ODP Corp (ODP) 2009 Q1 法說會逐字稿

Good morning and welcome to the first-quarter 2009 earnings conference call. All lines will be on a listen-only mode for today's presentation, after which instructions will be given in order to ask a question. At the request of Office Depot, today's conference is being recorded. I would like to introduce Mr. Brian Turcotte, Vice President of Investor Relations, who will make a few opening comments. Thank you, Mr. Turcotte, you may begin.

Thank you, Emily. Before we begin I would like to remind you that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

A detailed discussion of these factors and uncertainties is contained in the Company's filings with the SEC. The press release and accompanying webcast slides for today's call are available on our website at www.OfficeDepot.com, click on Investor Relations under Company Information. I'll now turn the call over to Office Depot's Chief Executive Officer, Steve Odland. Steve?

Good morning and thank you for joining us for Office Depot's first-quarter 2009 earnings conference call. With me today are Mike Newman, our Chief Financial Officer; Chuck Rubin, our President North American Retail; Steve Schmidt, our President of North American BSD; and Charlie Brown, our President of International.

The first-quarter 2009 total company sales were $3.2 billion, a decrease of 19% compared to our first-quarter results last year. Our net loss on a GAAP basis was $55 million compared to earnings of $69 million in the first quarter of 2008. The GAAP loss per share on a diluted basis was $0.20 for the first quarter versus diluted earnings per share of $0.25 one year ago.

Adjusted for charges, net earnings and earnings per share on a diluted basis were $27 million and $0.10 a share respectively. The charges, which include unusual items that are not considered indicative of our core operating activities, include pretax charges of $120 million or $0.30 per share for actions taken as part of the strategic business review.

We're very pleased that cash flow before financing activities was a positive $160 million and free cash flow was $67 million in the quarter. As we mentioned on our previous call, cash flow and liquidity are key focal points for us in these challenging times and Mike will cover our liquidity position in greater depth later in this call.

For the last three quarters cumulatively, cash flow before financing activities has been $415 million. I'll repeat that -- cumulatively for the past three quarters cash flow before financing has been $415 million. These are very strong results given the economic environment we are all experiencing.

Adjusted for charges total operating expenses decreased by $192 million compared to the first quarter of 2008. Approximately $33 million of this decrease relates to lower G&A expenses reflecting reduced payroll, lower legal and professional fees as well as the impact of changes in foreign exchange rates. EBIT adjusted for the charges was $57 million in the first quarter of 2009, or about 2% of sales, compared to $124 million or 3% in the same period last year.

As we go through the call today we will update you on our plans to continue to manage the Company through this challenging period. I'll now turn the call over to Chuck Rubin to talk about North American Retail's first-quarter performance and key initiatives. Chuck?

Thanks, Steve. First-quarter sales in the North American Retail Division were $1.4 billion, down 16% from the prior year. Comparable store sales in the 1,138 stores in the US and Canada that have been open for more than one year decreased 17% versus the first quarter of 2008 and were slightly better than the fourth quarter.

While transaction counts were down compared to last year, the decrease was smaller than the fourth quarter and the drop in average order value was the greater contributor to our sales decline. This decrease in sales was driven by macroeconomic factors as consumers and small business customers reigned in their spending, especially on large ticket items like furniture and computers, along with our deliberate decision to be less aggressive with advertising promotions in certain categories.

We estimate that our comparable store sales were negatively impacted by approximately 300 basis points from pulling back in these categories. Although this pullback reduced the top line, it benefited operating profit in the first quarter and I'll cover that impact in more detail in a moment.

Within each of our three major product categories of supplies, technology and furniture we experienced a sales decline compared to the prior year with the greatest percentage declines in furniture and technology. Our best-performing categories, although still negative, continued to be ink, toner, paper and design print and ship services.

Our tech services offering, while still a relatively small part of our overall sales dollars, was positive year over year. Also some of our more seasonal categories such as software, calendars and storage showed improved performance.

Florida and California continue to weigh heavily on our results as our small-business customers in these two markets continue to be impacted by weak economic conditions, high unemployment levels and limited access to liquidity. Combined these two states represented approximately one-third of our comparable store sales decline in the first quarter.

In the first quarter we closed 107 stores, one of which was not part of the strategic business review action, we relocated one and opened zero bringing our total North American store count to 1,160 at quarter end. Operating profit for the North American Retail Division was $81 million in the first quarter of 2009, essentially flat with the $82 million of one year earlier. Operating profit as a percentage of sales was 5.7%, up 90 basis points from 4.8% in the first quarter of 2008.

The key components of the offering probably change versus a year ago include the following. On the positive side we had four key drivers of improved operating margins -- first, an improvement in product margins for the third straight quarter. The increase was a proximately $27 million reflecting an improvement in product mix as core supplies and key services contributed a larger portion of our sales along with improved rates in most product categories.

Second, we had a $15 million benefit related to lower charges for shrink and inventory valuation that resulted from our previously discussed efforts to lower our inventory, minimize our clearance and reduce our shrink exposure.

Third, we had a $15 million comparative benefit from closing the 112 stores identified as part of the strategic review that generated operating losses last year. I should note that we continue to make every effort to retain a portion of the profitable business in those markets. Where we have closed stores we're shifting the business to nearby Office Depot stores or to our Business Solutions division utilizing OfficeDepot.com, catalogs and our contract sales force if there are no the other stores in the area.

I should also note that significant store closure costs for leases, severance, etc., are not included in the division results, but are included in the corporate charges that Mike will address later in the call.

And forth, we benefited from $13 million in expense reduction which reflected tight expense management across the board including lower advertising and store preopening expenses. On the negative side, the flow-through impact from our sales volume decline negatively impacted operating profit by approximately $71 million compared to last year.

In North American Retail we continue to focus on providing innovative products, services and solutions to micro-business customers while continuing to manage our costs. I'll take a few minutes to update you on our progress.

First, our product assortment line reviews are going well. As a reminder, our goal is to deliver a more profitable assortment of supplies, furniture and technology from the most respected brands including Office Depot's private brands. In the first quarter we continued to work with our vendors to create more attractive product presentations and improved pricing for our customers.

Examples include our new label and binder set along with our new writing set that offers exclusive new looks, pack sizes and demonstration areas that provide customers an exclusive smarter way of shopping in our stores. In most cases we saw improvement in our sales trends after the new-product assortments were implemented in store. We expect those product line reviews to continue through the balance of the year and touch most of our current product categories.

Second, our service offerings remain a critical component of our assortment. We are expanding our design, print and ship services offering to include even more options and convenient on-site design and printing capabilities for resumes, small business marketing, collateral, presentations and more. We've also expanded our in-store large print format and self-service color copiers to address customer needs. Additionally, our Tech Services business continues to perform well with positive sales trends to last year and attachment rates above expectations.

Third, we continue to manage our inventory very tightly. Our per store inventory at the end of the first quarter was $635,000, down 27% from the same period one year ago and nearly 8% lower sequentially. Average inventory per store in the first quarter was $657,000, down 31% from a year ago.

These declines are a result of improved inventory management including the rationalization of assortments, reduction of excess safety stock, utilization of distribution center inventory to support retail locations, and assortment changes that helped reduce exposure to large ticket inventory items.

We're confident that we are managing our inventory at the appropriate level to support our business. Our in-stock metrics continue at historically high levels. As we look to the end of the second quarter we expect inventory levels to be higher sequentially as we ramp up for back to school, but lower on a year-over-year basis.

Fourth, we plan to open 12 or fewer new stores this year. Additionally, with approximately 10% of our existing stores having expiring leases in 2009 we're making progress on our rent concessions as we work aggressively to reduce our occupancy costs. To date we have been successful in capturing dollar savings as well as landlord funded improvements to the physical structures.

And fifth, we remain committed to providing strong customer service in all of our stores. Our metrics, as measured by an independent third party, continue to show very high scores. And to ensure the continuation of these we have tied these metrics to our store manager's annual bonus.

In summary, I am proud of the North American Retail team's efforts to successfully improve product margins, close unprofitable stores and manage expenses in this first quarter. Our operating profit this quarter demonstrates the rapid leverage we can regain as higher sales dollars are achieved.

As we look at the second quarter, which is historically our weakest sales quarter of the year, we expect operating profit to be negative as we deleverage on these lower sales dollars. However, we continue to work to find new ways to deliver higher profitable sales not only for the second quarter but the balance of the year. I'll now turn over the call to Steve Schmidt to review the first-quarter results and key initiatives for BSD.

Thanks, Chuck. Total sales in the North American Business Solutions division worth $914 million, down 17% versus the first quarter last year due to continued significant spending cuts by our customers in all segments. Sales in both our small- to medium-size business customer segment, or SMB, and large national account customers continued to decline in the first quarter in both a year-over-year and sequential basis. This decline was principally driven by a decrease in the number of transactions by our customers.

I'm pleased to report that during the first quarter we were not only successful in retaining existing customers, but also acquiring a number of new large accounts that were put up for bid. In the national account segment we were successful in maintaining most of our existing customer count while winning almost half of the RFPs in which we participated.

On a product category basis the division continues to see weaknesses in furniture, technology and perishable as customers delayed their purchasing of durables in favor of consumables. To this point we have not yet seen any indication that this trend will be returning to a more historical higher-margin mix during the second quarter.

Similar to the fourth quarter, the sales decline in Florida and California continued to exceed the overall rate of decline of the entire business in the first quarter. However, Florida's sales were essentially flat on a sequential basis while the sales decline in California continued to accelerate. These two states continue to represent about 30% of the division's revenue and about one third of the revenue decline in the quarter.

As I mentioned on our last call, state government continues to cut back on discretionary spending. This along with reduced access to liquidity for small, medium and large companies continues to have a negative impact on our division's financial performance.

In regard to our government and education business, I'd like to mention that we are implementing a new structure that will simplify our pricing. It has been our experience that the structure of many of our customer contracts is very complex, making it difficult for both our customers and ourselves to interpret and manage. We believe that the simplified pricing structure will be favorably received by our customers and will lead to an industry shift towards more straightforward pricing.

North American Business Solutions operating profit was $33 million for the first quarter of 2009, down from $60 million for the same period of the prior year, and up sequentially from a loss of $28 million in the fourth quarter of 2008.

The components of the first-quarter operating margin decline versus one year ago included the following key factors -- approximately $36 million of the operating profit decline relates to the flow-through impact of lower sales levels; a $13 million decline due to the negative impact of product margins including a less profitable mix, cost increases that were not fully passed on to our customers and increased promotional activity in the direct channel which was partially offset by increased vendor program funds. Partially offsetting some of the operating margin decline was about $22 million in benefit from reduced selling and G&A expenses.

Although difficult business conditions persist, the Business Solutions division continues to focus on taking a customer centric approach to servicing new and existing customers. I'll take a few minutes to update you on our progress.

First, we have reorganized the portion of our contract sales force that deals with small to medium customers to become more regionally focused. Sales Representatives are now territory development managers, or TDM's, responsible for all the sales and customers in a specific geographic area. These TDM's not only take care of our existing customers, but also continue to prospect for new customers to grow the business.

We are encouraged by the early results and have received positive reviews from our sales organization. Additionally, our customer file, which is a measure of unique customers who have purchased from us in the past year, grew for the first time since the second quarter of 2008.

Second, within our Telephone Account Management, or TAM organization, which supports both the contract and direct channels, the key performance indicators we have put in place continue to improve the performance of our TAM partners. We have also expanded their responsibilities to include both handling orders and making prospecting calls.

These positive leads coupled with third-party canvassing efforts, like feet on the street, are off to a good start. However, given the significant economic headwinds we are facing, these improvements are not yet being truly reflected in our business results.

Third, the North American retail and BSD organizations are working together to meet our customer needs. Customers want solutions and are not concerned if their needs are met by an associate in retail or BSD. Therefore our store managers and TDM's are now making a point to collaborate more closely in a customer centric fashion to ensure that no customer is left behind.

We will also ensure that our messaging and pricing is consistent across all marketing vehicles and that our customers' interests are put first regardless of the division servicing them. We expect to start seeing the benefits of this initiative in the second quarter.

Fourth, in our direct business we continue to test and revise our pricing and promotional strategy. In March we launched a new pricing strategy utilizing a sophisticated price optimization tool that will enable us to improve our portfolio. We will also continue to test new marketing strategies in an attempt to stimulate topline demand while maintaining profitability.

Fifth, we continue to pursue new business opportunities and vertical product offerings. In addition, we continue to invest in our knowledge management capabilities and learn more with each test, although testing and reading results in the current environment is challenging given the unique economic times that we face.

In the first quarter 82% of total BSD sales were online, up slightly from the same period a year ago. Our global company Internet sales for the past 12 months totaled $4.6 billion compared to $4.9 billion for the same period a year ago.

In summary, BSD's first-quarter topline results continue to be soft driven by significant spending cuts across our broad customer base. However, we have been successful in tightly managing our expenses and will continue to do so during these challenging market conditions.

In the early stages of the second quarter we have not yet seen evidence of a material change in our customer spending patterns. But we will continue to focus on maintaining and expanding our customer base while effectively managing capital and operating costs. Charlie will now discuss the first-quarter results and key initiatives for the international business. Charlie?

Thanks, Steve. The International Division reported first-quarter sales of $875 million, a decrease of 24% in US dollars. Local currency sales decreased 9% with nearly all the countries in which we operate reporting a year-over-year decline. The UK, France and the Netherlands all reported double-digit declines in local currency and accounted for approximately three-quarters of the overall decrease in revenue.

Similar to North America, conditions abroad remain difficult as business investment and office-supply expenditures continue to be cut in the face of weakening demand as a result of worsening cash flows, tight credit conditions, deteriorating profitability and serious concerns and uncertainties about potential depth and duration of the global recession.

While there have been some positive indications regarding the economic situation in North America, we have not seen similar signs in our major international markets. Therefore we believe the US will likely lead any broad-based economic recovery with Europe markets trailing.

The direct channel declined 12% in local currency because of continued softness in big-ticket items such as furniture and technology; increased competitiveness within the channel, particularly from the mass retailers and hypermarkets; and a general decline in the frequency and size of purchases as customers limit their spending to business essentials.

The contract channel continued to be under pressure, down 8% in local currency, and has seen its sales over the past three quarters decline at a faster rate than the direct channel. This is mostly attributable to larger businesses reducing their nonessential expenditures as well as limiting purchases of office supplies to primarily their core list. As background, core lists typically offer office products with lower margins. In retail sales were flat versus a year ago.

The International Division operating profit was $19 million in the first quarter of 2009 compared to $60 million in the first quarter a year ago. The components of the change versus a year ago include the following -- on the positive side we saw an improvement in our operating expenses as we reduced selling and distribution cost by approximately $21 million.

The flow-through of lower sales levels negatively impacted operating profit by approximately $42 million. An increase in promotional activity and cost increases that could not fully be passed on to the customer had a negative impact of approximately $13 million. And lastly, a change of foreign exchange rates driven by a stronger US dollar unfavorably impacted operating profit by $7 million.

Although business conditions continue to be challenging we remain focused on [restricting] our contact strategy and value proposition and improving the profitability of our business. First, we're in the process of changing the way we market to our customers, moving from a channel approach to a customer centric approach in Europe.

This will be accomplished by monitoring the purchasing behaviors of our customers and using this information to improve our segmentation. This knowledge will not only be used to help us better serve our existing customers, but also help us identify prospective customers.

The key focus here is that this initiative includes providing clear value propositions in branding; increasing our marketing capabilities with better integration and more effective use of our touch points; strengthening our e-commerce capabilities where we aim to be the best in our industry; and expanding the use of our more profitable private brands -- private and exclusive brands.

Second, we continue to move ahead with our SKU rationalization and harmonization program. The objective of this program is to simplify inventory management while significantly reducing our operating cost and inventory levels. The initial results are encouraging and we expect to complete the initial phase of this program by year end.

As a reminder, this initiative is just one of several that we have underway to improve our operating margins. We continue to redefine our distribution footprint; consolidate our about back office support functions and call centers; reduce the complexity and cost of our organization and address unprofitable businesses such as Japan. We expect the operating expense improvement we have demonstrated in the first quarter to continue through the year, albeit offset by a continued disappointing sales environment.

And third, we continue to look to grow the number of international markets were Office Depot brands are represented. We entered into a franchising arrangement with MH Alshaya Company, an international retailer operating over 40 international brands throughout the Middle East, Eastern Europe and Russia. In the second half of 2009 they expect to open two stores in Kuwait and plan to eventually open about 25 stores in the region.

Furthermore, we are actively seeking additional opportunities where we can leverage the strength of the Office Depot brand with strong regional operators. We view this arrangement as a prudent way of expanding our presence into untapped markets while minimizing our direct investment.

In summary, although we don't foresee the European economies exiting this recession in the near term, we will continue to execute our key initiatives to improve customer service, reduce cost and streamline our operations in an attempt to mitigate the headwinds.

For the second quarter we do not see a significant change in the economic situation in our major markets. Therefore we are expecting revenue to decline in local currency at about the same rate as the first quarter, while operating profit will be more negatively impacted by deleveraging on a smaller revenue base. As noted earlier, we are working hard to improve our results by creating a more customer centric business with a more efficient cost structure. With that I'll turn it over to Mike to review the Company's first-quarter financial results.

Thanks, Charlie. I'll first give you a brief update of the strategic business review actions we announced in December of 2008 and updated in our press release and filing in early March. In the first quarter we recognized $120 million of pretax charges related to these actions with actual cash paid of $28 million in the period. We closed 106 retail stores and five distribution facilities. We streamlined our European organizational structure; rationalized part of our Japanese business; and reduced headcount in our headquarters operation.

We have essentially completed our restructuring efforts in North America and should complete the streamlining of our European operations later in the year. For the remainder of 2009 we expect to take an additional $110 million in charges related to both these actions and 2005 Legacy initiatives principally due to the consolidation of our European supply-chain operations and other international initiatives. The cash usage is estimated to be approximately $90 million and these actions should positively impact EBIT and cash flow by about $105 million and $60 million respectively for the balance of the year.

Looking at cash flow, our first-quarter cash flow before financing activities was $160 million, slightly above the range of our earlier estimates. This totally includes $69 million in sale leasebacks of US retail stores and European facilities. An additional $19 million of domestic sale-leasebacks were completed and the first quarter that were classified in the financing section of our cash flow statement due to an accounting treatment.

Free cash flow for the first quarter was $67 million driven by positive earnings excluding restructuring charges and excellent receivable and inventory management. We reduced our domestic accounts receivable days by three in the quarter versus year end and also saw total company inventory turns improve to 6.2 versus 6.1 at year end. While our total accounts payable balance was down as a result of lower purchases and sales, our AP to inventory ratio improved from 94% at year end to 97% at the end of the first quarter.

Looking at liquidity, at the end of March our total available liquidity under our asset based lending facility plus cash on hand was $806 million, down $62 million from year end availability of $868 million. At the end of the first quarter we had zero borrowings against the ABL as a result of excellent cash flow performance in the quarter and had $160 million in outstanding letters of credit against the facility. We expect to see our ABL availability increase by $100 million to $150 million in the second quarter as our inventories ramp up to support our third-quarter back-to-school season.

As I mentioned last quarter, we expect free cash flow to be positive in 2009 and, given the expected benefits from our liquidity initiatives, we expect cash flow before financing to be in the $275 million to $325 million range for the year. I should note that liquidity initiatives completed in the first quarter contributed $160 million in cash. They included sale leasebacks of owned properties in the US and Europe; dividends received from a joint venture; tax refunds; and the benefit from reduced capital spending. To date we have realized about $200 million in liquidity actions and are anticipating over $400 million for the year.

In regards to 2009 capital spending, we're now targeting a full-year spend of about $125 million. Assuming that our second quarter is seasonally weak and we see a slight EBIT loss in the second half of 2009, our liquidity situation should provide an adequate cushion for running the business with little or no ABL borrowings at quarters end for the remainder of 2009.

Regarding our balance sheet, we ended the first quarter with $176 million in cash and cash equivalents. Inventory totaled $1.1 billion globally, down 31% from the same period last year. This decrease was driven primarily by lower inventory in North American Retail with inventory per store at quarter end at $635,000 per store down 27% from the same period a year ago.

As Chuck mentioned, we're confident that we are managing our inventory at the appropriate level to support our business and serve our customers and this improvement represents performance opportunities we have realized in our supply chain. Our net debt at the end of the first quarter was $554 million including $675 million in long-term debt.

With the asset base credit facility in place; $400 million of bonds not maturing until 2013; and the liquidity actions we are taking, we remain comfortable that we have a capital structure in place to take us through this business cycle. I'll now turn the call back over to Steve.

Thanks, Mike. We are pleased that our results exceeded our expectations in the first quarter. It's extremely challenging to provide an outlook given the current state of the economy but the second-quarter is typically our weakest quarter of the year and 2009 should be no different. It's likely that there will be an EBIT loss as we experience our seasonal sequential decline in EBIT from the first quarter to the second quarter, and we may use some cash in the second quarter due primarily to the normal back-to-school inventory build that Mike talked about.

But looking at the second half of the year, EBIT adjusted for charges could be slightly negative, but we expect free cash flow to be $50 million to $100 million in 2009 and cash flow before financing to be in the $275 million to $325 million range.

Although we have read signs that there are -- that there's some improvement in the US economy and that it may have bottomed out, the outlook for -- and with the outlook for retail is improving, we do remain concerned about our small-business customers' liquidity. As a result we will continue to take a very conservative approach to our liquidity position for both the near and the long-term.

In closing I'd like to reiterate that we are committed to leading the Company through these challenging times and that we will continue to do everything we can to provide innovative products and solutions to our valued customers, manage our costs and control our cash flow. Operator, we're now ready to open up the call for questions.

(Operator Instructions). Matthew Fassler.

Thanks a lot and good morning. A couple of questions about the charges and about the ABL. I believe that if you look at your release and your disclosure on charges today, you talked about aggregate charges for the year expected to be $230 million, and the 120 that you booked and then another $110 million. I believe that at the end of the fourth quarter the number was $186 million. Did I read that right? And if so what does the change relate to?

Matt, this is Mike. All the numbers that you quoted were correct. What change are you referring to?

I guess you said today based on the release that you booked $110 million -- $120 million rather; you have another $110 million coming.

Right.

And that is different, I believe, from the $186 million that you said you were going to have in 2009 associated with charges. So it looks like the amount you expect to book in 2009 increased?

Yes, and I'll have to get back to you on the details of what that increase is.

Mike, I think we had two stages. There were some initial -- there was the first phase that Matt is talking about that we announced in December, and I think the second phase we announced the end of February, which got to the same levels that we are referring to today.

Right.

Got it.

It is two phases; there is one international. I thought, Matt, you were talking about the changes in the aggregate total announcement that was in December and then the announcement in February. I believe the total charges from those two initiatives have not changed that much relative to (multiple speakers).

Got you, understood. Second question, just looking at the Q it looks like the average borrowings for the quarter on the ABL were $240 million. What was the timing of the asset sales? So if we were to essentially look at the average cash on the balance here from the asset sales just figuring out sort of what the pro forma ABL outstanding would have been?

The asset sales in the first quarter of $160 million mostly -- I would say most -- they were ratably over the quarter. The sale-leasebacks on the international sides came in earlier in the quarter. The domestic side were towards the end of the quarter. Tax refunds that we had of $40 million were earlier in the quarter. So it was throughout the quarter, Matt. It wasn't really towards quarter's end.

The average borrowings tends to be higher because we tend to, at the end of the quarter, aggregate all our excess cash and pay down debt, which we do not do at month's end due to cash management systems, etc. So that is really what is driving that.

And then finally related to that, Mike, you had $160 million of asset sales. Are there more to come? Would you expect to see additional cash raised through that process?

Yes, we do. Through today, $160 million in the first quarter. As we sit here today, we've gotten an additional tranche of sale-leasebacks done in Europe, so the total is closer to $200 million today. And we feel confident that we have another $200 million to go in the balance of the year, which is both sale-leasebacks, receivable factoring and some other initiatives.

We have probably in my estimation been on the high end of our expectations on what we've delivered to date on liquidity initiatives, and we think that $400 million number for the year is very solid.

Got it, thank you so much.

Colin McGranahan.

Good morning. Three questions for you. First, Chuck, if you could talk a little bit about the line reviews, first just walk us through the process. Secondly, I'm curious as to how far along you think you are in terms of by categories, looking at them, re-assorting the business, getting some potentially better rate. And then any color you can give us on the impact of those line reviews on profitability?

Good morning, Colin. The way the line review works is that we invite all vendors, both branded as well as private brand, to come talk to us and show us their wares. It's a very intense process that we look at all factors from the product assortment and brand recognition and share that a vendor might have to obviously the cost. It's a holistic view. It is done category by category. As I mentioned, it's very intensive and we've found them to be very successful so far.

We are not -- in terms of how far along we are, there are really a couple ways of looking at that. We're less than halfway through. What you're seeing in store is even less than that because, keep in mind, that once the line review is concluded it takes time to get the products in some cases built and that it takes time to get them set up and stores. So we're certainly less than half way through. This process will continue certainly for the balance of this year.

In terms of savings, we are seeing good savings but, keep in mind, there are multiple purposes in this. We have looked at pricing things appropriately for the marketplace, so customers are seeing some of the savings. Obviously we've seen some nice cost benefits. But also, importantly, we're very pleased with the assortments and how they're coming out in terms of how simple they are and it's just a smarter assortment for our customers to shop and the newness of the products that we're bringing in. We've had outstanding vendor support on this and we are very thankful for their support and people have come to the table aggressively to work with us.

Okay, thanks, Chuck. Second question for Steve. You said that -- actually, Steve, first if you could just talk about in BSD how the sales breakdown plays out between existing customer sales and then net change in accounts. Specifically you had said that of the RFPs that you've participated in to date you've won almost half of those. Can you talk about how many you've participated in year to date?

Colin, we haven't talked specific numbers, but I would just simply say again to repeat, that the majority of the RFPs with our existing customers, we retained a significant portion of those. And again, based on all of the national account RFPs that we went through where the customers were not our existing customer, we won almost half of those. So we're very, very pleased with our results in that area and we continue to believe that we are gaining share, particularly in that large national account segment.

But this is more than a couple, Steve. I think it's just --.

It's ballpark -- if you want a ballpark number, let's just use the term 20 new RFPs that we entered into as part of this.

And these are the big multimillion dollar ones.

Yes, these are multimillion dollar contracts, correct.

And so, Steve, let me just push on that a little bit. So if you look at your net number of let's say national accounts at the end of 1Q '09, would that be greater than or less than the net number of 1Q '08?

The net number would be higher.

Okay. And then sales per existing customer were down similarly to the total business or down a bit more then?

When you say down, the business segment of large national versus the rest?

Well, BSD was down 17%, obviously that's got some catalog in there, that's got a big chunk of contract. I was just curious in your contract business, sales per existing customer, what that trend was?

The trend for our large national account customers was less than the aggregate of the entire SMB or the entire contract decline with a slightly greater decrease in our SMB segment.

Okay, thanks. And then just final question for Mike. CapEx looks like it came down from $150 million to $125 million. Is there more opportunity there given that you're only now opening about 12 stores or is that $125 million pretty committed on supply chain and other spending?

I think that $125 million is about as tight as we can get it.

Okay, thank you. Good luck.

Oliver Wintermantel.

Good morning. I had just a follow-up question to Colin's question just now. Could you give us a little bit more color on how the different subsectors of the Business Solutions division performed, and if you could comment on the sales trends in small versus large, and if you have seen some improvements in some of the subsectors versus the others?

Yes, as we've talked, we're obviously facing significant headwind across all of our business segments. Our large national account customers continue to reduce spending and only focus on their core products; we continue to see declines, as we talked about, in technology and furniture and across basically any nonessential items.

On the small- to medium-sized business sector, we continue to see very significant headwinds, really due to the lack of liquidity that exists within that segment and also a significant cutback in any discretionary spending. We also, as we talked about, continue to have about one-third of our business in Florida and California. While we've seen some stabilization in Florida, California continues to decline at even a greater rate as you're aware of the budget issues that existed there.

And so as we look across each of our core business segments that headwind exists, we see it also impacting our government business. We are the largest provider to state and government agencies in the United States and we are aware of all of the cutbacks that are going on within both state government and education contracts which continue to have headwind.

But Steve, I think it's probably safe to say that we have actually picked up customers, but that our customers are hurting and they're not able to buy as much and you've seen computers and furniture and some of the big-ticket items come down and it's more of the consumables that people continue to buy at this point. So that the reduction in sales is coming from the inability of our customers to buy.

Yes, as we talked in our opening comments, we were very pleased in the first quarter that for the first time we actually were able to grow our file as we talked about in the SMB segment. But again, the decline is simply coming from those customers buying significantly less than they did in prior years.

Okay, thank you. And one follow-up. Have you closed all of the underperforming stores that you identified? Or if the sales environment stays like it is or decreases from here are you looking to close more stores in 2009 or 2010?

No, we have closed the tranche of stores that we wanted to close. There will be an occasional store closure as lease terms expire, but that's normal course of business.

Okay, thank you very much.

Dan Binder.

Good morning. A few questions for you. With Easter falling in April this year and spring break coming a little later, I was just curious if you could quantify what the benefit may have been to top-line as a result of that shift. And then you provided some guidance on March 10 of an EBIT loss of $30 million to $40 million, obviously came in much better than that. Just curious where the major deviation from your expectation was from that point in time?

Mike, why don't you start with that one.

Yes, this is Mike Newman. I'll start with the minus $30 million to $40 million. The major deviation from that forecast was, one, frankly we had -- we've built a little conservatism into that forecast. But more importantly, we performed from a restructuring perspective at the high-end of where we thought we'd be in terms of the execution. We did realize in the first quarter about $25 million of benefits from the restructuring that we took.

And second, in the North American Retail business the mix in the business, I think, exceeded our expectations from what we forecast for the reasons Chuck described earlier. So those two reasons plus some conservativism were the principal drivers in why we exceeded that forecast.

But I think we were very pleased about the margin results in the North American Retail business. As the line reviews and the active management of the mix and (multiple speakers) and less promotionalism. I think, Chuck, we called out that we actually gave up 300 basis points of top-line (multiple speakers) be less proportional and that helped our margin as well.

Right. And to Mike's point, we came in on the high-end of our expectations on a lot of the components. We took a lot of actions over the past number of months and in first quarter realized some nice benefit as a result of that.

Dan, in terms of your question on Easter. It has had a positive impact to a small degree in the first quarter. Interestingly New Year's Day shifted in the first quarter as well, that had a negative impact. We measure these things both internally and we use an external firm to help us measure as well and then we compare the results. And in both cases, internal and external analysis showed that they were really pretty much a wash. The upside of Easter was offset by the shift in New Year's. So first-quarter overall performance, we think the two holidays blended out against one another.

Will there be a negative shift in the second quarter or is it --?

Yes, Easter, unlike most other retail businesses actually hurts us because people are off. So we will see some negative influence in the second quarter from Easter.

Yes, I think that's important as you build your estimates. We normally have the sequential second-quarter drop off from the first quarter, it's most pronounced in the retail business, but this year also Easter shifted from quarter to quarter which will hurt us a little bit. But I think -- so that's one thing to keep in mind with your estimates and we're trying to make sure that we're conservative about how we manage the second quarter.

But from an overall economic standpoint I think, which is the other way to think about it, we see a continuation from a broad economic standpoint in North America of the first quarter. We don't see things deteriorating from a broad economic standpoint. We, however, do continue to be somewhat worried about Europe and particularly some of the big countries in Western Europe where the economies seem to be continuing to deteriorate slightly.

Okay, this is a follow-up. Can you give us an update on where your private label mix is now? And then also how the effectiveness of the promotions in your business. It sounds like retail is maybe down but other parts of the business have continued promotional activity?

Dan, the overall private brand globally is just under 30% and that's bounced around a little bit. We've talked about before that direct import is, we believe, the more significant opportunity for us in terms of profitability of the product. The promotional effectiveness for retail, as I mentioned in my comments, we did scale way back specifically on big-ticket things, computers and TVs.

Because what we were seeing is the prices that we needed to sell it at for the customer to respond were just unprofitable for us and we pulled back on that. And to my comments earlier, and Steve mentioned a minute ago, it had a significant impact on our top-line, bringing down our top-line for the first quarter. I'll let Steve talk about BSD.

Dan, on the promotional side during the first quarter, and we've talked about this in our opening comments, one of the difficulties we have right now is trying to measure cause and effect. During the first quarter we did run some aggressive promotional activity primarily in the catalog and web area. And trying to balance between trying to hold and gain share versus the cost of that promotional activity.

And as I mentioned, we're starting to see the fruits of our knowledge management system as we start to track each one of these different promotional activities. But it has been very challenging in these very tough economic times and significant headwinds. So we tried to increase promotional activity, saw some stabilization on the revenue side, but in any case like this you see some margin degradation going on. So this continues to be something that we are challenged with daily and trying to continue to improve the return on each one of the promotional activities that we generate.

Does the same hold true for international?

Well, in international, Dan, what we're seeing -- the big part of our mix is paper, ink and toners, as I'm sure you know. So what we're seeing is as sales trend soften, not just for us but for others, people coming out with really hot prices on a case of paper or particular ink and toner skews. I would not describe it as irrational, but it is a factor as people scramble for market share.

Great, thanks.

Emily Shanks.

Hi, good morning. Apologies if I missed it, but in terms of the charges, the one-time charges related to lease accrual, severance expenses and inventory write downs, did you give a breakout as to which amount is assignable to those specific buckets?

No, we didn't give a breakout, but of the $120 million of EBIT charges we took in the first quarter, a large portion of that was related to stores and DC closures. The balance of that, I would say two thirds of that is stores and DC closures, the balance of that relates to international and domestic headcount reductions.

Okay, that's very helpful. And I'm assuming that there is a mix between cash and non-cash in that number?

Yes, there is. In the first quarter from a -- the cash impact to the charges in the first quarter was only $24 million and that would relate more to the people side of the pieces that I mentioned.

Okay, that's very helpful, I appreciate that. And then just my second and last question would be around availability on the revolver. Clearly it's down on a year-over-year basis. I absolutely appreciate that your accounts payable leverage improved which looks like you did a nice job on the balance sheet. But I just want to be clear, as you guys look at that availability, is 100% of that shrinkage due to lower inventory levels or is there anything else going on there?

In the second quarter from year end it's principally driven by the fact that our inventories at the lowest point they are going to be for the year and in the script we called out that we expect availability on the ABL to go up by $100 million to $150 million, again principally driven by the inventory build for back to school. This is the absolute low point for the year in ABL availability. We would expect that by year end we would see the ABL availability stay up in the $100 million to $150 million range and continue through year-end in that fashion.

Okay, but I was thinking (multiple speakers).

(multiple speakers) -- availability is much higher, right?

Right -- yes.

Well, just from the asset base, just from the asset base.

It would go up by that much --

It will go up by the asset base by that amount and then we also have the balance of the free cash that we'll generate for the year. So the asset base will go up $100 million to $150 million and stay there and then we'll generate additional cash consistent with the cash flow guidance of $275 million to $325 million cash flow before financing.

Okay. All right, great, thank you.

Christopher Horvers.

Thanks and good morning. First on the expense side, the $860 million of operating expenses in the first quarter, was there any -- Mike, were there any one-time items that would make this level unsustainable at this level of sales?

A lot of the reduction in the first quarter, we were down -- if you take charges out in this slide that's in the presentation excludes charges, we're down about $30 million in G&A, we're down about $160 million in selling expenses. It's payroll, it's advertising, it's distribution; on the G&A side it's professional fees, it's compensation, it's legal and professional. Those are the results of the restructuring actions and all the actions we've taken last year to reduce cost. A lot of those are sustainable. There aren't -- if there are one-time items they're not the driver by any stretch of the imagination.

And it sounds like on the international side there's opportunity forthcoming to take those costs down. Let's say you had got them done by the first quarter, what do you think the expense level would have been in the first quarter if you had made the international changes?

Charlie, you've got more restructuring coming I think is what Chris is saying. And so therefore it will (multiple speakers) benefits will accrue. But --.

Yes, well, we've got in the first quarter a nice benefit from some of the restructuring changes that we candidly have been working hard on for the past couple of years, it's starting to come to fruition now. And we expect that trend, as I said in my opening comments, to continue (multiple speakers).

But we do have more restructures coming. It's difficult at this time. I don't think we have a number, Chris, that says what that rate would have been in the first quarter but it's lower in international when we get through it toward the end of the year.

Right.

So Charlie, you think your quarter away through or half way through on the expense reduction side?

I think it's an ongoing process. The fact is, I don't see an end to it this year. What I expect to see is that the trends that we showed in the first quarter to continue, but it will continue into next year.

Okay. And then broadly for the Company, at what level sales do you think you need to add incremental variable expense? If your overall sales are going down 15 -- I'm sorry about 20%, as you start to get to a minus 15% do you have to add incremental cost or what's the runway on leverage?

I think that from an overall G&A standpoint we're going to try to hold things very tightly on the way back up. The place where we, of course, would have to add some expenses in the store labor number. So as sales improve we'll be cautious about that, but we certainly want to make sure that we've got the right service levels in our store.

And to be clear, Chris. I think we are actually adding resources, selling resources both in my business as well as in Steve's. What we're doing is taking out shall we say the less productive parts of our cost structure. But we are adding to our selling resource.

Okay. So there's some runway at -- you're adding expenses in, but you could see sales get less worse and you're not adding a lot of incremental dollars to address those sales, is that fair?

Yes, I think that is a fair wary to characterize it.

And then finally on the retail side, you had mentioned on the fourth-quarter call that things were a little bit better. You came out with a minus 17, that's really only slightly better. Did you see a slowdown in the back half of the first quarter? And did you make any comment about what retail trends were quarter to date? Thank you.

But remember, Chris, we said that we were less promotional and that we actually improved our margins towards the end of the first quarter. And we said that we would have been 300 basis points better on the top line had we been as promotional. So we gave up a little more deliberately on the top line and achieved that payout on the bottom line. Chuck, I don't know if you want to characterize in any more detail?

I think all of that's accurate. Also as I noted in my comments, our transaction counts are down compared to a year ago, but that drop is shrinking and actually improved in the first quarter when compared to the fourth quarter. And that the bigger contributor to our negative comp in the first quarter was our average ticket which again goes hand-in-hand with what we've talked about in cutting back on some of the promotions.

In terms of second quarter, we didn't comment specifically beyond what we've said. We're planning conservatively and the second quarter is historically or low volume quarter in retail and expect this quarter to be the same.

Okay.

Okay, next question.

Kate McShane.

Thank you, good morning. I'm not sure if you said anything about this earlier, so I apologize if it's repeating. But can you talk about any price competition that you're seeing either here in the US or internationally?

Yes, I think if I could characterize all of the business, it seems to be very competitive out there as normal, but we don't seem to be seeing any abnormal levels of price competition. There are pockets here and there from category to category, but I think overall people are all trying to make sure we make money on the sales. Let me just ask any of the division presidents for -- to call out any specifics you'd like to mention.

Kate, this is Steve Schmidt. On the BSD side of the fence, I think everyone is aggressively promoting and trying to balance the level between promotion and trying to maintain margins because of the headwind that we spoke about. And so we do see aggressive promotion activity specifically on the Web and catalog.

On the contract side of the fence we have seen an increase in aggressiveness from a number of our competitors and we continue to try to both manage margin but at the same time try to not participate in any type of I'll call it too aggressive of a pricing level at this point. But we do it see pricing competition continue to increase, promotional activity is increasing.

Yes, on the retail side, Kate, we're seeing pockets of increases as well. In the technology arena in particular it's been aggressive and we made the very conscious decision to not compete as heavily as we have in the past on some of that just because we don't believe there's a way to make money on some of that level of aggressiveness.

In international most of the competition that we see, again it's fairly aggressive, tends to be coming from the hypermarkets, the big box general merchandisers and then some of the smaller -- particularly Web-based suppliers of ink/toner. In terms of the large companies, large competitors, it's actually pretty rational.

Okay, that's great. Can I just ask one other question about any types of share gains that you're seeing possibly from the transition of Staples integrating Corporate Express or even from Circuit City going out of the market?

Share gains, Kate, on the retail side of it are still sketchy, the data isn't all complete. Obviously when we've closed the number of stores that we closed you're going to lose some share in markets that we vacated. In terms of Circuit City, I think that's still early to tell. We've not seen any negative impact as Circuit continued to liquidate some of their stores. So, that's how I would characterize the retail side.

On the BSD side, as we've spoken about, we believe we are gaining share in the large national account segment. Relative to the Staples/Corporate Express merger, we are gaining certain small- to medium-size customers as a part of that adjustment, but again, it's not something that we see significant at this time.

Okay, thank you.

Okay, we are running against the end of our time, but let's take one more question.

Joe Feldman.

Thanks for taking my question, guys. Two quick things, one was to clarify the guidance. The EBIT guidance that you gave for the second quarter and the second half, is that GAAP guidance or non-GAAP guidance?

That's non-GAAP guidance.

Okay, great. And then the other quick question, you guys, in terms of the international, you made the comment -- I know you guys have been looking at Japan and what to do there. If you could give a little bit more color than what you gave on the call, in the transcript. And as well as Mexico, maybe the status of the joint venture there?

Okay, this is Charlie. In terms of Japan, what we -- we're carrying through with the plans that we announced earlier this year which was to exit the retail channel. We had 27 retail stores at the end of the year, we've closed seven and we're now entering the bulk of the closures over the next three or four months so that we expect to be out of retail in Japan by the end of August.

The other parts of the business, the catalog and the contract business, we are maintaining that business and that's probably all I need to say I guess at this point in time. But the retail side was really the most problematic for us in Japan.

In terms of Mexico, the offer that was floated last year is really off the table. We continue to manage that business with our partner, Grupo Gigante, to the benefit of both parents. As Mike had announced, part of our liquidity in the first quarter was a dividend that the JV paid to us. So the business is holding up quite well and we're continuing to work very closely with our partner.

That's helpful. Thanks, good luck with the next quarter, guys.

Thank you. I'd like to thank everybody for joining us today. I'd just remind everybody that as we move into the second quarter, the second quarter is always easily tough and we would just urge everybody to be conservative. But we're heartened by the second half of the year which is back to school and really back to our prime season which is more like the first quarter for us. And so we're very confident of our cash flow projections for the year and so forth.

We're very pleased and we'd like to thank everybody in the Company for their strong execution on the cash flow. I think it demonstrates our ability to drive cash flow and to drive our margins despite the economic headwinds that we're facing.

And finally, I know there are a lot of vendors on the call today and we'd simply like to thank you all. Our vendors have been terrific, they've been very strongly behind us and we really appreciate your partnership. We have a terrific group of vendors who have helped to weather this time and it's tough on them and it's tough on us but we're going to get through this tough economy and emerge stronger. And so thanks to all of you for your support. With that I'll end the call and we'll talk to you next quarter.

This concludes today's conference. Thank you for joining. You may disconnect at this time.