Feb 11, 2015
Executives
Jennifer Rice - Vice President, Investor Relations Boris Elisman - President and CEO Neal V. Fenwick - EVP and CFO
Analysts
Sam Reid - Barclays Chris McGinnis - Sidoti and Company Kevin Steinke - Barrington Research Brad Thomas - KeyBanc Capital Markets William Reuter - Bank of America Merrill Lynch Kevin Ziets - Citi
Operator
Good day, ladies and gentlemen and welcome to the ACCO Brands Fourth Quarter Corporate Earnings Conference Call. My name is Caroline and I will be your operator for today.
At this time all participants are in listen-only mode. We will conduct a Q&A session towards the end of the conference.
[Operator Instructions]. As a reminder the call is being recorded for replay purposes.
And now I would like to turn the call over to Jennifer Rice, Vice President Investor Relations. Please proceed ma’am.
Jennifer Rice
Good morning, and welcome to our fourth quarter 2014 conference call. Speaking on the call today are Boris Elisman, 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. These slides provide detailed information to supplement this call.
When speaking to quarterly results we refer to adjusted results. Adjusted results exclude restructuring, debt refinancing and other one-time costs and applying a normalized effective tax rate of 35%.
Schedules of adjusted results and other non-GAAP financial measures and a reconciliation of these measures to GAAP measures are in this morning’s press release. On this call we may make forward-looking statements.
Forward-looking statements are based on certain risks and uncertainties, and our actual plans, actions and 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 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
Thank you, Jennifer and good morning everyone. We are very pleased with our performance in the fourth quarter of 2014 and for the full year despite a weaker international macroeconomic environment and continuing structural changes in our industry.
Our top and bottom line results for both periods met our expectations largely because we executed well across the board and managed the impact from the large customer merger. For the quarter we delivered as expected a stronger underlying results offset a more significant headwind from currency.
Net sales declined 9% but only 5% on a constant currency basis. The decline was primarily driven by the large customer merger and our exit of certain commoditized outlet accessories products.
Adjusted net income decreased 7% to $0.36 per share compared to $0.39 per share in the last year's fourth quarter. The decrease was primarily driven by foreign exchange.
Sequentially as expected the fourth quarter was more difficult than prior two quarters. International markets continued to be weak but in the fourth quarter we saw that broader weakness impact our sales in Mexico and especially Brazil.
The U.S. dollar strengthened throughout the quarter and some of our customers in international markets cancelled or postponed orders.
Our mature markets, including the United States, Canada, Western Europe and Australia held up relatively well but of the super store closures and reduced channel inventories did have a negative impact on sales. Overall we managed the mature markets well by taking market share from competitors and reducing our cost in line with sales.
Computer products had a mixed quarter. Sales were down as we continued to exit commoditized product categories especially in the tablet accessory space but gross margins improved.
The security category and PC and laptop accessory categories continued to show strength. Computer products remains a turnaround story and 2015 is a critical year to change trajectories for both revenues and profit.
For the full year we delivered strong results. We generated $146 million of free cash flow and further reduced our leverage to less than three times EBITDA or 2.9 times to be specific.
We reduced our term loans by about $120 million and repurchased $22 million worth of stock. Full year earnings per share came in at $0.80 in line with our raised full year guidance of $0.79 to $0.80.
Compared to last year earnings per share grew $0.04 despite a $0.03 headwind from currency and $0.05 from incremental incentive accruals. Revenues finished at $1.7 billion down 4.3% versus last year and in line with our guidance.
Constant currency revenues declines 2% which was primarily attributable to the large customer merger. For 2015, our strategy will be consistent with the prior year.
We will continue to manage our mature markets for profit while offsetting some secular headwinds with market share gains and productivity improvements. We will continue to prudently invest in emerging markets with an expectation of top and bottom line growth and we will continue to focus on generating strong cash flows which we will use to pay down debt with the goal of ultimately achieving net leverage of 2 to 2.5 times EBITDA and for other shareholder value creating opportunities.
All things being equal we anticipate paying down less debt in 2015 than in 2014 and using more of our free cash flow to increase shareholder value in other ways such as share repurchases or acquisitions. As we did last year we built some assumptions into our 2015 guidance.
We believe the macroeconomic environment, especially in international markets will remain challenging with potential deterioration in some of our key markets including Brazil and Europe. We’ve assumed currency at current foreign exchange rates.
We've made assumptions about the continuing decline of sales to office super stores due to store closures and consumer buying shifts. We've assumed continued rigor around cost savings and productivity initiatives which should yield $30 million of benefit in 2015 and we've factored in some impact from the Staples and Office Depot announcement that could materialize later in 2015.
That brings me to our guidance. For 2015 we expect sales to decline in the mid-single digits before the negative effects of currency.
However, including currency sales are likely to decline in the high single digits to low double digits. We are forecasting adjusted earnings per share in the range of $0.78 to $0.82 before the impact of currency.
However we expect currency to reduce this by roughly $0.08 to $0.70 to $0.74 per share. We expect to generate free cash flow of approximately $140 million.
To sum up, I am very pleased with the way we have managed our business for the quarter and the year, executing well despite pressures from an uncertain economy and stable currency trends and customer consolidation. While these pressures will continue into 2015 I'm confident in our ability to execute and meet whatever challenges lie ahead.
With that I'll turn the call over to Neal for a detailed run down of our results. Neal?
Neal V. Fenwick
Thank you, Boris. Good morning everyone.
Our fourth quarter performance is recapped on page two of our slide deck. Q4 sales decreased 9% or 5% at constant currency.
The 5% decline was driven by lower volume. Pricing was favorable by 2%.
Adjusted net income was $41.5 million or $0.36 per share compared to $44.8 million or $0.39 per share in the prior year quarter. Adverse currency and lower sales drove the decline.
In terms of gross margin which is shown on page three of the slide deck, we continue to see benefits from our cost savings and productivity initiatives which contributed 80 basis points to gross margin in the quarter. Unfavorable product mix and other items were offset by lower product cost, net of pricing.
All-in gross margin increased 30 basis points to 34.1% in the quarter. SG&A expenses were down 7% in the quarter, as dollar cost savings more than offset the impact of sales deleveraging, increased incentive compensation and the impact of FX.
As a percentage of sales SG&A increased 30% basis points to 17.2%. In all operating income margin was flat at 15.7%.
Interest expense net of interest income was down $1.4 million in the quarter to $10.8 million, a benefit of $0.01 per share. Foreign exchange reduced fourth quarter EPS by $0.02.
Our fourth quarter reported results included $4 million restructuring charge in our U.S. operations.
This is related to new cost reduction initiatives which will keep our cost structure in-line with revenue expectations. These initiatives are incremental to restructuring charges we took in December of 2013, which we expect to still deliver $8 million of saving in 2015.
The new initiatives will reduce head count by an additional 100 people and drive a further $8 million of incremental saving in 2015. All-in between these two initiatives and additional productivity improvements we expect $30 million of cost production in 2015.
Turning to the full year results, sales decreased 4% or 2% at constant currency. Pricing was favorable by 2% but volume was down 4%.
The volume decline was due to the large customer merger as well as the slowdown we saw in international markets and the transition of our computer product segment. In regard to the large customer merger whose integration has impacted our sales through inventory reductions, share gains and losses and other changes in contract terms we saw a $40 million reduction in sales to this customer in 2014.
Despite the sales decline we're pleased with our margins. Adjusted net income was $93 million or $0.80 per share after a $0.03 adverse impact from foreign exchange and compared to adjusted earnings of $88 million or $0.76 per share in the prior year.
In terms of our full year gross margin shown on page four of the slide deck, we saw a 40 basis point improvement to 31.4%. The primary driver of the improvement was our cost saving and productivity initiatives which contributed 110 basis points of benefit and helped to offset unfavorable product mix inventory charges within our computer products and other items.
SG&A expenses were down 4% for the year, as cost reduction initiatives offset the impact of lower sales, increased incentive compensation and FX. As a percent of sales SG&A was up slightly 10 basis points to 19.5%.
In all operating income margin increased 40 basis points to 10.6% of sales with the improvement coming from our North American segment. Interest expense net of interest income was down $10 million in the year to $43 million, a benefit of $0.06 per share.
Foreign exchange reduced EPS by $0.03 for the full year. Now turning to an overview of our segments, in North America fourth quarter sales decreased 6% or 5% at constant currency due to volume declines.
The volume declines were primarily due to the large customer merger and lower inventory at wholesalers. North America adjusted operating income was flat quarter-over-quarter and segment operating income margin increased 90 basis points to 18.1% as cost reductions and price increases offset the decline in sales.
For the year North America sales declined 3%, again primarily due to the effect of the customer merger which reduced our global sales by $40 million, but mostly impacted North America. North America operating income margin increased substantially 250 basis points to 14.3% for the year, primarily due to cost savings and productivity improvements.
In our international segment fourth quarter sales decreased 9% largely due to foreign exchange translation. Sales decreased only 1% at constant currency.
The slowdown that we saw in Brazil at the time of the World Cup continued into the fourth quarter as the macro environment became weaker and European demand also softened. International segment operating income declined slightly in dollars and as a percentage of sales to $32 million and 18.5% of sales respectively, largely due to foreign exchange and lower volume.
International results were much stronger for the year as a whole due to the growth we had seen for much of the year. Full year sale increased 1% for the international segment on a constant currency basis.
Operating margin declined 120 basis points to 11.7% due to investments made to support long-term growth and due to a one-time benefit of 50 basis points in the prior year from the sale for the building [ph]. Computer Products net sales decreased 22% or 18% on a constant currency basis, driven by the continued exit from commoditized tablet accessory products.
As a result of the sales declines Computer Products adjusted operating income declined $2 million to $3.1 million and operating margin contracted 310 basis points to 8.7%. For the year Computer Products net sales decreased 13% or 12% at constant currency and margins declined 330 basis points to 6.8%.
The declines were driven by lower tablet accessory sales, reduced pricing and inventory charges. We expect the repositioning of this business to be complete by the second half of 2015.
We were pleased with our sales of security, PC and laptop accessories and continue to see stabilization in this space, which now represents more than 80% of segment sales and essentially all segment profit. Turning to our cash flow and balance sheet; we had strong cash flow during the quarter achieving $146 million for the year.
We paid down $120 million of debt and repurchased $22 million of stock. As Boris noted we finished the year with a net debt-to-EBITDA ratio of 2.9 times based on our bank covenant definition.
Looking into 2015 we’ve included a slide detailing guidance on page six of the slide deck. Currency has become a significant headwind given that 45% of our sales come from outside the United States.
Using recent spot rates foreign exchange is likely to have an adverse 5% impact on sales and an $0.08 impact on EPS. We do hedge our inventory purchases and increase selling prices in international market to offset the currency impact on margins, but we cannot hedge against the translation of our results.
While we do not provide quarterly guidance let me make a few comments regarding seasonality. Similar to last year our first quarter will likely have negative earnings.
The second quarter will be positive but small. Approximately 75% to 80% of our earnings will come in the third and particularly the fourth quarters.
We expect the most significant drag from foreign currency though to be in the first three quarters but particularly in the third quarter. Our cash flow is also seasonal with the majority coming in Q3 and Q4.
Our cash flow generation in Q1 will be essentially offset by the working capital investments for back-to-school during Q2. Q2 again will be a cash outflow quarter due to the seasonality of the North American back-to-school cycle.
In terms of our guidance for $140 million of annual free cash flow we expect the adverse impact from foreign exchange will be offset by lower cash restructuring cost. Page seven of our slide deck contains a number of other modeling assumptions that factor into our earnings and free cash flow.
Cash taxes will continue to be low in 2015 as we utilize NOLs from the Mead merger through 2016. 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?
Operator
Thank you [Operator Instructions]. Your first question comes from the line of Bill Chuck [ph].
Bill please go ahead.
Unidentified Analyst
Good morning.
Boris Elisman
Good morning Bill.
Unidentified Analyst
Boris if we can just kind of maybe step back and if you provide a little more color on the whole Staples Office Depot, I am trying to I guess multiple question from me, what does it do to the timeline in terms of your sales and for Office Depot, Office Max and how will this be different from the Office Depot, Office Max in terms of how it plays out, how it affects you and how can even, I guess you’d factor anything in this year when it doesn’t sound like the deal will close for some time. And I'm just trying to understand, I think what you had said in the past is it was less on at the retail doors and more at the distribution centers where you had excess inventory.
I would think you have a long lead time to kind of prevent that from building up, so just trying to understand how it really impacts you going forward?
Boris Elisman
Sure, we assume Bill that the deal won’t close until the end of 2015. So as we mentioned our assumptions for 2015 are small in terms of the impact on our revenues and profit.
However just like we saw with the Office Depot, OfficeMax merger the uncertainty of the deal created some misses on execution and conservatism in how much inventory, not only the merging entities want to carry but also how much wholesalers want to carry. There’s going to be some uncertainty as to whether it’s going to be United or SP Richards that’s going to stand to benefit from this and until there’s clarity on the decision, it’s going to slow things down.
So we’re assuming based on our experience with Office Depot, Office Max that some similar things will happen this year, even though it probably won’t close this year and especially in the fourth quarter there will be some effect on our revenues.
Unidentified Analyst
So is there any kind of guesstimate of where you think the number of doors will go of the superstores over the next two, three years?
Boris Elisman
You mean if the deal happens?
Unidentified Analyst
Exactly.
Boris Elisman
We have some estimates. We have no more insights than the new deal based on what both analysts are saying and both Staples and Office Depot are saying.
So it’s our assumptions if the deal were to happen, would be consistent with that.
Unidentified Analyst
Okay and switching gears, the look on the international and currency impact, I guess I was a little surprised in the quarter and in the guidance you’re not taking more pricing to offset that, is that just you’re unable to do that in local markets or it’s too early? I mean I would think that there is some opportunity to take some pricing to offset some of the currency impact?
Boris Elisman
We will take pricing, we have taken pricing in January and we will take additional pricing as the U.S. dollar strengthens and the international currencies weaken.
There is some lag in the impact of pricing and how it benefits us but also we are assuming that we’re going to be able to keep our gross margins hold, so pricing will definitely be the driver of that. What we can’t avoid is the translation impact of translating foreign currency into U.S.
dollars. So we may get the same amount of euros or the same amount of real, or the same amount of the [indiscernible] for us but then we have to translate it into U.S.
dollars and then that’s where the impact is going to be.
Unidentified Analyst
Okay and then last one from me, just trying to understand use of cash and it seemed like the share purchase in the fourth quarter was relatively small for the $60 million authorization you have. I mean I know you talked about acquisitions out there but with your stock now trading kind of six to seven times EBITDA, it seems like that’s the more cheaper acquisitions out there.
So is there a reason why you wouldn’t be more aggressive earlier than later?
Boris Elisman
So, as I mentioned in my prepared remarks Bill, paying debt down is still a priority for us, especially if Staples acquisition of Office Depot happens we want to make sure that we are appropriately levered going to that. Having said that on balance we will probably have a more balanced use of our cash flow than we did in 2014 and even though we would pay down more debt than repurchase shares, because we’re limited to how many shares we can repurchase to $60 million per year.
If everything stays the same we would buy back more shares in ’15 than we did in 2014. From a seasonality perspective we generate most of our cash in the second half of the year, so that’s most likely when if we do share repurchases that would occur.
Unidentified Analyst
And I missed what was the share count expected for your EPS guidance for this year?
Boris Elisman
115.
Unidentified Analyst
Okay, great. Thank you.
Boris Elisman
Thank you, Bill.
Operator
The next question we have coming from the line of Sam Reid from Barclays. Please go ahead.
Sam Reid
Thank you so much for taking my call. Quick question here with regard to the input costs environment given some of the moves that we’ve seen in commodity pricing in recent months.
So I was just curious what you guys are factoring into forward guidance in terms of your forward input costs and what type of a lag we might see there or any type of benefit at all?
Boris Elisman
We see the input cost environment being fairly benign; we are seeing a reduction in raw materials on some of our commodities. We are seeing labor cost increase net of our commodities and we are seeing inbound freight increase on our shipments from Asia to the U.S.
So net-net it’s kind of all in balance. The pricing action that we’re taking is due to currency and not due to the commodity cost pressures.
Sam Reid
Got you, thank you. And then one quick follow-up here.
Given how the volatility in some of your international markets has maybe increased over the last few months, how does that impact your view with respect to international M&A going forward?
Boris Elisman
We still believe that strategically those are the areas that will grow faster for our products. We are cognizant of the volatility, but we’re investing for the long-term and we still do believe that those are the right moves.
As we said before we will be prudent in whatever decisions we make, but it does not change our long-term position.
Sam Reid
Awesome, thank you so much. Much appreciate it.
Operator
Thank you. The next question we have comes from the line of Chris McGinnis from Sidoti and Co.
Please go ahead.
Chris McGinnis
Good morning. Thanks for taking my questions.
Boris Elisman
Good morning, Chris.
Chris McGinnis
Can you just talk is kind of slowdown on the economic side changed your market, like your strategy going forward and how are you trying to combat kind of the difficult environment?
Boris Elisman
We are assuming that the international environment will be challenging in 2015. We are being conservative with our spending as a result of that and there will be more focus on taking share, taking profitable share.
We’re not investing so much, or we are limiting our investments in the organic growth until we see the markets turnaround. So we’re being I think realistic as to what we can expect from the markets and in investing appropriately.
Chris McGinnis
Sure, and then just one other on the acquisition side of the M&A, what are the targets that you look -- is it to stay within kind of the office structure or are you thinking about outside of that. Can you maybe just expand a little bit since you did comment on that?
Boris Elisman
It really varies, at a very, very high level we want to be close to the categories where we currently complete, school, office, we mention that we’re invested in emerging markets in Latin America specifically. But we’re also are open to consolidating acquisitions if those are extremely accretive.
Chris McGinnis
And then just one last very -- just to make sure I heard right. Is it 40% from the ODP and OMX consolidation, is that the headwind?
Boris Elisman
In 2014, ODP OMX consolidation reduced our sales by $40 million, in 2014.
Chris McGinnis
Great, thank you very much.
Boris Elisman
Thank you.
Operator
Thank you for that question. The next question we have come from the line of Kevin Steinke from Barrington Research.
Please go ahead.
Kevin Steinke
Good morning everyone.
Boris Elisman
Good morning Kevin.
Kevin Steinke
It sounds like despite the challenges you are seeing in the external environment that you still feel good about the internal execution of the company and taking market share. And so I'm wondering if that applies to how you see back-to-school shaping up in 2015.
I believe you commented on your last call that you would have a better sense of how that were shaping up by kind of by the end of 2014.
Boris Elisman
Yes, we're optimistic about 2015 back-to-school. My expectation is that we will be able to retain most if not all of the gains that we've made in 2014.
As I mentioned on previous calls we were happy with our results and our customers were happy with their results for back-to-school. So I believe we're in a very, very good position.
But also as I expressed last year I'm not going to count it until we actually see orders and execute shipments but going into the season I feel very, very good.
Kevin Steinke
Okay, perfect and then any comments on, I guess you said Brazil remained weak from a [indiscernible] perspective, but how do you feel about how back-to-school shaped up there and do you have a constant currency growth rate for Brazil on the quarter?
Boris Elisman
We don't do quarterly guidance Kevin. But for the year we expect Brazil to be flattish at constant currency and then obviously there will be a negative impact from FX.
It was roughly flat in Q4 which was a change from the previous three quarters. They are in the middle of their back-to-school right now, middle of their very, very heavy selling season.
My expectation is that sales there will be flat to slightly down at constant currency. So Brazil is definitely being impacted by all of the macro issues they've experienced over the last couple of years but especially in 2014.
Kevin Steinke
Okay, thanks for that detail and if you look at the 2015 revenue guidance, low or high single-digits to low double-digit decline, what would be the factors that maybe get you to the top end of that range versus the bottom end? What are the swing factors there that you are baking in?
Boris Elisman
Well, that includes 5% from currency. So clearly currency will have a major effect on our revenue.
And then within that our expectation is that North America would be down mid-single digits and clearly if we have a good back-to-school that may change that. Our expectation is that the international will be down mid to high single-digits without currency.
This is at local currency and depending on what happens in Europe and in the emerging markets that clearly will swing that. And then we expect that the computer products segment will be roughly flat for us with slightly down performance in the first half and then growth in the second half and then obviously depending how we execute on that, that will have an impact on the revenue as well.
Kevin Steinke
Okay. Thanks for all the detail and thanks for taking my questions.
Boris Elisman
Thank you, Kevin.
Operator
Thank you. The next question we have comes from the line of Brad Thomas from KeyBanc Capital Markets.
Please go ahead.
Brad Thomas
Yeah, thanks. Good morning, Boris, Neal and Jennifer and I did want congratulate you on what I thought a pretty good quarter and a good year in a difficult environment.
Just to follow up in the North America business, as you strip out some of these one-time factors like the pressure from Office Depot, could you maybe tell us a little bit more about what you are seeing in terms of the underlying trends in both the consumer and the commercial segments of the division?
Boris Elisman
Sure, from an economy perspective U.S. is certainly the star right now of the world and I think that’s consistent.
We’re seeing it and it’s consistent with what you or other companies are seeing from other reports. The consumer is relatively healthy.
The POS is relatively good. We’re seeing it pretty broadly both in the consumer and the commercial side.
There is definitely an underlying channel transition that we’re seeing away from specialty stores towards mass and e-tail. So there is a shift happening there but overall the underlying environment is pretty good.
Brad Thomas
Great, and then with respect to Computer Products, obviously not a huge segment for you but can you give us a better sense of why things were so pressured in the fourth quarter specifically how you are thinking about sort of the 1Q, 2Q sales results and earnings results or profitability results in the first half of the year and why you expect it to inflect?
Boris Elisman
Sure Brad. The decline in Q4 that we saw in Computer Products is really a compare issue.
A year ago in Q4 we participated in the iPad and iPhone launches and we moved a lot of product into the channel for the heavy holiday season and we recognized revenue obviously for that. This year or in 2014 we really did not participate in the holiday season with the tablet or smartphone accessories and that drove a huge decline in the sales of those particular products.
As Neal mentioned by the end of the year 80% of our sales in the Computer segment are security and PC accessories and all of our profit is derived from those products. We still have a quarter or two to anniversary some of the fire sales of tablet accessories but then after that I expect this to be in a very clean position to drive profitable sales, that are mostly focused on security and then PC and laptop accessories.
Our margins have expanded. The early information on sellout in 2015 looks good and looks promising.
So I am optimistic for our Computer Products segment but the proof will be in the pudding and we’ll have to see what happen through the rest of the year.
Brad Thomas
I appreciate it. Good luck.
Thanks Boris.
Boris Elisman
Thanks Brad.
Operator
Thank you. The next question we have comes from the line of Jacko Brian [ph] from CJS Sec.
Please go ahead.
Unidentified Analyst
Good morning.
Boris Elisman
Good morning, Jack.
Unidentified Analyst
Heading back to back-to-school for a minute, last year you guys worked pretty closely with some customers in helping them stock a better products mix for their ILs. I was wondering if at this point you guys have been given any indication on if that’s going to be the same strategy going forward this year.
Boris Elisman
It’s going to be similar. It’s not -- we don’t have exactly the same assortment and we have slightly different products with different customers.
But overall it’s in the same direction and same order of magnitude and that was my answer to a previous caller. I expect us to have a similar back-to-school that we did in 2014.
Again I don’t want to celebrate yet because we have to get the orders and we have to ship but it looks similar to 2014.
Unidentified Analyst
Okay, great. And then quickly returning to consolidation, I was wondering if you guys could expand upon a bit what you guys can do to keep SG&A down in respect to the consolidation among your customers?
Boris Elisman
We have been fairly aggressive in managing our SG&A and our cost in general and have them aligned to our top line. We have a now a five year Lean Six Sigma effort where we have diligent initiatives across the company and across all of the functions that are able to drive significant productivity improvements.
For 2015 our goal is $30 million of cost reduction and of that $14 million is just due to the productivity initiatives. The other $16 million is due to the previous or current restructuring efforts.
I have utmost confidence that going into ‘16 and beyond we will be on the same type of productivity improvement trend, there’s a lot of things we can do to get better.
Unidentified Analyst
Okay. Thank you very much.
Boris Elisman
Thanks Jack.
Operator
Thank you. The next question we have comes from the line of William Reuter from Bank of America Merrill Lynch.
Please go ahead.
Q - William Reuter
Hi, couple of questions. First on the $30 million of costs reductions that you outline for this year.
Does this include $8 million of cost savings from the restructuring activity that you did last year and were expected to achieve this year? And then additionally, can you talk about how this is going to breakdown between your gross margins and SG&A and how much you might be reinvesting of these savings?
Boris Elisman
It does include the $8 million from the 2013 restructuring and the $8 million that Neal talked about that we put into Q4 of 2014. It’s going to go across the board between cost of goods and SG&A.
I don’t have a precise breakdown of that. Some of those savings will be reinvested but most of that will go to protect our bottom line and to address the pressures that we talked about from currency and industry consolidation.
Q - William Reuter
Okay. And then you talked about some canceled orders that impacted your fourth quarter results.
Can you talk about the magnitude of these, were these I guess in the grand scheme of things meaningful?
Boris Elisman
Well, it’s meaningful for our quarter results, it’s not really meaningful for the year. But when you compare quarters and especially when you look at the performance by segments, it certainly makes a difference for the international segments, where they’re going to be down 1% and local currency are going to be up 1% or 2% in the local currency.
So it’s not meaningful from an annual corporation perspective but it is at the quarterly or the region level.
William Reuter
Okay. So that’s a type of magnitude you might be talking of 2% to 3% swing of the international business?
Boris Elisman
Something like that, yes.
Q - William Reuter
Okay, and then just lastly for me, if you can talk a little bit about, when you’re talking about your free cash flow, you talked about a little bit more going towards shareholder from activities. Can you talk about acquisitions?
In the past you’ve talked about emerging markets as an area? Can you talk about what you’re seeing there in terms of; I guess whether through our large acquisitions whether you guys are getting close with any and how you feel with the valuations there?
That’s all for me. Thanks.
Boris Elisman
Thanks Bill. I’m not ready to provide any color on acquisitions.
We mentioned before that’s a core part of our strategy. If and when that happens is hard to predict.
If they do happen obviously our cash will be deployed that way, but if they don’t happen as I mentioned than we will have a more balance use of our cash between paying down debt and share repurchases.
Q - William Reuter
Okay. That’s all for me.
Thanks.
Boris Elisman
Thanks Bill.
Operator
Thank you. The next question we have coming from the line of Kevin Ziets of Citi.
Please go ahead.
Kevin Ziets
Hey, good morning. Sorry, you will have bear with my cold a little bit here.
The $40 million impact from the DepotMax merger. I assume that’s just business that you lost when it came up for bid and not necessarily business that I guess the impact of destocking or anything like that?
Boris Elisman
No, most of it is destocking.
Kevin Ziets
Okay and can you give a sense of margin impact on business that you kept, but maybe had to keep at a lower margin than where you were going into the merger?
Boris Elisman
Yes, Kevin. We don’t give out details of margin by customer, but as Neal said in his prepared remarks that we’re happy with how we managed that transition and we believe that we are a smaller, but a healthier company as a result.
Kevin Ziets
Okay and I guess ex the Staples merger, do you expect this year’s impact to be greater than the $40 million given the store closures occurred later in the year?
Boris Elisman
You’re talking about for Office Depot, OfficeMax?
Kevin Ziets
Yes, yes. Excluding…
Boris Elisman
We expect it to be in this -- of a similar magnitude.
Kevin Ziets
Okay, great. And then on the Computer Products business, I guess, I understand the de-emphasis of low margin business.
I guess, I would have expected a little bit more impact on operating margin, sounded from your prepared remarks like you thought gross margins were higher. So is the difference just investments in sort of new products to try to drive ’15 results?
Boris Elisman
It’s some of that but also it’s deleveraging.
Kevin Ziets
Just top line deleveraging?
Boris Elisman
Exactly.
Kevin Ziets
Okay and then you said that should start to abate if not reverse in the second half of this year?
Boris Elisman
That’s correct. My expectation is it will reverse in the second half of the year.
Kevin Ziets
And your outlook for the laptop market is still one of stabilization or…?
Boris Elisman
Yes we’ve seen that now for several quarters and all of us can speculate as to why that is but it certainly is a big market. We’ve been growing on a quarterly basis in that market for the last several quarters and my expectation it’s going to be similar vein in 2015.
Kevin Ziets
Okay, great and your products are holding margin in general or moving up the value chain?
Boris Elisman
Our products outside of tablet accessories are holding margins.
Neal V. Fenwick
Yes they are holding margins they are good margins for the company.
Kevin Ziets
Okay great. On the FX impact can you roughly breakdown how much is transaction versus translation, is most of the translation are you transacting in this…?
Neal V. Fenwick
So there are two impacts. The vast majority of what we are communicating is translation of results.
And just to give a bit of color around the size of some of these FX movements we really are exposed to currencies at a meaningful level, the Australian dollar, Brazilian Real, Canadian dollar, euro, UK Pound and Mexican Peso. They will move negatively on average the best by 9% the worst by 17 and if you look at the impact on the sales it’s pretty much all of those currencies are down from a sales translation impact.
Brazil would be the worst, Mexico would be the smallest but that’s sales driven. From a profit point of view again it’s pretty much across the board, all of those currencies but you get more of a concentration around Australia where we will still have the joint venture that gets impacted not just the reported results.
So the impact you’re going to see from transaction is often a quarters to quarter issue. We struggle to raise prices in the market as quickly as our cost of goods goes up.
We try and protect against that through a certain amount of hedging but that is never enough to keep up with the rapid face of change we’re seeing. So that tends to be more of a quarters to quarter impact not a long-term impact.
The impact for the long-term is really just translational result.
Kevin Ziets
That’s really helpful color. My last question is on acquisitions and I know you’d rather talk about them when they have been, but I guess just curious in general given the pending Staples merger and I guess some of the softness that you alluded to in international markets, what are you generally seeing multiples come down and you view sort of more attractive then you have maybe a year ago?
Boris Elisman
As you said Kevin I’d rather talk about them when they happen, I am not ready to give anymore color on that.
Kevin Ziets
Okay, that’s fair. Thanks very much.
Boris Elisman
Thank you.
Operator
Thank you. Ladies and gentlemen that’s the end of the Q&A.
At this I would like to turn the call back over to Boris Elisman, President and CEO for closing remarks.
Boris Elisman
Thank you Caroline. In closing I’d like to thank you for participation this morning.
As you gathered from our comments we’re pleased with our overall performance for the quarter and the year despite some of the industry and macroeconomic challenges. Those challenges will be with us throughout 2015 but I'm confident that our team will continue to execute well and deliver the results our shareholders expect.
I look forward to speaking with you on our next call. Have a nice day.
Operator
Thank you, Boris. Ladies and gentlemen thank you for taking part in today’s conference.
That concludes the presentation. You may now disconnect and have a good day.