then when I look at the e-tails by customer, it was pretty broad, most of our customers grew in their sell-through with us. It was led by the Five Star brand. We had much better placement then last year and much stronger end user demand for our key products.

We had a couple of accounts that declined based on just they are -- time and place in the industry, and they are focused on private label, but the majority, and especially, the growing customers including major mass marketer, mass merchandiser and the e-tailers have grown. So the season was very, very strong. And then just to tie it into the sales, as Neal mentioned, the sell-in -- a lot of that sell-in for that sell-through happened in Q2, where we had 9% growth in Q2, and then we got some replenishment in Q3 with 3% growth. But the overall season was very, very strong with plus 5%.

Bill Chappell -- SunTrust -- Analyst

Got it. And so with that in mind, there is -- the inventory levels are in good shape, you don't see a de-stock kind of as we go in fourth quarter or first quarter next year?

Boris Elisman -- Chairman, President and Chief Executive Officer

No. And that's a very important point. What we've seen actually over the last couple of years is an emphasis by our customers to exit the season clean. So they are trying to sell through more than they buy, because they hold some inventory going into the season. So yes, we feel that exiting the season we're in very, very good inventory shape.

Bill Chappell -- SunTrust -- Analyst

Yeah. And then just switching quick to Foroni, just help me understand it seems similar to the products you have with Mead. I thought there was some option to kind of expand that internationally. So is this more of a different product line or is it more of just it was easier or faster to buy that, the leading player versus kind of move tangentially into the market?

Boris Elisman -- Chairman, President and Chief Executive Officer

No. It's a similar product line, and really the driver for the purchase is the brand. Foroni is a very strong 100-year old brand in Brazil with very strong consumer allegiance. They are number two player in the market, next to us. We are number one player in the market with Tilibra. So this allows us to have number one and number two strongest back-to-school brands in Brazil. We're going to continue to push them as two separate brands with separate lines and separate assortments, and we try to create some synergies in the back end.

Bill Chappell -- SunTrust -- Analyst

Got it. And then last one from me. Neal, you talked about incentive comp in the fourth quarter not being released, I just didn't fully understand, is that because you're not hitting your targets or is it because there was a bigger than normal release last year?

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

It was last year. Last year we were not hitting our targets and we released significant incentive comp in the fourth quarter and this year we are anticipating not doing the same thing, i.e, we are anticipating hitting our targets.

Bill Chappell -- SunTrust -- Analyst

Yeah. Okay. So incentive release, I mean, last year there was a reversal. This year there is not, that's the way you think. Perfect. Okay. Thanks so much.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thanks, Bill.

Operator

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

William Reuter -- Bank of America -- Analyst

Good morning. With regard to the mix of products, which I guess was a little bit dilutive to margins. I guess, can you talk about that, was it some of the new products that are not up to scale at this point in terms of units?

Boris Elisman -- Chairman, President and Chief Executive Officer

No. The mix was driven primarily by our heavier participation in private label this back-to-school season than last season. As we've talked before, we are fairly tactical with our private label strategy with bid on products, where we can make dollar gross profits and if it's a loss, we don't bid on it. So given all of the inflationary pressures this year and late last year and the tariffs, we participated in more opening price point private label business this back-to-school, which drove revenue, but also diluted our margin. So that's really the mix issue that we're talking about.

William Reuter -- Bank of America -- Analyst

That makes sense. Do you think that there is a -- it sounds like if you hadn't participated in this, then your branded product sales would have been down a little bit or I guess they were down a little bit. Do you think that there is a strategy from a lot of your customers to shift their mix of products that they offer more toward private label. And I guess, do you expect that to continue?

Boris Elisman -- Chairman, President and Chief Executive Officer

No. The branded product sales were actually up this season. So if I look at our growth in North America, it is roughly 60%-40%. 60% of that growth was driven by the branded products and may be 40% by incremental private label. So we've done well with branded products, and I mentioned Five Star which was the fastest growing brand during the back-to-school season of the Top 10 brands.

As far as the private label strategy from our customers, as we've talked before, it's very customer-specific. Given the change in ownership with a couple of our customers from public to private and private equity backed, there is a little bit of an increased push for private label from those specific customers. Our strategy remains unchanged. Private label today is around 7% of our global business. And then depending on the year, there'll be plus or minus a couple of points, as I mentioned, as we'll bid on profitable business and we will not participate in unprofitable business.

William Reuter -- Bank of America -- Analyst

All right. It sounds -- that makes sense. And then just lastly, I think when you had talked about List 4 tariffs, previously you mentioned, I think $28 million impact. I guess, how do you expect to contend with this next year? I guess, what do you expect the net impact of those List 4 tariffs is going to be? That's all from me. Thanks.

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. I think when you're talking about $28 million, Bill, it's 2018 and 2019 combined and that also included inflation. If you look at tariffs, the number is small, it's roughly half of that and we anticipate roughly a similar impact that we saw in 2018 and 2019, with us anticipating in 2020, unless things change, and as you know, things can change on a daily basis when it comes to tariffs. Right now, we plan to have price increases on January 1st to offset the tariffs that we know of that are coming on December 15th. Obviously US is in negotiations with China. So some of that may change. And if it does change, we'll react to it. If the tariffs go down, we will reduce our pricing of our price increases and if the tariffs continue to go up, we will have to pass those increases through.

William Reuter -- Bank of America -- Analyst

Okay. So I guess what that would mean is that 2020 impact would be about $14 million, but more or less you expect to offset that with price, the tariffs are in place, they end up [Phonetic] in the same spot on a margin basis?

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

2020 is about half of that, it's about $6 million to $7 million in tariffs.

William Reuter -- Bank of America -- Analyst

Okay. All right. That's all from me. Thank you.

Boris Elisman -- Chairman, President and Chief Executive Officer

Okay. Thanks, Bill.

Operator

Thank you. And our next question comes from the line of Joe Gomes with Noble Capital. Your line is open.

Joe Gomes -- Noble Capital -- Analyst

Good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, Joe.

Joe Gomes -- Noble Capital -- Analyst

Just wondering if you could give us a little bit more color on the e-tail segment? What kind of growth are you seeing there, what percent of overall revenues is e-tail now making up for the firm?

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

We track e-tail sales for US specifically, because that's where we get the sell through information and right now or in Q2 -- sorry Q3 e-tail was roughly 15%, 16% of the quarter. The growth was very strong. The growth is teen percent growth, e-tail continues to take share during the season, both for back-to-school and back-to-college. We have very broad participation in e-tail literally pretty much every SKU that we make get sold through e-tail. There's nothing that today at least. They're not willing to carry. So it's a very successful channel for us. It's margin accretive for us, and we love e-tail and we continue to focus on it.

Joe Gomes -- Noble Capital -- Analyst

Great.

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

And it's a lot less developed internationally.

Joe Gomes -- Noble Capital -- Analyst

Okay. And I think switching gears for a second here, just kind of want to revisit Australia, New Zealand in the Pelikan acquisition. That market has been under pressure here for our, at least for two years that I've been following the company here. Are we getting close to a point, where we might have to start considering whether there is going to be write downs on this business?

Boris Elisman -- Chairman, President and Chief Executive Officer

I'll let Neal answer that writedown question. I'll let him answer that question.

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

Not that we anticipate at the moment, Joe.

Joe Gomes -- Noble Capital -- Analyst

Okay.

Boris Elisman -- Chairman, President and Chief Executive Officer

Just to give you additional color on Australia, New Zealand, Joe. It has been a tough market. You're absolutely right, for the last couple of years, both because of a weakness in Australian economy as well as industry specific issue, where you have both consolidation -- de-consolidation is happening on the part of a couple of commercial customers and those customers are reducing their footprint as well as just competitively and not doing well, and they're big customers and when they don't do well, obviously that affects our sales.

But the biggest impact we have felt in Australia is on the legacy ACCO side, not on the Pelikan, Artline side. So legacy ACCO has historically participated more in trade products, not end user products and more in commodity categories, as opposed to well-known branded value added categories and that is the part that has suffered the most during the last couple of years, both private label that we historically made for our customers that they are choosing to source directly, as well as the some of the commodity categories, which are just declining. The Pelikan, Artline, a part which we have acquired, has done relatively well compared to the legacy ACCO part.

Joe Gomes -- Noble Capital -- Analyst

Okay. That's very informative. Thank you. And then just one last one from me. If we looked at what the nine-month free cash flow number is, little over $50 million and looking for full year and the $165 million to $175 million, that suggests, it's -- call it a $110 million to be generated in the fourth quarter, and what is your, guys, early thoughts as to -- if that all happens as to how you would allocate that money in the quarter.

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

So firstly, Joe. That's very consistent with the free cash flow generation that we had last year and normally see in the fourth quarter. So right to-date, our free cash flow is only $6 million lower than the prior year. And that's really all driven by paying higher taxes earlier this year, which we anticipated . So we're very confident on hitting our free cash flow target for the year. It's something that we put a lot of time and effort behind to make sure we achieve it. And it's driven by the seasonality of our business.

In terms of how we would deploy that cash, obviously we would continue with what we traditionally do in terms of deployment of cash. So year-to-date, we've spent a significant amount on stock repurchases and on dividends. We've obviously announced an increase in dividend. We have an ongoing stock repurchase program. But one of the big things that we would tend to do in the fourth quarter is pay down debt, because we then seasonally added again in Q1 and Q2. And so it's part of our cycle and it replenishes our ability to make future acquisitions.

Joe Gomes -- Noble Capital -- Analyst

Okay. Great. Thanks guys. Appreciate the time.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Joe.

Operator

Thank you. And our next question comes from the line of Chris McGinnis with Sidoti & Company. Your line is open.

Chris McGinnis -- Sidoti & Company -- Analyst

Good morning. Thanks for taking my questions.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, Chris.

Chris McGinnis -- Sidoti & Company -- Analyst

Actually I wanted [Indecipherable) that keep on the -- our North American back-to-school, but was there anything specific around Five Star, was it new product introductions or market share gains that are in the sense of shelf space that helped drive some of them, that strong sales?

Boris Elisman -- Chairman, President and Chief Executive Officer

We launch new products with Five Star every year. There are new colors, new materials, new innovations that we introduce. It's literally thousands of SKUs for the back-to-school season. We've got great placement with major retailers this year. Also last year, we introduced a new demand generation campaign focusing on the teens, which are the primary buyers of the Five Star brand and that campaign continued this year and obviously it resonated with the consumer. So it's all of those things combined that drove a very, very successful back-to-school season.

Chris McGinnis -- Sidoti & Company -- Analyst

Okay. Thank you. And then just quickly if you could touch on TruSens end-of-school [Indecipherable) at the discount, where you've seen as you've launched in the first quarter?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. TruSens is our air purifier brand we introduced it in February in the US, and then in Q2 we started to roll out across the rest of the world. We are incredibly pleased with the ramp up, almost every week we are hitting new records in sell-through in the US, and we have -- we are very optimistic it's going to become a multi-million dollar brand for us. So far incredibly excited about the launch and the opportunity and we're going to be expanding that product line in the future.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. Thanks for taking my questions and good luck in Q4.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you. Thank you, Chris.

Operator

Thank you. And our next question comes from the line of Kevin Steinke with Barrington Research. Your line is now open.

Kevin Steinke -- Barrington Research -- Analyst

Good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Hi.

Kevin Steinke -- Barrington Research -- Analyst

Hello. So you mentioned that you're encouraged about initial read on the back-to-school season in Brazil. And maybe if you could expand on a little bit more on what you're seeing there and then maybe in contrast, you mentioned back-to-school in Mexico was a little disappointing. And maybe a little more color on the factors behind their performance?

Boris Elisman -- Chairman, President and Chief Executive Officer

Sure. Brazil continues to do extremely well for us. We had roughly 10% growth in Q3 as we are just beginning to ramp up for back-to-school, and all the signals that we're seeing that back-to-school will be strong for us in Brazil. So last year we had a very strong back-to-school. We're anticipating that to continue this year. Obviously, we have to see what the sales are actually going to be, but going into the season we think we are very well setup.

As far as Mexico is concerned, the back-to-school was disappointing, and it's really an economic condition in Mexico. Mexico saw a contraction in Q2. We don't have the numbers on Q3, but then Q2 saw contraction from prior year. So the economy is not doing well. What we've heard from all the retailers is, that the back-to-school overall in Mexico was very soft. And then we've done commensurately with how everybody else has done. So I'd say, it's definitely a more disappointing season in Mexico that we're used to. Back-to-school does not represent a huge part of our business in Mexico. It's mostly drives our new acquisition, the Barrilito acquisition. And it was a little bit softer than we had last year.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Got it. And I believe, you said you expect International segment sales to be flat for the year. I believe that it's down from what you're expecting on the prior call, just in terms of growth, but is Mexico a key factor there or any other factors that maybe change the outlook just a bit for International?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. Mexico was down a little bit versus our prior expectations, and Asia is down versus our prior expectations, both. Strength in Brazil is consistent with what we were expecting. And then Australia, Australia's performance is also consistent with our expectations. And it's really Mexico and Asia that declined our view of the fourth quarter as lower than we had before.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Thanks. And then you mentioned Europe softening economic environment there is what you're seeing, the impact you can find a certain -- countries or as you might expect like the UK or is it, you're seeing something more broad based there in terms of the economic impact?

Boris Elisman -- Chairman, President and Chief Executive Officer

It's a little bit broader than the UK, our biggest country in Europe is Germany. And German economy has softened both in Q2 and Q3. And Germany obviously is a big trading partner with the rest of Europe. So it does affect several European countries. I mean, we're seeing some weakness also in Eastern Europe as well as countries that are in and around Germany and UK. Obviously with the Brexit uncertainty was weak as well. So the economic softness in Europe that we're seeing is broader than just one country.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Thank you. And then lastly for me, just maybe talk a little bit more about the dividend increase and the thought process behind that and your view of a dividend policy going forward?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. As you know, Kevin, we implemented our dividend in the beginning of last year, and over -- when we issued the initial dividend, we said that the strategy is to grow it over time prudently. We want to reward our long-term shareholders with a return. And when we looked at our future projections of cash flow we felt it was the time to increase the dividend. We've been repurchasing a lot of shares. So if you look from a total cash outlay, the GAAP cash outlay per year that we projecting even with an increased dividend for the Company is about the same as we paid in dividend in all of 2018. So it's not a increased portion of our cash flow. But on a per share basis, it's a nice 8.3% increase in dividend for our long-term shareholders.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Great. Thank you very much.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Hale Holden -- Managing Director

Good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Hi, Hale.

Hale Holden -- Managing Director

I have a couple of quick -- thank you. I had a couple of quick ones. You know following up on the European comments you just made, you also made in the text, you did some commentary around US corporate clients pulling back around uncertainty, and I understand you're not giving guidance, but in general, are you thinking a little bit more conservatively on the go forward given what you're seeing from Europe and more specifically US corporate clients, commercial?

Boris Elisman -- Chairman, President and Chief Executive Officer

I think that's fair that we are a little bit more cautious when we look out forward. As Neal mentioned in our prepared remarks, the US consumer continues to do well and we have not seen any weakness from the US consumer, but certainly outside of the US, and if you look at commercial or industrial customers, they are becoming more cautious. So yeah, I'd say our tone is a little bit more cautious when we look out to the future.

Hale Holden -- Managing Director

And then on the price increase that you are taking in January, I mean, have you -- I guess, socialize that and had additional discussions on it and or do you expect any pushback around it?

Boris Elisman -- Chairman, President and Chief Executive Officer

We have communicated the price increase or the intention of a price increase to all of our customers. We're working through the details now. There is pushback every time we do any kind of a price increase. So it's normal business commercial negotiations that we do with our customers. Nothing unusual this time around.

Hale Holden -- Managing Director

And then my last question was, the commentary around leverage being down on a year-over-year basis at the end of the 2019, is that adjusted for the recent acquisition in Brazil on the $50 million of financing there, is that including that?

Boris Elisman -- Chairman, President and Chief Executive Officer

So on a reported or pro forma basis it should be lower than prior year.

Hale Holden -- Managing Director

Perfect.

Boris Elisman -- Chairman, President and Chief Executive Officer

The acquisition, that's significant in terms of its impact.

Hale Holden -- Managing Director

Great. And you have to fund now with the revolver, right?

Boris Elisman -- Chairman, President and Chief Executive Officer

We did.

Hale Holden -- Managing Director

Good. Great, thank you so much. I appreciate it.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you. Hale.

Operator

Thank you. And our next question comes from the line of Karru Martinson with Jefferies. Your line is now open.

Karru Martinson -- Jefferies -- Analyst

Good morning. In terms of the price increase on January 1st, is that going to -- is there a typically a pull forward of sales and perhaps a little bit of a depressant for the first quarter that we should be looking at?

Boris Elisman -- Chairman, President and Chief Executive Officer

You know it depends, Karru. Historically I would have said, yes, but nowadays given what we've -- patterns that we've seen over the last couple of years, it depends. We have not seen that, for example, last year, when there was a very significant price increase in January. We have not seen any pull forward in December. So I can't really comment on that. We'll see when it happens.

Karru Martinson -- Jefferies -- Analyst

Okay. And realizing that the tariff backdrop can change on a day-to-day basis, where do we stand now on the alternate countries of supply, what's our exposure to China and where have me moved our manufacturing to?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. We've been very aggressive in trying to move our supply chain from China, where it makes financial sense. And it makes sense for most products, where we don't have tooling or just heavy capital investment in China. So a lot of our paper SKUs, we have been very aggressively moving to other South East Asian countries or low-cost countries. Some of our -- even some of our tooled products, we are moving to countries like Taiwan.

So I expect that our foot print, manufacturing footprint in China will be significantly lower next year than it is this year and then it was past year. So we certainly are not waiting for the tariff policy to be clarified before we move our supply chain, and regardless these moves are semi permanent. I don't want to ever say, permanent, but even if the tariffs are repealed, we don't envision moving the manufacturing back to China, because cost in Vietnam and Taiwan are also becoming very, very competitive with China, given the inflationary increases that we've seen in China historically.

Karru Martinson -- Jefferies -- Analyst

Okay. And then in terms of the inflation, you talked about $14 million over the '18-'19 period. What's the outlook for raw material, and I would assume that's built into that January 1st price increase?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yeah. Outside of tariffs, the expectations for material inflations are fairly muted next year. We don't see the kind of inflation that we saw in '18, which was very, very high and then some of it bled over into '19 as well, especially into the first half of '19. So outside of tariffs, the inflation expectations are fairly muted and we are being fairly surgical with our price increases in the US to only increase prices and those products are exhibiting our increased costs.

Outside of the US, the inflationary pressure is coming from the strength of the US dollar. So we are definitely going to be adjusting our local currency pricing in both EMEA, as well as in international countries to account for the fact that the US dollar is a lot stronger today than it was 12 months ago.

Karru Martinson -- Jefferies -- Analyst

Okay. Thank you very much guys. I appreciate it.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Hamed Khorsand. Your line is open.

Hamed Khorsand -- BWS Financial -- Analyst

Hey, good morning. So first off, I just wanted to get an understanding of the push back you're seeing in Europe. Is that across the board? Is there a specific area in Europe that's creating the lower numbers for you.

Boris Elisman -- Chairman, President and Chief Executive Officer

So there is a couple of things going in Europe Hamed. The primary reason is the economic weakness that I talked about, and that's pretty much across the all of EMEA. It centers around, Germany and the UK. But as I mentioned, it's pretty much affects all of the EMEA. The other thing with EMEA is just compares versus prior year. Last Q3 Europe grew over 3%. It was a very strong quarter a year ago and that was driven by GDPR and the launch of the shredders that we had in EMEA and there were two factors there. One is just increased shredding and focus on privacy coordinated with the GDPR launch, as well as just the channel fill. Because a lot of our customers were carrying shredders for the first time. So it drove us very significant increase in shredders last year. This year, the stapler [Phonetic] is going well and the sales are going well. But from a year-to-year comparison perspective, the sales of shredders are down, and that's another contributor to the 2.3% decline in EMEA this quarter.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And then in the US, you were talking about your commercial customers being a little bit cautious. Are those the same customers you were targeting as far as getting them as a direct customer?

Boris Elisman -- Chairman, President and Chief Executive Officer

No. I am talking about the big contract Stationers and the commercial arms or office product superstores. The independents, the small independents that were trying to buy from us direct continue to do well.

Hamed Khorsand -- BWS Financial -- Analyst

And then with these commercial customers, do you have insight into if there's too much channel inventory out there?

Boris Elisman -- Chairman, President and Chief Executive Officer

I don't believe there is more -- there is a lot of inventory, but they are just buying less, because they are preparing for the future. So when you look at competitive channel dynamics everybody is trying to compete with the most efficient resellers and the most efficient resellers carry very little inventory. So we see that our historical legacy customers in trying to compete with these modern efficient resellers try to carry just-in-time inventory and when they think the demand is going to be down in the future, they reduced their purchasing.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. Great. That's it from me. Thank you.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Hamed.

Operator

Thank you. I am not showing any further questions at this time. I will now turn the call back over to Boris Elisman for any further remarks.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Sidney. In closing, we're very pleased that the business has performed well in the first nine months of the year, driven by North America's strong back-to-school results. We remain confident about our future and continue to position the Company for growth and strong returns for our shareholders. I look forward to speaking with you again after report -- after we report our full year results. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Christine Hanneman -- Senior Director of Investor Relations

Boris Elisman -- Chairman, President and Chief Executive Officer

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

Hale Holden -- Managing Director

Bill Chappell -- SunTrust -- Analyst

William Reuter -- Bank of America -- Analyst

Joe Gomes -- Noble Capital -- Analyst

Chris McGinnis -- Sidoti & Company -- Analyst

Kevin Steinke -- Barrington Research -- Analyst

Karru Martinson -- Jefferies -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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