ACCO Brands Corp (ACCO) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ACCO Brands fourth-quarter and full-year 2008 earnings conference call. My name is Mary and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Jennifer Rice, Vice President of Investor Relations. Please proceed.

Good morning, everyone, and welcome to our fourth-quarter 2008 conference call. On the call today are Bob Keller, Chairman and Chief Executive Officer of ACCO Brands Corporation, and Neal Fenwick, Executive Vice President and Chief Financial Officer.

We've posted a set of slides to accompany this call to the Investor Relations section of ACCO Brands.com. These slides provide detailed information to supplement the call.

Our discussion this morning will refer to our results of continuing operations. In January, we announced the pending sale of our commercial print finishing business, which is now shown as a discontinued operation.

Our discussion will also refer to results on an adjusted basis. A reconciliation of these results to GAAP can be found in this morning's press release.

During the call, we may make forward-looking statements and based on certain risk factors, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of those factors.

Following our prepared remarks, we will hold a Q&A session.

Now, I will turn the call over to Mr. Keller.

Good morning. By now you have seen our results for the fourth quarter of 2008 and the full year. Clearly, they reflect the challenging environment and deteriorating economic conditions that exist today.

Last quarter, we said we would not be providing guidance for 2009, and we are maintaining that position. However, we'd like to spend a few minutes this morning discussing our 2008 results in the context of how we got there, and then give you our perspective on the long-term actions we are taking to appropriately size our business with the potential of an extended economic downturn, and to shift our go-to-market strategies to address the new realities we face today.

Our fourth-quarter sales declined 30%, or 22% excluding currency and business exits. Adjusted operating income declined 64%. This resulted in EBITDA of $35 million and earnings per share of $0.37.

There were four primary drivers of our fourth-quarter performance and why we've lagged both our customers' performance and those of our traditional competitors' results. First, a reasonable portion of our product line, from whiteboards to binding and laminating machines, are what we consider durable goods as opposed to consumables. In this environment, people are buying more expensive products on an as-needed basis rather than a scheduled replacement basis.

Second, we lost market share last year, both in product placements but also because our customers' customers are making value decisions. Our strategy to mainly focus on the premium placement in a category has largely left us out of the value game.

Third, our lack of channel breadth has hurt both our Office Products and our Computer Accessories business.

Fourth, our customers are able to react faster than we can to changes in demand and did so by significantly reducing their inventory levels even more aggressively than their store and DC closings would suggest.

We've responded to all of the above challenges aggressively. We renegotiated the terms of our senior credit facility in December to create additional operating headroom. We also reduced our planned capital expenditure levels for 2009 to $20 million, a 55% decrease compared to the 2008 level of $44 million.

We are assuming the environment we've operated in, in the last 90 days, is the environment we are going to operate in for the foreseeable future, and we've sized the business accordingly. We've already taken actions that will drive an additional $30 million in savings in 2009. These savings are in addition to the $45 million to $55 million of cost reduction we had previously announced would flow through in 2009. We believe the roughly $80 million of annual savings provides adequate cushion on our bank covenants and ensures that we have access to liquidity.

Our initiatives to achieve these savings include changes to further streamline the organization, substantially reduce SG&A and other costs, and drive greater operating efficiencies to better position the Company to recapture market share. Restructuring costs related to our expense reduction initiatives are currently expected to be in the range of $20 million to $25 million, essentially all cash with many of those already accrued in our 2008 financials with approximately $6 million anticipated for 2009.

Additionally, since the end of 2008, we have reduced our cost of goods sold by 11%. While we are obviously operating our business conservatively, we continue to invest in our future. At the current levels of point-of-sale demand, we believe our expense structure is appropriate and will allow us to invest in new product development while implementing a more aggressive go-to-market strategy.

Part of the aggressive go-to-market strategy is a fundamental shift from a premium product focus to a category management focus. Going forward, we want to provide value-based products at meaningful price points, including the opening price points in the categories we serve. By definition, that means we are willing to work with our customers on their private label strategy.

We've also focused on our channel strategy, broadening it dramatically for our Computer Accessories business and focusing our Office Products business on increasing penetration in the mass-market channel, specifically at Wal-Mart. We've had a couple of wins recently that support our belief that we can compete successfully in that arena.

In the Computer Products business, specifically we are transitioning from a product-focused strategy to one that emphasizes channel penetration across all relevant channels. Going forward, we will aggressively compete for business in the Mass and Office Products channels, in the e-channel as well as consumer electronics channels, where we already have a meaningful foothold. We also intend to expand and deepen our relationships with Original Equipment Manufacturers to improve the attachment rates for our Computer Accessories.

Acknowledging that customers are buying fewer high-cost machines, our go-to-market strategy includes a heightened focus on selling maintenance contracts, service options and our consumables, both to new customers and our existing customer base, for our higher-end binding and laminating products.

Finally and importantly, in February, our sales and our customers' sales of our products are finally converging. I believe that their sales of our products are a better reflection of the true demand for our products than our sales to them. If in fact our customers have reached what they believe to be appropriate levels of inventory, our results going forward should more closely approximate theirs.

To summarize, we will aggressively manage cash and continue to deleverage our balance sheet. We believe that focusing on cash is critical in this uncertain environment. In addition to the aggressive pursuit of cost-cutting actions, we have deferred capital investments that do not have an immediate payback, and we will manage our current excess inventory down. We continue to refine our entire product portfolio to reduce unprofitable or low-velocity SKUs, to determine the optimal sourcing strategy for every product line, and to take better advantage of our size, breadth of products and geographic footprint when negotiating with sourcing partners and vendors.

We are also committed to stopping the erosion of our top line by aggressively competing to gain back and win market share, by improving key customer service and supply chain metrics, and by quickly improving the vitality of our product lines by accelerating the introduction of new products currently in development.

Over the last four months, I've had the opportunity to visit our largest customers and to become acquainted with many of our employees across the globe. My meetings and conversations have given me an even stronger belief in the long-term prospects for this business.

Our customers are responding favorably to our new direction. They recognize, in this difficult environment, that having a partner that they can trust is a competitive advantage. We are committed to being that partner.

Now, I will turn the call over to Neal for more specific financial highlights. Neal?

Thanks, Bob.

Recapping the quarter's performance, as detailed on Slide 8, sales declined 30% for the quarter or 22% on a comparable basis. With the lowest level of consumer and business demand that we've seen all year customers curtailed orders as they worked down existing inventories and chose not to make year-end rebate-related purchases.

Gross profit decreased 36% and gross margin contracted 300 basis points, principally due to the decline in volume and increased input costs, which were not fully offset by midyear price increases.

SG&A decreased 20%. We implemented a two-week furlough for US employees at the end of Q4, had lower management incentive accruals, lower pension costs, lower overall expenses, and a $6.6 million benefit from FX translation. As a percentage of sales, however, SG&A increased 310 basis points as these lower-cost reduction efforts did not fully offset the deleveraging effect from lower topline.

In total, adjusted operating income declined 64% and margin declined 620 basis points to 6.9%. While volume was the principal issue, we also were adversely impacted by $12 million in commodity cost escalation and $5.6 million of adverse foreign exchange.

The adjusted tax rate for the quarter was 33%. Adjusted EPS was $0.37.

In terms of reported items, as expected, we did incur one-time charges in the quarter. Pretax restructuring and restructuring-related charges were $22 million. We also took an additional $249 million in non-cash goodwill and trade name impairment charges and an $11 million tax charge for previously untaxed foreign earnings.

Turning to an overview of our segments on Slide 9, this is the first quarter we operated under our new segment structure. In January, we published restated segment information for all historical quarters beginning in 2007.

The story is consistent across all of our business segments. Soft consumer and business demand drove customers across nearly all geographies and channels to trim orders and also to work down their existing inventory levels. The fourth quarter was the most severe in terms of these effects, and this continued through into January.

In the Americas, fourth-quarter sales declined 33%, or 29% excluding currency and planned business exits. The US has clearly been the hardest-hit from a demand perspective. As previously reported, we also lost some share and exited business in the Americas throughout the year. Operating margin for the Americas declined to 8.8% from 14% as a result of the lower volume, increased customer rebate programs, and higher input costs that were not fully offset by price increases.

In the International segment, sales declined 25%. Excluding currency and planned business exits, sales declined by only 9%. Weakened demand throughout Europe also led to inventory management by customers. Segment margin declined to 6.1% from 10.4%, principally due to the lower sales volume and higher input costs, not again fully offset by price increases.

Turning to Computer Products, fourth-quarter sales were down 33% and on a comparable basis down 28%. We saw deteriorating consumer demand and reduced retail product placements throughout the back half of the year, including a disappointing holiday sales season. As such, margins declined to 15.9% from a record high of 26.6% in the prior year.

We now show a discontinued operation. In January, we successfully signed a definitive sales agreement of our commercial print-finishing business and expect it to close in the second quarter. This had become essentially a breakeven business. Therefore, the proceeds, which will be used to reduce our debt, will be accretive to our bank covenant test during the second quarter.

Looking briefly at our results on a full-year basis, on Slide 10, we break down the change in sales. For the year, sales declined 14%. The combination of lower demand and lost market share accounted for $226 million of the decline. Customer inventory reductions, we estimate, accounted for another $47 million.

In terms of lost market share, as Bob discussed this, we believe the actions we have taken over the past four months to simplify our structure and drive better customer interaction and supply-chain fulfillments will allow us to address the dissatisfaction voiced by our customers. We are already seeing some positive recognition of our actions.

Turning to margins on Slide 11, for the full year, operating income declined $58 million and operating margin contracted 220 basis points to 6.8% from 9%. The contributing factors were raw material inflation, which even after price increases accounted for 110 basis points, driven by the sharp rise in raw material and freight costs midyear.

Net synergies and cost savings came in at $35 million for the year, $10 million above our original commitment as we took new initiatives to respond to weak demand. However, this was not enough to offset the deleveraging effect of lower sales volume, which was itself offset by $19 million of lower management incentive payouts. Looking forward, the sharp increase in commodity costs will continue to negatively impact our first quarter, but we expect the reduction in costs to help us in the second half of 2009.

Now, turning to cash flow on Slide 12, working capital was positive in the quarter by $6 million but much less than we would have expected because the inventory balances at year-end were much higher than we would've expected. These were about $60 million higher than they needed to be on an ongoing basis and will provide a strong source of cash as we work them down.

We deleveraged our balance sheet by $63 million in the quarter. As part of the reduction, we repurchased $36 million of face value of our senior fixed-rate notes at a cost of approximately $19 million, resulting in a $17 million non-cash gain in the period. We also took steps to lower the amount of cash on hand needed to run our business, which was a reduction of $24 million for the year.

Slide 13 details our debt balance as at year-end. In terms of our liquidity needs and cash uses going forward, we have $26 million in principle due in the second half of the year. We don't anticipate liquidity issues, as we both work down our excess inventories and reduce payables. Our first quarter will show our normal seasonal debt increase, but with our seasonal cash generation in the second half of the year, we aim to reduce our debt levels for the year as a whole by $30 million to $40 million, excluding the proceeds from the commercial print-finishing disposition.

As Bob mentioned, we announced in December that we renegotiated the terms under our senior credit facility to provide more operating headroom under our maximum leverage and interest coverage ratios. We appreciated our bank's willingness to work with us and provide this additional headroom. The new permitted maximum leverage is 5.5 times, although through September, and steps down to 5.25 at year-end, as noted on Slide 14. As of December 31, we were at 4.5 times, well within the range, although Q1 and Q2 are always our seasonally most challenging quarters.

We remain in compliance with our bank covenants and expect to be going forward. To reiterate Bob's comments earlier, we have taken additional actions to eliminate costs and are preparing additional layers of contingency plans in case economic conditions worsen and will be ready to adjust on short notice, if needed.

Finally, turning to Slide 15, as always, we have provided some assumptions to help with modeling certain items. We have added the additional cash flow associated with all of our productivity initiatives to the restructuring figures.

Based on the broad perspective that 2009 will be another challenging year, last quarter, we dramatically reduced our capital expenditure assumption to $20 million versus $44 million spent in 2008. Our cash restructuring figure incorporates all planned actions announced to date for 2009. Amortization of stock options is lower as we determined the performance metrics under a number of our stock-compensation plans were no longer attainable.

At this point, Bob and I will be happy to take your questions.

(Operator Instructions). Reza Vahabzadeh, Barclays Capital.

Good morning. I was wondering. Do you have a sense as to what was the impact of inventory destocking at retail for your sales in the quarter?

Yes, that's actually included in the slides that we put together, which shows a walk-through of what we think. We think our sales were reduced by about $47 million during 2008 as a result of our customers' inventory reductions throughout the year.

Do you have that number, do you have an estimate for the fourth quarter?

Yes I do. You know what? I will answer it later in the call, and I will look it up in the meantime.

Okay, I got it. Then have inventory levels fallen to a low enough level where there's going to have to be some reordering, or is the POS too low for that to happen?

Actually, I think we are finally getting to a point, or we believe in February we have gotten to a point where it's normalized a little bit. I think, historically, our customers were running about 4 turns a year on our product. They are well up over 6 at this point in time. In discussions with a couple of our largest customers, they've told us that they believe that they are at normalized rates right now.

In response to your earlier question, Reza, we think our Q4 sales were impacted by about $25 million of channel destocking. (multiple speakers) down for the year.

As far as net additional cost savings, I know you have a bunch of different initiatives, some of them from last year, some of them from this year. What's the net incremental cost savings that we were supposed to arrive at for '09 versus '08?

Between $80 million and $90 million is the volume dependency, which is the difference.

$18 million and $19 million?

$80 million to $90 million.

$80 million to $90 million. Will you reach that run rate in the first quarter, or will it take you a couple of quarters to get there?

Some of those cost savings have to work through the cost of goods line. Obviously, those are always time-delayed. You will see significant positive impact in Q1 as well.

I got it. My last question is when will you receive the proceeds of the sale?

In the second quarter.

Arnie Ursaner, CJS Securities.

I will start with a follow-up to the last question you were asked. What proceeds do you expect on the sale when you get them in Q2?

You know, Arnie, I am not at liberty to report those at this stage. Obviously, as soon as we are, we will make that report. It's a reasonable amount but you have to remember this was a breakeven business. Therefore, effectively we sold it for its working capital assets.

Okay. You mentioned a few times in your prepared remarks that you thought, in February, the customer sales had been more -- final sales for your customers had reached some form of equilibrium. What evidence do you have of that?

We get weekly point-of-sale information from several of our customers, and we saw a lift in overall sales in February over January.

Okay, but you also would have to have dialogue with them about their inventories, or have a better sense of their inventories as (multiple speakers).

We have that on an ongoing basis.

We actually know exactly what their dollar holding of our inventory is, so we actually can tell how much they have and what that calculates back their turns to be.

So you actually have real data to make this point on?

Absolutely.

Okay. The other question is a little more broad. Obviously, you inherited your leadership role at the Company but the message you've had for investors since you were carved out is a high-end brand focus. Yet, in your prepared remarks, it sounds like you are targeting much more of a full product offering, targeting things as much as the opening price points. It's a material change in the strategy you've had as a company. Could you expand a little bit more on why you are shifting?

Well, I think the operating environment has changed pretty dramatically in the last 90 days. It's our assessment that there has been and will continue to be a fundamental shift in buying behavior. I don't think there is going to be a quick recovery, and I think, frankly, the habits that people are beginning to develop about how they spend money are going to continue on an ongoing basis.

I think, if we were to limit ourselves to being the premium provider of product, we are going to cut out an awful lot of the market. So, we believe that we have an opportunity to compete effectively and cost-effectively across the entire product spectrum. We also believe that we have the opportunity to create enough efficiencies in our own operation that that is not going to dramatically impact margins.

The final question I have is related to your cost of inventory and the selling prices you're getting. Obviously, the price increases you put in at the beginning of the year are critical to achieving certain margin goals. Can you comment on the price increases you generally were able to put in, in January, and are they now sufficient, given the declining commodity costs, to recover your costs going forward and (multiple speakers)?

I'm going to have to give you two different answers here. So within the United States, we actually rolled back the proposed price increases that we previously communicated. We felt the market had changed so substantially. As a consequence of that, our first quarter will be depressed by about $6 million as we work through inventory that we purchased in the prior period, which is one of the challenges we have to get over in the first quarter.

In the rest of the world, although commodities are coming down, the bigger issue for them is that they have currency inflation because they buy in China, much as everyone in the United States does, but they buy in US dollars and they sell in their own local currencies, call it euros or pounds or Aussie dollars. So they've had to pass through significant price increases. So we've passed through price increases in non-US markets, which really reflect foreign-exchange-driven commodity cost inflation. In the United States, we've put through no increases.

Bill Schmitz, Deutsche Bank.

Can you just talk about some of your underlying macro assumptions for the $30 million to $40 million of cash flow next year?

Yes. One of the big ones is working down the excess inventory that we had. Although it would appear, from reported numbers as though our inventory reduced, that's entirely driven by foreign-exchange. So despite the reduction in top line, which is significant, we've got no underlying reduction in our inventory. If you take our own inventory back to the turns we used to achieve, we have about $50 million to $60 million of excess inventory right now. So, we will work that inventory down. Obviously, that inventory arose because we didn't forecast the dramatic reduction in sales that occurred at the fourth quarter.

If you run through the rest of the modeling assumptions that I've put together, you should be able to back into what we are anticipating for cash.

Yes, I mean I was actually talking about (multiple speakers).

In terms of macro assumptions, we are assuming three things you should think about. The first one is foreign exchange is going to have a big component to our business going forward. So just in very simple terms, if you take Q4's foreign exchange rates and rolled them into next year, you'll see something like a 10% reduction in the topline, just through foreign-exchange through Q1, 2 and 3. Profit will be impacted by about $16 million just taking foreign exchange into account, year-over-year.

That's just translation. Is there a transaction component, too?

From a transactional point of view, we don't anticipate an impact because we raised prices in our non-US markets to impact the transactional exposure that otherwise we would have. From the rest of the metrics, we have assumed negative volumes running through next year, so the underlying demand levels that we've been experiencing are what we think are going to continue. So, that's what we've modeled into our 2009 plan.

Okay. Because you've always said that white-collar employment is a huge barometer of the business, and it looks like that's going to get worse. So is that in the model?

It is. The one thing that should help us allow for further deterioration of white-collar employment is the inventory reductions we've suffered this year we won't suffer again next year, we believe.

Right. Aren't the inventory reductions -- I mean, won't that also impact gross margin because if you are not making any more inventory, shouldn't you have some gross margin pressure until you work through the inventory because you are not going to be running the factories?

That will cause us a bit of pressure, but we source about 70% of what we sell, so it's a relatively small impact.

Okay. That actually is a perfect segue into my next question on the private-label front. So it sounds like you're going to get more aggressive doing private label products. But if you are a retailer and you are sourcing directly, why would you put a middleman in there to manage a private label for you?

Because we -- a couple of reasons. One is we believe that, by aggregating volumes, that we can bring scale that no individual customer can bring in our product categories. The second thing is, if you just think about the transaction from a total cost perspective, our customers have working capital tied up from the point that they take receipt of the product from the dock in China, five to six weeks of transportation, the de-embarkation, the transportation, the shipping, the stocking, all of those costs they're carrying. Plus, they are carrying staff at both their local headquarters and in China to manage the process.

If you think about my earlier comment that they are getting in excess of 6 turns a year on our product and they have 60-day terms with us generally, it basically says that they buy the product from us, they are getting the product on consignment. So they have no working capital associated with our product at all until the point that it's sold. So if you look at it from a total cost perspective, it makes a lot of sense for them to let someone else do it if they trust that partner.

I got you. I mean, I don't want to be pejorative, but so then wouldn't you be translating the balance sheet risk or working-capital risk from them to you?

No, there are different models, Bill. We've already been exploring certain models where we effectively sell a product that they take the working capital exposure through from the point of shipment in China.

Okay, I got you.

Then the other question is, is this private label strategy -- is this permanent or is it just kind of a reaction to a really tough macro environment, meaning that, two or three years down the road, will you still be doing private-label? The reason I ask is that it's sort of hard to find sustainable private-label stories in the public markets because you lose a lot of your pricing power in that context.

The reality -- I mean I wasn't trying to make a point that said that we have an extraordinary focus on private-label. I want us to have a focus on managing categories. I think we can be a more holistic and better partner for our customers if we bring that to the table. I think, in this kind environment, having a strong, stable partner is meaningful and being able to consolidate suppliers is a meaningful opportunity for our customers. We haven't given them the opportunity to do that with us, and we would like that opportunity, frankly, going forward.

Okay, great. Then one last one if I could? So will inventory in your model be clean by the end of the March quarter?

No, it won't, and partly because we never anticipated January continuing to be as bad as our November and December turned out to be. So it takes a while for us to adjust our supply chain because it comes from China. So we can adjust our own manufactured products very quickly. It will take us through into the second quarter to get our inventory clean.

Bill Chappell, SunTrust.

Good morning. I just first want to -- I guess looking at Slide 10 and the lost contracts of $53 million for the full year, can you talk a little bit? Is that just really a one-quarter, two-quarter effect, or is that kind of a full-year run rate as we are looking into '09?

Then I think part of the reason why there was an accelerated change at the top back in September was the worry that there would be some more lost contracts -- and I'm trying to send a message to customers -- I guess it's the long way of asking. Were there additional lost contracts or is there still risk to lose some placements as we move into 2009?

You know, Bill, if you go back and look at how we've been doing things each quarter, there was a bigger impact in the first half than the second half, and so a lot of these contracts were lost at the end of 2007. We are actually believing we're going to be net positive in 2008 in terms of this same line item, with the one exception obviously of -- you know, we didn't lose a contract at Circuit City; we lost a customer.

Okay. Then in terms of looking at your product base be it durable versus consumer-stable, do you look to further reduce the SKUs or even product lines that just don't make sense?

Yes, I think one of the things that we're doing is looking at our SKUs on a much more rigorous and frequent basis in terms of understanding, at a SKU level, profitability and velocity and cleaning that up. So the answer is I think there are cost takeouts in that space, both from an inventory and from just an expense point of view in terms of managing the breadth of our product line, existing product line.

I guess my question is are you in too many product categories -- within the categories you are looking at, you're trying to improve the breadth? Are there too many categories that, over the next two or three years, just aren't going to make enough money to justify?

No. I think, at this point, we are pretty comfortable with the categories that we are in. We think we have opportunities to grow the categories that we are in, profitably. I think it's managing within the categories that will be the challenge in the foreseeable future.

Okay. Then final -- just again on that Slide 10. I was a little surprised that the benefit in '08 was only -- to sales was only about $26 million. I forgot. I mean, I was under the belief there were pretty substantial price increases at the start of the year that kind of started to carry through. Did you have a rollback towards year end?

One of the things that we did find, obviously, was several of our customers went through renegotiation activities on price with us. Some of that was driven by people like Staples buying Corporate Express, which we had to deal with a price equalization on, which is normal when that happens.

So we've moved away from the January-June type pricing changes and it's intra-quarter, intra-year?

No. We -- obviously acquisitions happen when they happen, and so we harmonized prices for Staples/Corporate Express back in June, when that transaction closed.

From a go-forward point of view, you will see positive benefit of price increase outside the United States because that's where we raised prices. In the first half, you will see some positive flow-through effect still of the June price increase that we did put through.

Okay, so when you look domestically for the January timeframe, were prices up or down?

In January, prices are up year-over-year, mainly international.

Great. Thank you.

Chris Dechiario, ISI Capital.

I guess the first question, what was POS in the fourth quarter? Do you have that, what POS was down in the fourth quarter?

The POS of our customers was down?

Yes, your products at your customers?

So they vary by customer, so it's not a number that it's easy to give you a direct line on because we only have that number in detail for our US business, which is less than half of our business; and we only have it for the major customers within the US. We don't have it for the market as a whole. It's not a market number that we can go and get a hold of.

Right, no, I understand. I guess just at the major customers, is that something you can give us?

So we know from the major customers exactly what their POS was down, and we know what their inventory levels were down, which is how we identified the $25 million of destocking that occurred in the fourth quarter. Our customers' POS is down very differently, depending on whether they are retail customers or commercial customers. If you read their own reports, they talk about what their POS is down.

Right. So excluding the inventory destocking, like if I looked at Office Depot, OfficeMax, Staples, excluding the inventory destocking, was their POS drop of your products any I guess better or worse than what their average was?

Our average is worse than their average, which was the comment Bob made in his talk about the fact that we sell more durable products. We also did suffer some loss of contract placements, which of course other people won't have had either.

Right, so is there any way to quantify how much worse?

I did a sales bridge walk-through on Slide 10 so that you can get a good feel for what we think the constituents of our decline are.

All right. Also, I don't think I heard this correctly or I just misunderstood. When you were talking about the foreign exchange impact going forward, and I think you said if fourth-quarter foreign exchange rates let's stay the same throughout 2009, that impact would be a decrease in the top one of 10% and a profit impact of $16 million?

The decrease is -- Q4 was a dramatic change in foreign exchange rates, so the impact on Q4 by 2009 will of course be 0. The impact on the full year, if you just assume Q4 rates going forward, is about an 8% topline decline. But that's more like 10% therefor in Q1, Q2 and Q3. In dollar terms, it's about a $16 million translation loss on operating income, which is in Q1, Q2 and Q3.

I see. This is just I guess -- I may be wrong. I had a vague recollection that I think, last quarter, you were thinking there was going to be a $65 million to $70 million impact from foreign exchange this year. Is that correct? Are those two completely different things?

When you say $65 million to $70 million impact, you are talking about on the topline?

I was thinking profit. I was thinking of cash flow, but that was a question I had.

I don't know where that reference comes from.

Right, okay. Then the additional $30 million in cost savings this year, is that all from the salary reductions and the two-week furloughs that you announced earlier this quarter?

Would you mind repeating the question? I'm sorry.

Yes, the salary reductions that you had announced earlier this quarter, actually a couple of weeks ago, the $30 million is just from those actions, the $30 million incremental cost savings this year?

No. The $30 million is from a series of actions that include those actions that we announced last week.

Okay. What do you expect -- do you know yet what the excess cash flow payment will be this spring?

Our cash flow will be, as it always is, negative in the first quarter. If you go back and look at last year, it would be a fairly good indication of what our cash flow swing would be this first quarter.

Yes, I guess the year 2008 excess cash flow -- do you have to make an excess cash flow payment on the credit facility?

Yes, we do.

And you (multiple speakers)?

It's detailed in the credit agreement.

Right. Do you know what that number is?

(multiple speakers) cash we generate we will use to pay down debt.

Okay. That's all I have for now.

Derek Leckow, Barrington Research.

Just on the 2009 outlook here, as I take a look at Slide 10, which I think is helpful to try to think about different categories because there's some moving parts here, you kind of talked about the FX effect. Can you remind me again what you said about pricing? Is pricing also going to be a similar type of impact in '09?

From a price-impact point of view, I would expect it to look fairly similar to that which we had gained in 2008.

Inventory reductions, that you said has stabilized somewhat, right?

We anticipate that stabilizing, apart from the month of January where we still saw an impact continue. That's partly driven by the timing of some of our customers' period ends.

Then as far as volume, the comment you made about both planned exits and lost contracts -- are those items also changing at all or --?

Well, the biggest planned exit is the sale of the laminating business, and beyond that, we have none. In terms of lost contracts, we would anticipate, in 2009, that that box would go green. It will be a positive number.

A positive impact there, okay.

Then the comments on the SG&A savings, you know, would you suggest that we take a look at what you did here in the fourth quarter and try to use some of those year-over-year changes and apply those to the next few quarters? Is that kind of how --?

No, the savings will be substantially more going forward. As the fourth quarter went on, almost on a monthly basis, we took further actions each month, and so the fourth quarter doesn't reflect the full velocity of the cost reductions that we put through.

Is the velocity changing on the topline at all? I mean, did you notice anything month-to-month that gave you any sense for the direction of the curve at this point?

Actually, February is up over January, and so we have the line moving in the right direction for the first time.

Okay. That's great; that's great to hear. Thanks very much and good luck.

Ken Bann, Jefferies & Co.

Good morning. I was just wondering. Some of your major customers -- I think specifically Office Depot -- was mentioning that, in Europe, some of their vendors were getting a little bit nervous and maybe curtailing some shipments. Are you curtailing shipments to any of your major customers, or are there customers that you are concerned about their viability and watching very closely their payments or reducing their payment terms?

No. Well, obviously we watch all of them closely, and they watch us closely. But we've had very open discussions with all of our customers. We don't believe any of our major customers have liquidity issues at this point in time. So beyond the ongoing discussions about week-to-week and month-to-month performance, there has been no change in behavior. Our major customers are all current.

Could you talk a little bit about your raw materials? Obviously, you are expecting them to come down in the second half. Can you give us a little bit more detail? Have you locked in some prices of various raw materials at much lower levels? Can you talk about what some of those materials would be and what those levels might be going into this year?

So we couldn't totally hear your question, but I think it was about the changes that we are seeing in raw material velocity.

For us, the biggest impact on our margins in 2009 is going to be the negative effect of currency that we have offset by pushing price increases through.

In terms of raw material commodities, we are primarily exposed to plastics, steel, paper and packaging. What we've seen is that those commodity costs have fallen sharply, and they are back to similar levels to the first half of 2008 at this point, and so not true for every specific SKU. You've still got some which are elevated, but there is a time lag before that will work through our P&L. Particularly, roughly what I'm expecting is a $5 million or $6 million charge which I'm going to have to take in the first quarter. It's roughly neutral in the second quarter, and then I should see a recovery in the second half of the year as we start to get ahead of some of those commodity cost increases, which are now coming down.

Okay, thank you. Could you talk a little bit more about the increased placement of your products in terms of the mass channels, how much in terms of additional doors are you putting products in, how many additional SKUs are going in? Any evidence like that that you could provide?

You know, I mentioned, in the last call, that was a focus for us. We are really just getting started there.

I would tell you that we have won the stapling and the board category at Wal-Mart, and so if you are walking through those stores, you will see our product there for the first time in those categories. We feel good about that. I think we have significant opportunity going forward, but we are at the front end of that stage.

Okay, great. Thank you very much.

Karru Martinson, Deutsche Bank.

As you shift to this category management focus, what's the timeline here for getting kind of the value products and developing the private label into the stores?

You know, I expect us to make progress during the course of the year on that. I think one of the things that's changing in this environment is I think our customers historically have had a couple of cycles where they looked at line reviews. I think honestly there's a shift going on right now to where it is a continuous process. So, I think we will have an opportunity to compete going forward. In fact, we are in discussions with clients as we speak.

That kind of leads right into my second question. Of those line reviews, is there really kind of an opportunity right now of size to get private label in and to displace competitors, or what's the normal lag on that type of development?

Again, the question isn't about, isn't specifically about private label. It's about our ability to expand our presence throughout categories. We are in discussions with several of our larger clients about that opportunity as we speak. If in fact we were successful, there's an opportunity for us to impact results in the back half of this year.

Okay. You mentioned that, if things -- if the general macro economy got worse, you had some contingency plans that were out there. I mean, what's the size or scope of these contingency plans compared to, say, the $80 million or so of cost cuts that you guys have planned or savings that you have planned for this year?

You know, there are things within that $80 million which assume that they are not continuous and that they are short-term actions. I mean, it's public knowledge that, for example, to help us get through some of the margin pressures we have in the first quarter, that we have asked all of our employees to take a pay cut. At the moment, we wouldn't anticipate those things continuing. We've also completely suspended our management incentive programs and our pension plans and our 401(k) matching. Therefore, we've taken some pretty draconian short-term actions to get us through a lot of pressure that we anticipate in the first half of the year.

We are looking to currently try and take share, which will help us deal with the declining topline that volumetrically is going to continue being a pressure on us. But there are many levers we can pull. Obviously, the longer that we can pull together the leverage that we have with our own suppliers, we will be looking to get our suppliers to help us get through what is a downward spiral. A lot of that is also driven by falling commodity prices, which helps us to do that.

Just lastly, just for clarity's sake, you cannot buy back any more senior subordinated notes under the amended credit agreement, correct?

We cannot buy back any subordinated notes any longer.

So, debt repayment, that's going to go to your term loans, revolver, all that good stuff?

Correct.

Stephen Chick, Friedman Billings Ramsey.

Good morning. A couple of questions and I guess I apologize in advance for maybe not understanding the nuances of it. But when your customers (technical difficulty).

Hello? Stephen? Operator?

Well, we seem to have lost that last question.

We are trying to find it.

Can you guys hear me?

We couldn't for a while; we can now. Would you mind repeating the question? I apologize.

I'm sorry about that. So the question is -- and I am just trying to get an understanding, maybe, of how it works. But if your customers fail to make their year-end rebate purchases, clearly that hurts the volumes and the top line. I would think that that might help your margins. Am I misunderstanding that?

The customer rebates are tiered to volume, but in fact, given the way that 2008 turned out for everybody, that wasn't part of the equation. So there's a big fixed element to rebates, and it's part of why it appears as though we got less of a price increase than we would have liked to have gotten for 2008.

So our rebates have a variable element and a fixed element. The variable element is not as big as we may choose it to be if we could write the contracts independently. But this is a negotiated economy, and therefore, unfortunately, our rebates have big fixed elements.

Okay. When you speak of, you know, when you are discussing the margin decline for the quarter and you say that your increased rebate programs -- how do you connect the dots with that? What exactly does that mean? Is that kind of part hand-in-hand with the harmonization that you mentioned?

It has to do with the fixed element of programs.

They are two different things. If you go back to 2007 in the fourth quarter, we benefited, as that year came to an end, with about $3 million of lower volume-related rebate accruals that we didn't see the benefit of this year. Effectively, what you did see in the fourth quarter of this year was us having to increase program payments for certain customers where mergers had taken place, no benefit of the volume-related credit from the prior year, and a fixed element that effectively means that it's like you are paying fixed dollars but on lower volume, which effectively is like having a price increase.

Okay, that's helpful. Last if I could, related to cases where there's mergers taking place, say, with your customer base, when you have to, I guess you could increase your rebate, so to speak. There's one element that is kind of the harmonization of comparing [lists] and kind of rightsizing it, if you will. You know, there's the other angle that that customer is now, let's say, a larger buyer, collectively, through you.

Are you looking at the rebate programs considering both, or is it strictly kind of the harmonization piece? I guess the reason why I ask is I would think that, if the volumes of the buyer are collectively down because of the economy and business trends, I would think that the harmonization would be an easier argument, whereas the collective buying might be a little more difficult. I hope that's not too convoluted, but can you speak to that a little bit?

So the impact that we saw in 2008 was the three elements I mentioned earlier. It was the harmonization, as opposed to any change in rate. It was -- there are fixed elements in programs. For example, there's a contribution that we make to an annual catalog; it's a fixed amount, irrespective of what the sales volume is sometimes. There is the fact that, in the prior year, we benefited from some volume reductions which we effectively had those benefits from earlier in the year in 2008 because it became obvious earlier on that the year wasn't going to meet it.

From a program point of view, they are effectively renegotiated every year, and so a lot of what happens in the first quarter of the year is that you negotiate pricing with your customers. Part of what you try and do is gain volume as part of that discussion.

Okay. Great, thank you. Good luck.

Due to time restraints, I would like to hand the call to Mr. Bob Keller for closing remarks.

I just want to thank all of you for your time this morning, and we look forward to talking to you at the end of the quarter. Thanks.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.