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ACCO Brands Corp (NYSE:ACCO)
Q4 2019 Earnings Call
Feb 12, 2020, 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 4Q and Full Year 2019 ACCO Brands Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Christine Hanneman. Thank you. Please go ahead.

Christine Hanneman -- Senior Director of Investor Relations

Good morning. This is Christine Hanneman, Senior Director of Investor Relations. Welcome to ACCO Brands fourth quarter and full year 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 our results, we may refer to adjusted results. Adjusted results exclude transaction, integration and restructuring costs and reflect an adjusted tax rate. Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to the most directly comparable GAAP measures are in the earnings release and slides that accompany this call.

Due to the inherent difficulty in forecasting and quantifying certain amounts, we do not reconcile our forward-looking adjusted earnings per share, free cash flow, net leverage ratio or adjusted tax rate guidance. Forward-looking statements made during the call 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. Thank you for joining us. I will spend the next few minutes reviewing the highlights of the 2019 results and commenting on the progress we're making against some of our strategic imperatives. Neal will follow me with more color and details on the full year and fourth quarter, and then we'll take your questions.

I'm very pleased to say that we reported a record year in 2019 for net sales, which rose 1% to $1.96 billion. Our adjusted earnings per share were also a record, rising 5% to $1.20. And free cash flow increased $11 million to $172 million, our second highest ever, allowing us to return $89 million to our shareholders, $65 million from share repurchase program and $24 million in dividend payments.

In addition, we reduced our debt $71 million and brought our net leverage ratio down to 2.7 times. Much of our success in 2019 was due to the strength and resilience of our geographically balanced business and our nimble responses to rapidly changing market conditions, as we faced inflation from input costs, multiple rounds of tariffs and changing circumstances with channels and customers.

We addressed the higher cost of commodities, logistics and tariffs in a few different ways. First, we pre-brought some of the 2019 inventory in the fourth quarter of 2018. That inventory was already priced for 2019 back-to-school shipments to our customers. We leveraged our balance sheet to avoid some of the impacts from tariffs and successfully brought down those high inventory levels as we sold through the goods in the second and third quarters of 2019.

We also took several price increases throughout the year to offset inflation and tariffs. Our pricing lagged the cost increases by approximately one quarter, but we successfully implemented what we needed to offset the higher cost.

Finally, we worked during the year to move a sizable part of our supply chain out of China and into Vietnam and Taiwan. It is very difficult to operate under continually changing external circumstances such as the ones we faced in 2019. And I would like to thank all of our employees whose hard work and diligence allowed us to overcome these challenges and post excellent results.

To further strengthen our business, last August, we purchased Foroni, a leading provider of branding notebooks and school and office products in Brazil. Foroni is the second-largest player in the market after Tilibra, which we already own. As a result, we are now a very significant participant in this growing product area in Brazil.

The fourth quarter is the largest and most important quarter for us in Brazil because of compasses shipments for the back-to-school season, as well as calendars and other data products.

Both businesses in Brazil performed well, with Tilibra growing at 5% in the fourth quarter and Foroni delivering better than expected profitability. Foroni is our fourth strategic acquisition in 4 years as we continue to focus and rebalancing our portfolio of brands, channels and geographies, to achieve faster and more profitable growth. We will look for additional acquisitions that will provide profitable growth and geographic or category expansion at a reasonable price.

Another critical component of our success in 2019 was our outstanding back-to-school performance in the U.S. Our Five Star brand led the way, allowing us to grow mid-single digits and take share in a flat market. The new product ranges introduced in 2019, such as TruSens air purifiers, the GBC automatic laminator, Kensington docking station for the Microsoft Surface Pro and a full line of Leitz and Rexel manual shredders, continued to perform very well as the year progressed.

We will continue to focus on growing these lines and enhancing them and other categories with additional innovations in 2020.

Moving to our productivity initiatives. We'll continue to generate substantial savings from our programs. Each year we target approximately $30 million in productivity improvements. In 2019, we achieved more than $40 million in productivity and integration savings. We have reinvested much of that into our business. I expect another year of solid productivity improvement in 2020.

Overall, I'm very happy with our results. Our full year performance manifests the fact that our strategy of focusing on growing channels, strong brands, innovative products and productivity improvements, complemented by accretive acquisitions and excellent execution is working.

Looking at 2020, our guidance reflects the fact that we expect the environment to continue to be challenging, but we are looking for improved profitability and strong free cash flow.

With that, I will turn the call over to Neal, for a review of segments, our outlook 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, and good morning, everyone. I'm going to focus largely on our full year results. For 2019, comparable sales increased almost 1% based on solid performance in North America. As Boris mentioned, it was critical that we raise prices throughout the year to offset higher input costs, including several rounds of tariff increases on Chinese imports.

We were successful in doing so, and that is reflected in posting an increase for the full year in both reported net sales and comparable sales. This is the best growth in comparable sales that we've had in a decade. Adjusted net income of $122 million was even with 2018. Adjusted EPS was $1.20 versus $1.14 in 2018. Having deployed $65 million of our free cash flow to share repurchases, we benefited from fewer shares outstanding.

Our gross margin was 32.4%, a bit above 2018s level. SG&A expenses as a percent of sales decreased slightly to 19.9% from 20.2%. We incurred $5.6 million of higher annual incentive expenses based on our performance in 2019. In 2018, very limited incentives were out.

Reported operating income increased to $196 million from $187 million and operating margin rose to 10% from 9.6% in 2018. On a reported and adjusted basis, operating income increased due to acquisitions by a net pricing and cost savings, partially offset by higher incentive accruals.

Our adjusted tax rate of 30.5% was higher than we estimated, as the various impacts from U.S. tax reform and, in particular, the areas related to the impact of our foreign earnings have proven more difficult to forecast. And those non-U.S. earnings have triggered higher U.S. taxes. For 2020, we expect our adjusted tax rate to be similar to the 2019 rate.

Now, let's turn to some details of our segment results. Net sales in North America rose 3% with higher prices offsetting higher input costs including tariffs and lower volume. Our back-to-school season was strong with growth in note taking and ring binders.

Growth also continued in the Kensington brand on the strength of new products in the notebook, docking and security areas. Office supplies in calendar items declined. We saw growth in the independent and wholesale channels, which offset some declines in dollar and other regional retail stores. North America operating margin increased to 13.5% from 12.4%, driven by pricing largely catching up with the cost inflation cycle that began in mid-2018. Pricing along with cost reductions were only partially offset by lower volume and higher incentive accruals.

For the first quarter of 2020, we expect North America sales to continue to benefit from some of last year's price increases, but our pricing will follow changes in tariffs. For example, we will reflect tariff reductions to List 4A items from May onwards. For the full year, we anticipate North America sales to be down slightly.

Now, let's turn to EMEA. Full year sales decreased 6%, almost all of which was related to currency translation. Comparable sales were roughly flat as we saw sequential demand improvement in the fourth quarter from the slower second and third quarters, primarily from gains in lever arch files, do-it-yourself tools and computer accessories.

As we have mentioned, EMEA had a very strong 2018 because of the new privacy law, the increased demand for shredders. So, the comparisons for 2019 particularly by quarter were difficult. We were very pleased that we almost matched 2018 sales by replacing one-time shredder demand from the privacy law with ongoing demand from share gains and new products.

EMEA gross profit and gross profit margin were negatively impacted by adverse foreign exchange and lower volume. EMEA's 2019 adjusted operating income of $61 million, declined 10% due to lower sales, adverse foreign exchange and higher input costs. The cost increase was largely due to weakness in the Euro and U.K. pound, which increased the local currency cost of U.S. dollar sourced products that we purchase in Asia but sell in local currency.

Looking at 2020. On a comparable basis, we expect EMEA sales to be approximately flat for the year. Moving to the International segment. Full year comparable sales decreased almost 3% because of lower volume, partially offset by higher pricing. The GOBA and Foroni acquisitions added approximately $54 million to sales in 2019. Adverse foreign currency reduced sales approximately $19 million.

Australia continues to be a difficult market with lost placements and an unfavorable mix, although we saw a slower rate of decline in the fourth quarter. In Asia, we are seeing the effects of exiting low-margin product lines. For the year, sales in Mexico, excluding the GOBA acquisition were down slightly.

Moving on, Brazil had strong sales during its back-to-school selling. As Boris mentioned, the fourth quarter is the largest quarter seasonally for both Tilibra and Foroni, and both performed well. Keep in mind that because both Brazilian businesses are heavily skewed to the fourth quarter, almost all of the profits there are generated in the second half.

As a result, in 2020, we expect full year ownership of Foroni to add approximately $30 million to sales, but add minimal incremental EPS. Full year reported International operating income declined slightly because of higher restructuring and acquisition related costs. Adjusted operating income of $53 million, rose 4% because of the acquisitions, partially offset by continuing difficulties in Australia and Asia, along with adverse foreign exchange.

For 2020, International sales are expected to be up high single digits with the benefit of full year Foroni, growth in general in Brazil and Mexico and less of a drag from foreign exchange Asia and Australia.

Let's move now to our balance sheet and cash flow. In 2019, we generated $204 million in net cash from operating activities and free cash flow of $172 million. We repurchased 8.3 million shares for a net $65 million, and we also paid dividends of approximately $24 million, returning $89 million to shareholders.

During the fourth quarter, we repurchased 800,000 shares for a net $7 million and paid $6 million in dividends. We also repaid $116 million of seasonal borrowings. At quarter-end, our net leverage ratio was 2.7 times.

Now, let's turn to our initial outlook for 2020. We estimate that sales will be in the range of negative 1% to positive 1%, including approximately $20 million from adverse foreign currency exchange and $30 million benefit from having full year Foroni results.

Our outlook for adjusted EPS for the year is in the range of $1.20 to $1.30, which includes $0.03 negative impact from foreign exchange and minimal incremental impact from full year Foroni results. We anticipate normalization of incentives and our guidance includes a $14 million headwind as a result.

In 2019, our sales seasonality for back-to-school was skewed toward the second quarter. In 2020 we expect back to school to be more balanced between the second and third quarters, similar to what we saw in 2018. The outlook for free cash flow is $165 million to $175 million. We do not expect to repeat the large cash outflow in the first quarter of 2020 that we experienced in 2019, because we have not pre-bought any inventory. The second quarter, therefore, will see a larger, more normal cash outflow as we build back to school inventory.

Subject to any new acquisitions, we anticipate year-end net bank leverage will be at or below 2.5 times. We have included certain modeling assumptions in our slide deck on Page 16.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Brad Thomas with KeyBanc Capital Markets. Your line is now open.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning, Boris and Neal, and congratulations on a strong fourth quarter and a strong year.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Brad.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

I wanted to ask a couple of questions. First, I was hoping maybe for a little bit more color as we think about some of these margin puts and takes. And I recognize that it's not easy to figure them all out across your different channels and countries that you're in. But as we think about pricing and tariffs being behind us, as well as some of the cost opportunities that you still have ahead, how are you thinking about some of those margin puts and takes for 2020, as we think about it on an annual basis?

Boris Elisman -- Chairman, President and Chief Executive Officer

If you look at the gross margins, they should be up a little bit just due to the tariff and inflation pressures largely behind us. We will have some inflationary pressures from currency because U.S. dollar is definitely stronger now than it was on average in 2019. We have increased prices in our international regions on January 1st. So, hopefully, we will mitigate the dollar weakness. But it has been getting stronger, dollar strength, it has been getting stronger. So there will be that additional inflationary pressure. But with all of that, I do expect gross margins to be higher in 2020 and SG&A should be a little bit higher as well because as Neal mentioned, we have $14 million in incremental incentives to absorb.

So, even though we do have a restructuring program in place and we will continue to drive on productivity, it probably will be a little bit higher as well. So, if I look from a operating margin standpoint, it should be roughly similar to what we saw in 2019. But we do expect less interest, significantly less interest in 2020 than 2019. And we expect fewer outstanding shares as well, so that will drive EPS accretion in 2020.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

It's very helpful, Boris. And if I could follow-up on how you all are thinking about the U.S. channel. It seems to me that the U.S. consumer is relatively healthy. Clearly, some of the retailers that you're partnered with on the mass side have had some nice momentum. On the other hand, the office superstores continued to shrink. How are you feeling about the setup here for 2020 in the U.S.?

Boris Elisman -- Chairman, President and Chief Executive Officer

It's likely to follow a similar pattern, Brad. We've seen that now for several years and that's why our Q1 and Q4 are relatively weak because we are more dependent on those channels. And Q2 and Q3 are relatively strong as long as we perform well in back-to-school, which we've done over the last few years. So, things are kind of going the same way. I'm very confident in our team, I'm very confident in our ability to manage all of this puts and takes. But the situation on the ground, I don't think we'll be any different.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

That's very helpful. And if I could squeeze in one more on sort of a topic de jour. As you all assess some of the sourcing that you do from China, can you give us an update on, if you're seeing any issues or expecting issues given the coronavirus?

Boris Elisman -- Chairman, President and Chief Executive Officer

Well, I'm sure you recognize it's a very dynamic situation. There is new information that comes in daily and weekly. We don't sell in China. So, the virus outbreak will have no impact on the sell side for us. But as you mentioned, some of our products are manufactured in China. We have not had any supply disruptions to date due to the coronavirus.

Typically, we pre-buy additional inventory ahead of the Chinese New Year, which lasts us for the period of normal factory shutdowns. This year, the shutdowns were one week longer than usual. But now the factories have opened and workers are coming back to work. However, we believe the ramp-up period to get to the normal production output will take longer than usual.

Luckily, we are entering our slow selling season from now through April and we're expediting some shipments out of China to make sure that we continue to save the stock.

Our North American sales start ramping up for back-to-school in May. About 20% of our U.S. back to school products are manufactured in China. Based on all the information we have today and our projections for customer needs and ramp-ups, et cetera, we expect to have good supply for BTS. But as I said at the very beginning, the situation is dynamic and this may change.

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

Thank you so much and congratulations again.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Brad.

Operator

Thank you. Our next question comes from 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

Good morning, Kevin.

Kevin Steinke -- Barrington Research -- Analyst

Hey, I wondered if you could touch a little bit more on the new product introductions that you mentioned in terms of the shredders and other, the other things you're expanding into. I think what -- can you give us a sense for the size of those in terms of revenue in 2019? And what's the outlook for new product introductions in 2020? Will you accelerate that pace or will it stay about the same?

Boris Elisman -- Chairman, President and Chief Executive Officer

Thanks. Thanks for the question, Kevin. we've launched several very exciting product lines in 2019. The ones I mentioned are the Halo products, the ones that are of significant value-add. And that's TruSens, that's the GBC Foton 30, that's the Kensington notebook dock, and the line of manual shredders under the Leitz and Rexel brands.

They were launched throughout 2019 and were very successful. We recognized revenue of around $13 million from those products through the partial year of 2019. Many of them are still ramping up, because we are introducing them on a global basis. They're nice margin products, so we're very, very pleased with our innovations.

This will continue to expand in 2020. We introduce thousands of new products every year, most of them are seasonal, that are either for back-to-school or back-to-business. But we will continue to introduce these Halo products and I expect certainly all of the four lines that I mentioned in terms of air purifiers, automatic laminator, shredders, and notebook docks continue to expand in 2020.

Kevin Steinke -- Barrington Research -- Analyst

Okay. That sounds great. And you continue to be really consistent with productivity improvements from year-to-year. It sounds like you're targeting more productivity gains in 2020. Can you just kind of give us a sense as to some of the areas where you expect to get those productivity gains and maybe is it still $30 million kind of the ballpark range to think about for this year?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes, I think $30 million is a good number to think about. This last year we delivered about $40 million. Some of that was driven from the last year, the last full year of the integration initiatives between ACCO brands and a sell-day. That explains the additional incremental roughly $10 million. This year we're shooting for around $30 million or so, and its thousands of projects that are targeting both cost of goods, logistics, distribution centers, as well as all of the general and administrative functions.

We are also rolling out a -- or consolidating on a single ERP in North America in April. And that should enable some additional productivity improvements in the second half of the year. But we don't expect something in the summer. But as that ramps up, we should get incremental productivity improvements in the second half.

This is something that we live with and do every year. It's a focus of every organization. We are a low growth business. So, for us, really, squeezing efficiency out of our operations is really important in order to drive improved profitability. So, we're very focused on that.

Kevin Steinke -- Barrington Research -- Analyst

Great. You mentioned the ERP implementation. You haven't called anything out about it before. But is there any meaningful incremental implementation cost in '19 from that effort that would go away?

Boris Elisman -- Chairman, President and Chief Executive Officer

No, over the last few years, we've been -- our capital expense been in the $32 million to $34 million range, which is up from around $25 million or so or that we were spending before the last couple of years. That incremental capital has gone into our ERP planning and development.

We've talked several times, whenever we give guidance, we're going to be around $35 million, which would include all of our capital needs. So, that was part of it. The guidance that we provided today includes what we are planning to spend on the ERP. As we get closer to it, when I give you guys an update after Q1, I'll have more visibility about quarterly impacts, because I do anticipate there may be some shifts from Q2 into Q1. But right now, it's just too early to tell.

So, since we don't give quarterly guidance, we give annual guidance, it doesn't change our outlook for the year. But there could be color within quarters that we will provide you when we speak to you in April.

Kevin Steinke -- Barrington Research -- Analyst

Okay, good. And then lastly, maybe an update on Australia in terms of the headwinds from customer consolidation that you've been experiencing there. Are we may be getting toward the end of that or is that kind of expected to be a continued headwind as we move through 2020?

Boris Elisman -- Chairman, President and Chief Executive Officer

I certainly expect sales pressures to continue. There is a large customer there that's consolidating. I do expect us to do less business with that customer. And given that they're fairly large, it's difficult for Australia to grow if that customer is shrinking.

We are managing Australia for improved profitability. Australia has taken a few restructuring actions last year and we have a good plan in 2020 to improve our profitability. So, I expect Australia to have a better year in 2020, but a better year for me is slightly lower sales and improved profitability.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Thanks for taking all the questions.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Kevin.

Operator

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

Joe Gomes -- Noble Capital -- Analyst

Good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, Joe.

Joe Gomes -- Noble Capital -- Analyst

So, just real quick on North America. I know the overall year looks really good, but the fourth quarter sales were down after two really good strong quarters, the second and third. I was just wondering if you could provide a little more detail and color, what was going on in North America in the fourth quarter and how you guys were responding to that?

Boris Elisman -- Chairman, President and Chief Executive Officer

Sure, Joe. This is something that we expect every year. As I mentioned on my previous answer, North America is really driven by Q2 and Q3, because the healthier channels, which are the mass and the e-tail channels are more prevalent and represent a higher mix in the second and third quarters.

In Q1 and Q4, it's less back-to-school and it's more back-to-business. And there, the share of the business that is driven by more challenged resellers is higher. So, therefore, it has an impact on our business. Again, this is something that's normal, we plan for that.

Overall, North America was up 3%, which is great, but it's really driven by the success in Q2 and Q3 and our increased share during back-to-school.

Joe Gomes -- Noble Capital -- Analyst

Okay, thanks for that color. And on the, your remarks, when you're talking about channel, you noted that the dollar store channel has declined. And I know, a while back you guys had some positive hope for that channel. I was just wondering what's going on there and where do you see that channel going?

Boris Elisman -- Chairman, President and Chief Executive Officer

We continue to experiment with the dollar channel. We were pretty aggressive with them in 2018, saw incremental sales, but unacceptable profitability for us. So, we pulled back in 2019 to try to strike a better balance between revenue growth and profitability. And we saw less revenue, but certainly improved profitability in 2019. It continues to be an important channel for us, but we have to get it right. We have to be able to drive profitable sales through that channel.

I think we have a better view on how to do that. I expect that we will have incremental sales through the dollar stores in 2020, but it's not going to be huge, a huge share of our business. It's a nice complement to our overall portfolio. But striking that balance between sales and profitability is important to us.

Joe Gomes -- Noble Capital -- Analyst

Okay, thanks on that. And then you also mentioned that you guys have taken some price increases in the international markets. And just wondering -- and due to the strength of the dollar, how does that price your guys products versus some of your competitors? And is that delta getting to a level where there might be some additional trade off in product?

Boris Elisman -- Chairman, President and Chief Executive Officer

We compete against local competition all the time. So, certainly, the competitive environment is part of our consideration. We look at pricing. We -- past pricing on products that are manufactured in Asia and costed in U.S. dollars, that affects most of our competitors as well. So, they have to do similar pricing to us. All of our locally produced products, we price differently because we don't have the same currency inflation going through them. So, it certainly is part of the consideration and our teams, our local teams review that to make sure that in the market, at the end of the day, we are competitive, we can sell, we have a good value proposition to both our customers and the consumers.

So, I feel comfortable where we are throughout the year. If we need to adjust things either up or down, we do that both based on cost of inflation, as well as market conditions.

Joe Gomes -- Noble Capital -- Analyst

Okay, thanks for the insight on that. One last one from me real quick. What is the remaining authorization of the stock buyback program?

Boris Elisman -- Chairman, President and Chief Executive Officer

Neal, do you have that number?

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

Top of my head, it's north of $100 million. I don't remember off the top of my head the exact number, Joe.

Boris Elisman -- Chairman, President and Chief Executive Officer

Well follow-up with you, Joe. We have enough, certainly, for this year.

Joe Gomes -- Noble Capital -- Analyst

Right. Okay. Great, thanks guys. Appreciate it.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Joe.

Operator

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

Bill Chappell -- SunTrust -- Analyst

Thanks, good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, Bill.

Bill Chappell -- SunTrust -- Analyst

Just starting on the top line outlook for North America and then for Europe. On North America, I think you said possibly goes backwards. Is that all on, I mean, it could be flat to down, is that all on just the roll-off on price or do you expect volume to be flat to down?

Boris Elisman -- Chairman, President and Chief Executive Officer

I certainly expect volume to be down. Price should be up a little bit. Overall, I mean, we had a great, great year in 2019 with North America. I expect the back-to-school to be roughly similar. But then, in Q1 and Q4, I do expect some fall off, again, driven by the decline and more challenge with more challenged resellers. So, I just expect it to be -- we expect it to be slightly down versus our superb year of 2019.

Bill Chappell -- SunTrust -- Analyst

And then on Europe, is it -- currency is included in that or you expect sales to be just flat as is and then currency? and i guess, anything you can give us on would be helpful.

Boris Elisman -- Chairman, President and Chief Executive Officer

No, that's right. Comparable sales to be roughly flat and then currency will certainly take them down a little bit.

Bill Chappell -- SunTrust -- Analyst

Okay. And then last one, I guess -- help me understand the $14 million of increased normalized comp in 2020. Just coming off of what you're saying is a very good year, I didn't realize or didn't understand. Maybe if accruals stopped sometime in 2019 and why they weren't fully paid out and then why there's such a big jump? Because I guess it's about $0.10 to EPS headwind on variable comp or on normalized comp in 2020. So, maybe a little more color there would be helpful.

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes, it's unfortunate dilemma, Bill. We did have a great year, but some of our incentive objectives were not met during 2019. So, hence, we did not earn our target bonus. So, for 2020, as we plan 2020, we are assuming to earn that in 2020, and that's the $14 million. Most of that is driven by annual incentives that were not meant for 2019. So, it's unfortunate, but that's a fact. That's where we are.

Bill Chappell -- SunTrust -- Analyst

Well, I guess I'm just trying to understand, I mean, you had a 1% overall growth or almost 1% organic growth in '19. You're looking for flat to that, roughly that in 2020. Maybe help me understand where you would have missed or where you fell below your expectations?

Boris Elisman -- Chairman, President and Chief Executive Officer

Well, if you look at the year, Bill, it was fairly uneven between regions, right? So, the overall company is the consolidation of all the regions. North America certainly did better and international or EMEA. So, EMEA and international have not met many of their objectives for 2019, which rolls into the enterprise.

And then the other one that we missed, even though we certainly met our free cash flow objectives, that is not a metric in our annual plan. Our annual incentives are based on working capital efficiency and we set ourselves a pretty high goal in 2019. And we haven't met that as an enterprise as well, that's about 20% of our total annual incentive. So, as a company, we haven't met that either.

So, it's more of a, I think, a goal setting issue other than a company performance issue. Because I think we can all recognize that we did as an enterprise, very well in 2019, but goal setting is a challenge. We do that early in the year when we don't have visibility to the full year. And unfortunately, we haven't met some of our short-term targets in 2019 that hopefully we will get a chance to meet in 2020.

Bill Chappell -- SunTrust -- Analyst

Okay, I'll leave it at that. Thanks so much.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Bill.

Operator

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

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good morning.

Boris Elisman -- Chairman, President and Chief Executive Officer

Good morning, Bill.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Hey, previously you had said that the impact of tariffs in 2020 was going to be $7 million. Is that still the number that you expect or has List 4 and 4A decreased in percentage, lowered that number?

Boris Elisman -- Chairman, President and Chief Executive Officer

It's going to be a little bit lower than that. Because -- exactly, because the 4B is no longer there and 4A is down from 15% to 7.5%. So, will be a little bit lower than that.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. And then earlier you mentioned that you expected a little bit of gross margin expansion based upon some price increases that would more than offset the tariffs. Will this be evenly spread throughout the year? Or based upon the timing of implementation of those and tariffs, will we see a little pressure in the beginning of the year that will be offset by expansion later on?

Boris Elisman -- Chairman, President and Chief Executive Officer

Yes, the gross margin expansion is driven really by international and productivity. There is not going to be so much due to two tariffs anniversarying. And I don't want to provide any color by quarter, Bill, because it's so difficult to predict. So, I think, overall, for the year, we're looking at little bit of an expansion, but exactly where it's going to come throughout the year, it's hard to tell.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. And then just lastly, you're near your target leverage ratio. I guess, as you look at the M&A pipeline at this point, how do you view it? Do you think you'll be active during 2020? Do you think valuations are attractive at these points?

Boris Elisman -- Chairman, President and Chief Executive Officer

Bill, it's -- anything has to do with acquisitions is very difficult to predict. I can't really comment anything more specifically. Acquisitions are core to our strategy. We like what we've done and we like the incremental results that we've delivered to our shareholders due to acquisitions. But we are patient and prudent buyers. We want to make sure that we don't overpay. Whether something is going to happen in 2020? I don't know, I can't tell you that.

William Reuter -- Bank of America Merrill Lynch -- Analyst

All right. Thank you very much.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Bill.

Operator

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

Hale Holden -- Barclays -- Analyst

Hi, thanks for taking the call. I was wondering -- just to follow up on Bill's tariff question. The commentary that 4A, when you step down in, I guess, in the second quarter for pricing, when you give that back or adjust back for your -- with your customers, is that sort of one-to-one on margins, or is there a lag time on how that works? And it sounds like 7.5% of just the 20% from China is a relatively small topline number. I just want to make sure I have the thinking correctly.

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

Yes, I think you have to understand -- first of all, the actual tariff reduction didn't happen until February. And then we have to work it through our purchase inventory cycle. And so, that's the lag to me. And we do that in the same way when we raise prices. When tariffs go up, we don't raise prices straight away. There's a 3-month lag. And so, we try and match our cost with our selling price. That's fundamentally what we're trying to do. It'll be margin neutral.

Hale Holden -- Barclays -- Analyst

Okay, great. Thank you. And then the only other question I had was, I just was wondering if you could give us sort of an update on what you were seeing in EMEA, one of the few regions you haven't talked about in the call yet in detail.

Boris Elisman -- Chairman, President and Chief Executive Officer

EMEA had, overall, a good year in 2019. It came on the back of a record year in 2018. We had really a phenomenal year. So, as Neal mentioned, we had similar sales, comparable sales to 2018. We were hurt by currency in EMEA sales and actual U.S. dollars were down 6% because of currency. And then EMEA had a kind of an unusual year. We had a strong Q1, relatively weak Q2 and Q3 and then a strong Q4.

So, we expect a flat business in EMEA. We have a very strong business there, but the economies, they are slowing down a little bit. So, we don't have expectations for more significant growth in EMEA in 2020.

Hale Holden -- Barclays -- Analyst

There's no shredder impact '19 to '20, like it was from '18 to '19, right?

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

That's right. The shred, the privacy laws in Europe came out in the second quarter of '18. So, you saw a surge in sales in Q2 and Q3. And that's what made such a difficult comp in '19.

Hale Holden -- Barclays -- Analyst

Great, thank you so much. Appreciate it.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Hale.

Operator

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

Karru Martinson -- Jefferies -- Analyst

Good morning. Just on for back-to-school, U.S. superstores continue to shrink and consolidate. Where do you see that U.S. consumer going? Where are the channels of growth that you're seeing?

Boris Elisman -- Chairman, President and Chief Executive Officer

Superstores are very, very small for back-to-school. Back-to-school is really made by three primary players and that's Walmart, Target and Amazon. And that's really has been the case for the last couple of years. And I expect that to continue to be the case. We are very strong with all three of them. They drive back-to-school. That's the reason why we were successful last few years. And again, my expectations that this will continue.

Superstores are a bigger player on the business side in Q1 and Q4, but really marginal for back-to-school.

Karru Martinson -- Jefferies -- Analyst

Okay. And then on the business side, are you seeing expansion from other players or is it still being dominated by Staples and Office Depot?

Boris Elisman -- Chairman, President and Chief Executive Officer

On the back the business side, Amazon is certainly making inroads, especially with small and medium business. And Independents [Phonetic] are doing a great job. So, over the last few years, we've seen Independents take share on the business side. They are focused on that, the small and medium customer and they do a great job servicing those customers.

So, one of the reasons we did well in 2019 in North America is because Independents have done well in North America in 2019. So, that channel is certainly something that we support and pay attention to and we expect further growth from.

Karru Martinson -- Jefferies -- Analyst

Okay, thank you very much. Appreciate it guys.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Karru.

Operator

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

Hamed Khorsand -- BWS Financial -- Analyst

Hi, good morning. So, first question I had was, what are your capital allocation plans for 2020? Because your presentation slides assumes very small, almost zero share buybacks.

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

Yes, we don't, we don't really forecast share buybacks in our future plans, Hamed. So, you know the history, we purchased $75 million in 2018 and $65 million in 2019. We certainly have the free cash flow to do more in 2020. But exactly how and when, we don't give guidance on that.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And then is there any indication that you're going to do more of the store brand sales this year?

Boris Elisman -- Chairman, President and Chief Executive Officer

Can you elaborate a little bit, what do you mean by store brand? Oh, private label? Got it.

Hamed Khorsand -- BWS Financial -- Analyst

Yes, the private label.

Boris Elisman -- Chairman, President and Chief Executive Officer

Got it. Private label is about 6% or 7% of our sales. We will continue to do private label. I expect that to be a little bit less in 2020 than in 2019. In 2019, we won some incremental private label business, seasonal private label business for back-to-school, which I don't expect to repeat. But other than that, the steady state private label business, I expect it has to continue to participate. But it will be in that 6% range. It shouldn't be higher or significantly lower than that.

Hamed Khorsand -- BWS Financial -- Analyst

Are you assuming some of your input costs stay the same even though there has been some deflationary pressures lately?

Boris Elisman -- Chairman, President and Chief Executive Officer

We certainly work very hard on it to capture all of the savings from lower input costs. And whatever we can achieve and consolidate, we will take into either incremental profit or into our demand-generation programs. As I mentioned in my prepared remarks, the $40 million of productivity that we achieved in 2019, most of that we reinvest back in the business to drive demand. I mean, it's really important for us to continue to feature our brands, to continue to feature our products. So, we will capture the lower input costs, but a lot of that will go back and drive demand.

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

Do remember another thing.

Hamed Khorsand -- BWS Financial -- Analyst

Okay.

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

At the end of 2018, we forward bought an awful lot of inventory to avoid tariff cost increases. That obviously can't be done again. And so, in 2020, what we've had to do is either work on resourcing those items to different areas or we will be receiving cost increases.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, that's helpful. Thank you.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Hamed.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Boris Elisman, any closing remarks.

Boris Elisman -- Chairman, President and Chief Executive Officer

Thank you, Jimmy. In closing, to summarize, we're very pleased with how the business performed in 2019. We remain confident about our future and continue to position the company for growth and strong returns to our shareholders.

I look forward to speaking with you again after we report our first quarter earnings. Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 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

Bradley Thomas -- KeyBanc Capital Markets -- Analyst

Kevin Steinke -- Barrington Research -- Analyst

Joe Gomes -- Noble Capital -- Analyst

Bill Chappell -- SunTrust -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

Hale Holden -- Barclays -- Analyst

Karru Martinson -- Jefferies -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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