ODP Corp (ODP) 2012 Q1 法說會逐字稿

Good morning and welcome to the first-quarter 2012 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.

Mr. Turcotte, you may now begin.

Thank you and good morning. With me today are Neil Austrian, Chairman and Chief Executive Officer; Mike Newman, Chief Financial Officer; Kevin Peters, President of North America; and Steve Schmidt, President of International.

Before we begin, I would like to remind you that our discussion this morning includes 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 are contained in the Company's filings with the SEC. In addition, during the conference call, we refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures as well as our 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.

Neil will now summarize Office Depot's first-quarter 2012 results. Neil?

Thank you, Brian, and good morning. Office Depot reported first-quarter 2012 sales of $2.9 billion, down 3% compared to the prior year. Constant currency sales in the first quarter of 2012 were also down about 3% versus prior year. Our first-quarter 2012 results showed continued year-over-year earnings improvement despite lower sales. The Company reported net earnings after preferred stock dividends of $41 million or $0.14 per diluted share in the first quarter of 2012, versus a loss of $15 million or $.05 a share in the same period one year ago.

First-quarter 2012 results included approximately $28 million of net benefits related to a number of discrete items. Charges primarily related to restructuring activities and actions to improve future operating performance and the loss on the extinguishment of debt were more than offset by a pension settlement related to a 2003 European acquisition. Excluding this net benefit, net earnings after preferred stock dividends would have been approximately $14 million or $0.05 per share.

I should note that our first-quarter 2011 reported earnings also included $8 million in charges. The net after-tax impact of the charges negatively impacted first-quarter 2011 earnings by about $0.05 a share.

Total Company gross profit margin increased about 120 basis points in the first quarter of 2012 compared to the prior year. This was the eighth quarter out of the past nine that we increased total Company gross margins year over year. The gross margin improvement this quarter was driven by increases of 170 basis points in North American Business Solutions, 140 basis points in North America Retail and 20 basis points for the International Division.

EBIT, adjusted for charges and credits, was $47 million in the first quarter of 2012 compared to $34 million in the prior period. The $13 million year-over-year improvement was attributable to a strong performance again this quarter in North American Business Solutions. I should note that first-quarter 2012 EBIT adjusted for charges and credits of $47 million included a non-cash store impairment charge of approximately $18 million in North American Retail.

I will now ask Kevin to review our first-quarter 2012 performance in the North American Retail and Business Solutions Division.

Thanks, Neil, and good morning. The North American Retail Division reported first-quarter 2012 sales of $1.2 billion, a decrease of 8% versus the prior year. Because fiscal year 2011 was a 53-week year ending on December 31, first-quarter 2012 sales benefited from having fewer selling days impacted by the holidays compared to the first quarter of 2011. However, store closures completed during 2011 including our 10 remaining stores in Canada negatively impacted total sales for the first quarter of 2012. The net effect of the holiday shift and store closures is estimated to be neutral on the first-quarter 2012 sales.

Same-store sales in the 1,096 stores that have been open for more than a year decreased 6% for the first quarter of 2012. As we described last quarter, this comp sales deceleration is largely reflective of our deliberate and continued focus on improving the profitability of the business, which is enabled by taking a more strategic and economically defensible approach to our product assortment, pricing, and promotion.

For example, over the trailing 12 months, unit sales of tablets and readers have mostly offset the unit decline in laptops as we have rationalized our laptop assortment and been less promotional in general. However, the average sales price of tablets and readers are about 40% lower than their laptop counterpart, contributing to a decline in overall comp sales. More recently as the laptop market has softened, this has accelerated the comp sales pressure.

Now despite the comp sales pressure, the gross margin contribution from tablets before attaching related accessories is higher than our historical gross margin from laptops with attachments. Therefore, as we grow our assortment of tablets and their related accessories in the coming quarters, finetune the laptop assortment, and complete the renovation of our peripheral assortment through the introduction of exciting new product categories to stimulate demand, we are optimistic we can grow the business profitably.

We take a closer look at our performance by product category, Copy and Print Depot continued to perform well again this quarter achieving high single-digit increases in sales. We also saw increasing sales in the aforementioned tablets and e-readers while sales of computers and their related products were down. It is important to note that if we included sales of computers and their related products, same-store sales would have been flat in the quarter, in the first quarter of 2012. Sales in paper, ink, and toner decreased in the low single digits versus prior year.

Sales of furniture were also down year over year as promotional activity in the first quarter of 2011, which drove a significant increase in sales in this category, was not repeated this year. North American Retail's average order value was slightly negative in the first quarter and customer transaction counts declined approximately 5% compared to the same period last year.

Our goal to increase direct import of products continues to go well. For example, direct import penetration in North American Retail increased in the first quarter versus prior year to 11%. The North American Retail store count at the end of the first quarter was 1,123 stores. During the quarter, we opened one new store and closed nine. In 2012 we plan to close 25 to 30 stores in total.

We also remodeled seven stores and relocated five in the first quarter, successfully reducing the square footage of those locations by almost 40% on average.

North American Retail reported operating profit of $44 million in the first quarter of 2012 compared to $58 million in the same period last year. This decline was driven primarily by a store asset impairment charge of approximately $18 million and the negative flowthrough impact of lower sales, partially offset by the year-over-year rose margin improvement of about 140 basis points and lower payroll and advertising expenses. To the extent that forward-looking sales and operating assumptions are adjusted, or we commit to a more aggressive store downsizing or store closures strategy, additional non-cash store impairment charges may result in the future.

We continue to make progress on our key initiatives and I will now provide you with an update on a few of them which drive profitable sales and reduce cost for North American Retail.

First initiative is the in-store customer experience which was rolled out to an additional 370 stores since the end of 2011 for a total of approximately 700 stores to date. Our conversion continues to improve with sales growth in rolled-out stores exceeding the balance of the chain. We are currently on track to complete the rollout of the remainder of the chain by July 2012.

The second initiative involves our continued effort to improve the sales productivity of our stores through both store closures where appropriate and the development of a plan for a more aggressive cadence of store downsizing. This includes remodeling about 30 to 35 locations in 2012 and reducing the average store size wherever possible. Given the remodels and relocations currently in the pipeline, we believe that we are on track to deliver occupancy savings of about $10 million in 2012.

Also in the first quarter we opened our new 5K store in St. Petersburg, Florida. This opening in addition to two store relocations into the 5K format during the quarter raised our total to 11 locations at quarter-end. We remain very excited about the potential for this new 5,000 square foot store concept across our fleet.

Looking forward, the second quarter is typically our weakest sales volume quarter of the year, and we anticipate our same-store sales rate to be down but better sequentially as we continue to execute our new technology and peripherals assortment strategy. Our second-quarter operating profit is projected to be down versus prior year due to lower sales and some nonrecurring benefits in the second quarter of 2011.

Now let me shift our attention to the North American Business Solutions Division. BSD reported first-quarter 2012 sales of $828 million, a 3% increase versus the same period last year. The year-over-year sales comparison included the calendar shift that benefited the first quarter of 2012. On a normalized basis, we believe the cells would have been about flat.

First-quarter 2012 sales in the direct channel were up 2% versus last year while sales in the contract channel increased 3%. Sales to large accounts increased high single digits versus prior year due to successful large customer acquisitions in the back half of 2011. In addition, we continued to gain traction in this customer segment as evidenced by a number of large customer bids won during the quarter. We also achieved positive sales growth in our Global Accounts segment; however, we continue to see weakness in the public sector as these customers experience budgetary pressures.

Sales to small- to medium-sized contract customers were relatively flat versus prior year. We are pleased to announce that we have finalized the transition of our telephone account management organization from legacy third parties to our new inside sales organization based in Austin, Texas. We are excited about bringing this critical sales function back in-house with the goal of driving high-margin, small-business customer sales growth in contract.

Looking at our first-quarter sales by product category we reported positive year-over-year sales growth in Copy & Print, seating, printers, cleaning supplies and breakroom supplies where, by the way, we continue to gain traction with sales improving at a double-digit rate again in the first quarter.

First-quarter 2012 operating profit for BSD was $43 million, up $26 million from the same period one year ago. This increase reflects a 170 basis point gross margin increase partially offset by higher supply chain expenses and temporarily higher payroll costs during the transition to the new inside sales organization.

It is important to note that we are now lapping the bulk of the successful cost reduction efforts realized in 2011, and we are now seeing a shift towards gross profit rate expansion in 2012 driven by our sales and margin initiatives as they continue to gain traction.

In summary, it was a good quarter for the North American Business Solutions. We continued to win new business and retain existing customers in the contract channel and our direct channel performed well once again. We improved margins in both channels and it is our cost containment initiatives and prudent investments to grow the business, drove improved operational performance. As we move through 2012 we continue to look forward to improved performances for both channels. In regard to BSD's second quarter of 2012 outlook we expect our sales to be flat to up slightly versus prior year, and operating profit to be about flat on a year-over-year basis as we anniversary about $10 million of nonrecurring benefits one year ago.

I would like to turn the call over to Steve now to review the first-quarter 2012 performance in the International Division. Steve?

Thank you, Kevin. The International Division reported first-quarter 2012 sales of $825 million, a decrease of 2% compared to the prior year period in US dollars and an increase of 1% in constant currency. I should note that the International sales benefited by approximately $30 million in the first-quarter 2012 from the calendar shift.

Excluding this benefit, constant currency sales would have declined 3% versus prior year. As I speak to sales results by channel this morning, I will do so in constant currency.

Total European contract channel sales increased mid-single digits in the first quarter of 2012 versus the prior year with sales growth in the UK and Germany partially offset by weaknesses in other countries. Our contract channel in Asia also reported a mid-single digit increase in year-over-year sales in the first quarter of 2012. First-quarter 2012 sales in the European direct channel were lower than a year ago. We continue to focus management attention and resources on our direct channel business to reverse the unfavorable trends in this channel.

Our objective is to improve the customer experience, both online and off-line, in order to increase customer retention, acquisition, and development.

First-quarter 2012 sales in the European retail channel increased by low single digits compared to prior year. This was mainly driven by the acquisition in Sweden in the first quarter of 2011.

As a reminder in Europe we own and operate a total of 115 retail stores in France, Sweden, and Hungary.

In Asia, we continue to see sales growth in our South Korean retail business. The International Division reported first-quarter 2012 operating profit of approximately $15 million compared to $27 million reported in the same period the prior year. Excluding approximately $18 million of charges related to business restructuring actions and process improvement activities, adjusted operating profit in the first quarter was $34 million compared to $33 million in the same period in 2011. These charges primarily included an adjustment to close facility accruals and severance costs for restructuring activities in several European locations. If we exclude the calendar impact benefit of $30 million on first-quarter 2012 sales, our adjusted operating profit would have declined by about $9 million as a result of negative flowthrough impact of lower sales.

In Latin America, Office Depot de Mexico reported first-quarter 2012 sales of $285 million and net income of $17 million. We do not consolidate sales from this joint venture but Office Depot's portion of the net income was approximately $8 million for the quarter and is reported in the miscellaneous net income line on the income statement.

Slide 7 shows that Office Depot de Mexico ended the first quarter with 249 stores after opening a total of nine new stores in Mexico, Panama, and Guatemala. We remain very pleased with the performance of this business and are optimistic about our retail and business-to-business growth opportunities throughout Latin America.

In summary, the international contract channel performed well in the first quarter and we are making progress in improving the performance of our direct channel. As we look forward. we will continue to carry out our strategic initiatives to profitably increase sales and reduce our cost. In regard to our second-quarter 2012 outlook we expect our sales and constant currency to be down 4% to 5% versus the prior year and operating profit excluding charges to also be down as the negative sales trends more than offset cost reduction efforts.

I will now ask Mike to review the Company's first-quarter 2012 financial results in more detail. Mike?

Thanks, Steve. As Neil mentioned earlier, first-quarter 2012 total Company EBIT excluding charges was $47 million, a $13 million increase versus one year ago. First-quarter 2012 EBIT of $47 million includes the $18 million North American Retail asset impairment previously mentioned. Before the asset impairment, EBIT increased about $31 million year over year.

The waterfall chart on slide 8 provides a snapshot of the factors driving the $13 million year-over-year improvement in EBIT. On the plus side we had approximately $44 million in benefits realized from our business initiatives and $16 million related to productivity improvements and cost reduction efforts. These benefits were partially offset by about $22 million from the negative impact of lower sales volume, $18 million from the store asset impairment charge, and $7 million from business reinvestment.

I will now update you on our restructuring charges.

In the first quarter, we reported $23 million of restructuring-related charges and other costs intended to improve efficiency and benefit operations in future periods. These charges included about $18 million for European business restructuring and process improvements and approximately $5 million for business process improvements at the corporate level. I should note that the European charges included an $11 million adjustment of a lease reserve for a closed distribution center in the UK.

I would next like to expand on the $28 million of net benefits related to discrete items that Neil mentioned at the outset of the call. These benefits included $68 million of pension benefit related to a 2003 European acquisition that more than offset $23 million in restructuring charges and about $12 million related to the extinguishment of debt. The $68 million of pension benefit was recognized as a credit to income on the income statement and a $5 million expense related to this arrangement is presented in G&A expense for a net increase to operating profit of $63 million.

Turning to slide 9, free cash flow for the first quarter of 2011 was a use of $128 million, up slightly versus one year ago. However, this total includes $58 million of usage related to the pension funding.

The inflow of $58 million of cash related to the pension settlement was treated as a source of cash in investing activities and, from an accounting perspective, this is treated as a purchase price adjustment. The payment of $58 million made by Office Depot into the pension fund was treated as use of cash in operating activities and negatively impacts free cash flow by $58 million. However, the total cash impact to Office Depot is zero. The free cash flow usage in the first quarter excluding the pension settlement was primarily driven by a decrease in accrued expenses, such as payroll and bonus.

I should note that our original full year [2000] free cash flow projection of $80 million to $100 million, although unchanged from an operational perspective, will also be impacted by the accounting treatment of the pension settlement and is now estimated to be in the $20 million to $40 million range. Again, the total cash impact to Office Depot from this pension settlement will be zero.

Turning to liquidity, we ended the first quarter with $489 million of cash and cash equivalents and $704 million available from our amended credit agreement for total liquidity of $1.2 billion. No amounts were drawn under the amended credit agreement at quarter end.

Further to our liquidity on March 15, we purchased $250 million of our outstanding 6.25% senior notes due in 2013. The total consideration for each [with] $1,000 note surrendered was $1,050 resulting in loss on extinguishment of debt of about $12 million. On March 14, 2012, we issued $250 million of 9.75 senior secured notes due March 15, 2019.

We are pleased that we've been able to increase our operating flexibility by successfully staggering our debt maturity dates with the remaining $150 million of our outstanding 6.25% senior notes due August 2013, the $1 billion asset-based lending facility due May of 2016 and 9.75% senior secured notes due March of 2019.

Shifting to operating expenses, total Company first-quarter 2012 operating expenses adjusted for restructuring charges, but including $18 million of assets impairment charges of $845 million, were down $6 million versus the prior year period. The year-over-year reduction in expenses was driven by productivity improvements and lower advertising in North America, partially offset by higher supply chain expenses and payroll in BSD.

The effective tax rate for the quarter on a reported basis was 18%. The effective tax rate on our earnings adjusted for discrete items was 34% for the first quarter but our tax rate can be volatile because of our valuation allowances. As I mentioned last quarter, the US Internal Revenue Service has proposed a royalty assessment from our foreign operations. We disagree with this assessment and based on the technical merits of issue believe that no accrual is available or required -- excuse me, is required at this time. We continue to work with our outside tax advisors and the IRS to resolve this dispute in a timely manner.

During the first quarter, we recorded a dividend on our convertible preferred stock of approximately $8 million which was paid-in-kind on April 1.

Looking at the second quarter of 2012, we expect total Company sales to be down about 3% versus the prior period and adjusted EBIT to be down $20 million to $30 million compared to last year, reflecting a number of factors including nonrecurring 2011 items, lower International Division operating income, and the deleveraging impact of sale softness in North American Retail.

There are two important things to note in our first-half 2011 results as compared to 2012. The first quarter in 2011 was a relatively weak quarter EBIT-wise as we were investing in our key initiatives and in advertising. So our first-quarter 2012 EBIT comparison was a relatively easy one.

Also, the second quarter of 2011 included significant nonrecurring benefits that we are now comping. However, we expect full-year 2012 EBIT to be in the $120 million to $130 million range including the first-quarter impairment charge of $18 million. This tracks with the guidance we gave you on the fourth-quarter earnings call of $140 million to $150 million of full-year 2012 EBIT.

With that, I will now turn the call back over to Neil.

Thank you, Mike. As you heard this morning, our first-quarter performance was much improved versus prior year despite the sales decline as we continued to execute our strategic plan. In fact, I should note that first-quarter 2012 adjusted EBIT of $47 million is $13 million higher than last year, and that is because this year's adjusted EBIT includes the non-cash store impairment charge of $18 million which we look at internally as being a $65 million EBIT, an increase of about $31 million versus prior year.

Although the second-quarter outlook is weaker than we would like, we remain confident in our plan and in our ability to execute and believe we will drive significant full-year 2012 EBIT improvement versus the prior year.

Thanks, Neil. Operator, we are now ready to take questions.

(Operator Instructions). Colin McGranahan.

Good morning. So, just thinking. Looking at 2Q first, I guess to make sure we are working off the same numbers, was the nonrecurring benefit in 2Q 2011, did that total $10 million?

Yes. We called out two items last year. Well, we called out items last year that were about in aggregate about slightly over $10 million. Frankly, there was probably a number of other smaller items that were below a certain threshold that had a fairly significant impact year over year that we didn't call out. There were six or seven items that were below $2 million or $3 million that we did not call out. So what we are comping from last year is well in excess of $10 million.

Okay, but [if they're down $20 million to $30 million, FX charges] EBIT looks like it was maybe about $11 million.

Last year, yes.

Last year. So you know, add back the $10 million. Are you saying you are going to be down $20 million to $30 million from kind of a baseline of $21 million?

No, we are going to be down $20 million to $30 million from the baseline of the $11 million that was reported last year.

Yes, the other thing I will point out is that historically -- well in the last four or five years we typically have lost -- we had negative EBIT in Q2 if you look back in 2009, 2010, we lost anywhere from $60 million to $20 million. So as I said in the script the Q1 last year was unreasonably -- unusually soft due to the reinvestments we were making in the business and advertising. We were also investing heavily in initiatives.

And so it is really for me to look at the first half, where we are saying if you look at the guidance we gave we are going to be flat to slightly up through the first half of 2011, if you exclude the impairment. That is where we think we are, which has us on track to do the guidance for the year that we talked about on the call.

Okay. And then is there anything special -- obviously you're anniversarying these non-recurring benefits from Q2 last year and you still have a little bit weaker retail comps until some of the accessories and other tech stuff comes in. But is there anything else unusual about 2Q that would cause such a big downward pressure and profitability?

Year over year? It is really the unusual. If you look -- we are a little bit softer in Retail than last year. We are a little bit softer in International and we have got more of the initiatives taking end in Q3 especially with in-store customer experience. I am not at all concerned about the 2Q number. It is really for me it's a profile of 2011 Q1 and Q2 that is giving us this plus -- very strong performance in Q1 and very soft performance in Q2. I feel like we are on track to get the guidance for the year. It is really the nature of last year's numbers that makes it look different.

Understood. And then I guess taking a step back, though, and just thinking about the profit profile, clearly another great gross margin performance here in 1Q pretty long string, eight out of nine quarters. Would you think the gross you are starting to get toward the end of that on gross margin and so there is just less benefit there? And how do you think about gross margin more broadly going forward?

In the North America business the way that we think about gross margin going forward is, I think we will still see some benefit from our mix shift, particularly as we rationalized out of the principally the low-end laptop assortment and embrace the tablet and reader assortment along with the accessories. So I think that is one piece.

I think the other piece that arguably probably we are in the earlier innings with is our direct import and own brand penetration. I think we've made some progress there but I think there's probably much more progress to make in terms of penetration, both in the BSD and Retail. It should give us some continued tailwind in gross margin improvement.

Okay. Great. I'll let someone else get on now. Thank you.

Brian Nagel.

This is [Rupert Shree] for Brian Nagel at Oppenheimer. We saw laptop sales were getting pressured at this quarter. What are your expectations for the rest of the year and do you expect any meaningful improvement with the Windows 8 launch and the rollout of Ultrabook later in the year?

I think a couple of questions. I think laptop sales were, in fact, the market was soft in Q1 and maybe even some acceleration of the softness in late Q1. I think at this point I am not -- I am personally not expecting a turnaround in Q2 or Q3. I think the wild card as you point out is the Windows 8 launch and how the market responds to the Windows 8 launch. I think the Ultrabooks with regard to your other question is a wait and see. I think the price points on the Ultrabooks today relative to the Mac alternative probably aren't as appealing. If there is downward price pressure on those there may be a pickup there, but probably only in concert with the Windows 8 launch, because that enables the functionality of the touchscreen.

Okay, and our second question has to do with the $18 million impairment charge. Is that -- is the majority of that charge related to leases? And also why was this included within the adjusting EBIT number?

Yes, it is actually not related to leases. It is the impairments on about 50 some stores that really relates to leasehold costs and it is everything but leases that is in the store. And your last question was why is it included in operating?

Yes.

Because the accountants make us. (laughter). You know, this is Neil's (multiple speakers). Yes, go ahead, Neil.

What I will point out as of those 50-something stores there's only two that are cash flow negative. This is an accounting charge that really doesn't affect anything. It goes against the leasehold assets that are in each store and you have to do it on a store by store basis.

Okay. Thank you.

Michael Lasser. (Operator Instructions).

Good morning. It's Michael Lasser from UBS. Just to be clear on the full-year guidance reduction is that exclusively coming out of the EBIT guidance reduction? Is that exclusively coming from the second quarter so you expect the back half to remain the same and that is what the math would imply obviously?

Yes, just to be clear our guidance, the last time we spoke to you guys on Q4 call we guided $140 million to $150 million. The guidance we are giving today, what I was trying to point out in the script is essentially the same if you exclude the impact of the impairment. So we've guided $120 million to $130 million including impairment. And so what we are looking at in Q1 was year-over-year improvement of about $30 million. We are looking at Q2 being down $20 million to $30 million and realizing we are up against some significant one-timers from last year.

So the balance of our improvement year over year would be in the second half which is I think is what your point is.

Yes and is the business today trending where you thought it would be so you are not anticipating some meaningful --?

In fact operationally if not for the one-timers in Q2 last year I think we would be up $10 million to $20 million operationally versus last year's numbers. Now having said that, we have a number of initiatives kicking in in Q3, in-store customer experience. Some of our other initiatives are a little bit more backend-weighted. So I feel like we are on track to where we need to be to hit that guidance.

Okay and then two real quick questions. On the stores that have been converted, how much of a lift are you seeing both on the sell side and the margin side to give us an indication of what we can expect moving forward?

Yes, we haven't called out specifically the exact value of the lift. I think what we said in the script was that the stores that we rolled out on the in-store experience, customer experience program are performing better on a comp sales basis than the balance of the fleet.

Okay and the returns associated with that because presumably they are going to require incremental costs as well?

Well, the costs are typically more one time and that's related to the transition. It is primarily related to training. But the easiest way to think about it is just simply converting more shoppers into buyers. So the new program through visual merchandising and better selling skills of our associates in the store allow us to convert more shoppers into buyers. We convert them even if you think we convert them at the average basket side that flows through as incremental margin.

Okay and my last question is on the reduction of the lower end laptops. Is it your expectation that once you anniversary that, that that will start putting pressure on the overall comp results? Because I guess there's a case that can be made if there's always a segment of buyers that will be interested in that assortment, and so you could be perpetually missing out on those consumers.

Yes, I think one of the things we talked about is we are not going to chase comp sales at the expense of profit. And when we looked at our technology assortment while we had laptops in our assortment that drove traffic into the stores, in particular the laptops that were Theodore price point laptop tended to be purchased from consumers that were won and done. So they weren't sticky customers. They came in, they bought, they didn't attach.

We lost money on the laptop and we didn't see the customer again. So our decision was to get out of that business to go to more of that mid tier and upper tier price point and to replace those low-end laptops now with tablets and readers. So I think there will be comp pressure. There will be comp pressure from simply transitioning out of the low-end laptops. There will also be comp pressure in terms of the mix between laptops and tablets and readers. But more importantly we should see an IGM benefit as a result of the mix shift.

Okay. That's helpful. If I could seek one last one, I know I am pushing it here. But, Neil, you know we are four years into economic recovery. We are still seeing mixed results from on the demand side. Admittedly there's some one time-ish type issues going on, but what sort of economic conditions do you think need to exist for the topline trends to improve?

Well, I might take a little issue with a recovery because the recovery has been really spotty and if you look at our business, Europe's is in a recession and you just have to look at the papers again today to see what is happening in Spain and how that is going to kick over to the rest of some of the Eurozone and here I think what we're seeing is that while some of the consumer sentiment has changed slightly -- and I'll say slightly -- what we haven't seen in all of our data is any enthusiasm yet from small- to middle-sized business in terms of hiring. And it is the hiring part of that that dramatically affects our business as opposed to just seeing some sales go up.

While the manufacturing sector has clearly improved in the United States, basically our business is almost non-related to that across the board. So what we are looking for is just more of the same quite honestly for the rest of the year.

Okay. And good luck with that.

Only thing I like to add to that is we are seeing trends in our BSD business. We are seeing large national accounts in segments of BSD. You saw the guidance for Q2. We are looking at flat to slightly up in sales. That is encouraging for us and actually gives us hope that that may be one of the early signs of some light at the end of the tunnel going forward.

But moreso private industry than public sector, to your point.

The public sector is dead right now. Yep.

Understood. Thanks again.

Carla Casella.

My company is JPMorgan. And I just wanted -- the first quarter same-store sales, can you give us an idea of the sequence of it? Was it pretty even throughout the quarter? Do you see improvement each month?

I am just going to repeat your question because I believe your question -- this is Kevin. I think your question was with regard to same-store sales in retail in the first quarter was the comp sales relatively equally distributed across the months or did it accelerate or decelerate. Was that your question?

Exactly. Yes, thank you.

Yes, I think for all intents and purposes that it was essentially flat across the quarter and I think it is reflective of some of the decisions that we made beginning late last year to start to rationalize the tech assortment and begin to bring in the mix of tablets and readers. I will say, however, as we got closer to the end of the first quarter, specifically as it relates to laptops and desktops with the general market trends and softness, that we did see some acceleration in the comp sales pressure.

Okay, great. And then you mentioned you had some duplicative costs in the first quarter from payroll related to the transition to inside sales force. Is that complete now or should we see some more in second quarter and could you give a magnitude of what the -- how much the duplicate cost was?

Yes. Those were one-time costs, specifically associated with the transition from our multiple third parties into our in-house inside sales organization in Austin, Texas. And it was just payroll that we use to make sure that it was a seamless transition and our customers weren't impacted. It was one time in nature and won't repeat.

Okay and did you say the dollar amount?

I didn't hear the question. I'm sorry. (multiple speakers). We did not call out the dollar amount.

Okay, just one follow-up, one final question. How much of the North American Business Solutions is now public sector? Or where could that be as a percentage of that sector by year-end?

I don't think we specifically called out the percent of our business at the public sector. But I think it would be fair to say, given the budgetary pressures on the public sector that as a percent of our total sales, it's declining.

Declining. We typically called it out at 20% in the past and this year given the performance where you are seeing significant differentiation versus the rest of BSD it will be declined by year-end.

Okay. Great. Thanks.

Dan Binder. (Operator Instructions).

Dan Binder, Jefferies. Had a couple of questions for you. First on the copy and print business. Given the trends in paper and ink and increasing use of electronic presentations in corporate America, I am just kind of curious what you think is supporting the growth in Copy & Print. Is there simply you just have such a small share and it is growing off a low base and what your outlook is for that business?

Yes, I think there's two things that I would share about Copy & Print. Certainly while there's pressure in the reduction of paper consumption, I think that's actually just a piece of the Copy & Print business. So for example, shipping is included in the Copy & Print business and we are seeing nice double-digit gains in shipping. Office Depot is, I think, one of the only retailers that has UPS and USPS shipping.

In addition to that, business cards would be another category that sits inside of Copy & Print Depot as well as signs and banners. So all those categories are growing.

I think the other area of opportunity for us is in the space called managed print services which is really allowing companies like Office Depot and our partners to help small and medium businesses as well as large global accounts to manage their print services business by going in and helping them understand how we can reduce the number of printer assets that they have on the floor and get better utility out of the print jobs that they have. So I think that those two things are certainly two drivers to continue growth opportunities and I think your first point -- probably a good one as well -- and that is just the opportunity from being underpenetrated to grow the business.

Right. I was wondering from a competitive standpoint what you're seeing across the different divisions from your main competitors, from a pricing standpoint.

(multiple speakers). You know I think and primarily I assume you are asking on the BSD side. I don't know that I would say that there is any significant change. I think it seems like everybody is finding creative ways to win business and so I don't know that there's been any material change.

I guess the one callout I might spend a little time talking about is, in the past I think most contracts were all-inclusive. So it was a broad range of customer supply business. We are seeing some indications today where customers are beginning to break out smaller parts of the supplies business and doing separate contracts on those. They might have a separate contract for paper, ink, toner, printers, technology -- things like that.

Great. Thanks.

Matthew Fassler. (Operator Instructions).

Good morning. It is Goldman Sachs. My first question relates to the $18 million charge for underperforming stores. Given that this is booked against EBITDA and you are including it in operating earnings, what are the layers of stores that are coming close to the thresholds that would trigger those kind of write-downs? And was it the apparent deceleration in sales at the end of the quarter that triggered these charges or was it a little bit longer on the [coming]?

Yes, it was a little bit longer on the coming. We look at those stores individually, the stores that generated the $18 million charge were about 50 in number. We probably -- we start the analysis out with a group of stores that is about double in that size and look at a number of different parameters. We look at sales going forward. We look at the impact of our initiatives. We look at store specific initiatives.

So, it was really the change in sales that we saw immediately following Black Friday and it's particularly driven by a lot of the tech and peripheral changes that we have seen. So, frankly, it is a conservative forecast going forward that drove that impairment charge.

But it is a group of about 50 stores and the analysis starts again with a group that is about double in that size and we eliminate about 50 of those stores through the process. Some of those stores are also partially impaired, meaning they have positive cash flows going forward. But they don't have enough to cover their book value.

The other point to make is that we are in a capital-constrained environment, and if we had more capital, we would likely downsize a lot of these stores if we had the capital. And if we downsized those stores' great returns, we would make them profitable post-downsize. So given the environment we are in a kind of -- it is an interesting thing that they are actually on the priority list for us to downsize if we had more capital to allocate to them.

Yes. I think, Mike, that is a great point from Mike. I think the stores that were hit with the impairment were typically our lower volume bottom stores; and in fact, most of these stores would be candidates for a 5K downsize when you run the pro forma on a 5K downsize, they're profitable.

And can you remind us what the capital commitment is for a 5K downsizing on average?

Per store?

Yes.

Yes, about $600,000.

Got it. That is the cash cost or does that include the write-down of the lease, et cetera?

Well, it's cash cost.

Got it. And then, secondly, I know you have gotten a couple of questions on this just to try to parse what you said about the nature of the comparison. I think you had isolated one item of about $10 million and then you said $6 million or $7 million that were probably under $2 million in aggregate. So that would add up to something along the lines of $20 million.

But I think you also said in answer to a question that to down $20 million to down $30 million would be up $10 million or more on a more normalized comparison for the second quarter. I'm not trying to study the words too closely but just really want to understand how big the one-offs were last year. And I understand the second quarter is a lower margin -- lower volume quarter so things tend to get -- the leverage tends to come out in a fairly extreme way.

But just to make sure I understand exactly what year on year trend would imply for the second half and whether you need to see the sales get better in the second half in order to make your numbers.

Yes, if you take -- here is the easiest way that a simpleton like me looks at it. If you look at Q1 and you look at Q2 guidance excluding the impairment charge we are up $30 million in Q1. You saw the guidance on Q2. That would say that you are about flat excluding impairment. I think that if you look at what we called out last year, and in the individual items that we didn't call out we had about $20 million of unusuals last year. So in some range we would be up EBIT year over year through the first half which is the reason the earlier question I got gives me confidence that we are on track to deliver that [120 to 130] of EBIT for the year. Again, including the impairment charge.

So we called out about $10 million plus of charges last year. There was another $10 million that we did and that were very small items and that is the policy we use. We weren't trying to be cute; last year, we had about six or seven items that were $2 million-ish each in order of magnitude.

And to the extent that, at the outset of the year, you spoke directionally to low single digit sales declines in aggregate. Is that still the sales plan that underlies that EBIT expectation?

Yes, we have a fairly conservative look at the year and we have been focused on initiatives and we have been focused on cost. That was actually the forecast that went into the impairment discussion as well. Kevin is pushing his people much harder than that internally and they have different goals. But from the standpoint of what we're looking at, in terms of EBIT commitments, you're right.

Got it. Thank you.

Chris Horvers. (Operator Instructions).

JPMorgan. Good morning. Piggybacking on a series of questions including what Matt was just driving after. So it sounds like the cost containment initiatives, a lot of that is in the base now. The gross margin lift, there's some incrementality going forward. But perhaps that is in getting baked into the EBIT.

So is the -- your outlook going forward more predicated on not necessarily macro but your ability to improve results in North American Retail with the accessory and PC resets and with the new store operating model? And maybe just a little bit of BSD getting better?

Yes, I think -- let's do BSD first. So certainly we have lapped over the US community. We have had some nice wins in picking up some large global accounts. So, I think our expectation is that BSD will perform better, to your point.

I think with regard to North American Retail, I think we are not planning on any change in the macro economic environment. What we are expecting is that with the changes to the technology and peripheral assortment, as well as our continued actions on pricing and promotion. And then, finally, better conversion through the in-store customer experience that will improve the comp sales trends that were partly continued to drive incremental margins to the business.

We think the initiatives -- again, we have guided $150 million to $170 million of gross benefits from initiatives this year. I think we still have got initiatives that if we look at 2013 that we will be working on, we are starting to translate some of the successes here into the international business as well.

So to say that we are going to rely on the macro going forward would be a gross misstatement. I think we are still looking at -- to Neil's earlier point, we have to operate this business assuming this environment is not going to improve dramatically. BSD is better, but we are still very focused on initiatives and process improvements and trying to look at parts of the business that are growing, to Kevin's point, like CPD and other areas of growth.

I think the other piece is that we haven't really -- we have focused on but we haven't discussed is I am very optimistic that over the next year or two we are going to significant lead turnaround the direct business on the international side which is enormously profitable relative to the contract business. And I think Steve has done a terrific job from the time he jumped in there in November in terms of understanding what the issues are and taking some of the best practices we learned here over to Europe and infusing that into business. So I think there is a real opportunity for that.

The other piece I would mention on the BSD side that Kevin talked about earlier our small- to medium-sized business as you guys know is significantly more profitable than the large. And I think that the business we have set up in Austin, Texas, is going to significantly change the mix of our customers over time to a more profitable margin base in the BSD side in the US.

So then as a follow-up to do that so can maybe in that $150 million to $170 million of gross benefits from initiatives this year how much is explicitly non-sales related?

80% of it. (multiple speakers). You are getting some contribution from in-store experience but the bulk of it is pricing promotions, in direct expenses, quite a bit of it is non-sales related.

Okay. And then final question on the store impairment charges is this -- ? I'm assuming this analysis is done once a year, so you wouldn't expect any additional charges in the future quarters in

It is actually done every quarter. We started it in November for year-end and we did it again in Q1. So to say that we would not expect -- for us to see a significant change in this impairment charge, we would need to see a change in the trajectory of the sales assumption we use, which I am not going to call out and/or a lack of performance in our business initiatives which, you guys have seen, we have done a very nice job in the last year and a half on that or a significant change in specific store assumptions that are really out of the control of the macro. A store for whatever reason doesn't perform well either due to people or due to egress or whatever because it is done on a store by store basis.

So for me to sit here and say you won't see any noise on this going forward would be a difficult thing for me to say.

Understood. Thank you.

Mike Baker. (Operator Instructions).

Mike Baker from Deutsche Bank. I wanted to focus on store closings and downsizes and leases and those types of questions. Can you remind us when your leases come due how many come due over the next couple of years? And more specifically of those that come due, how many are bigger stores and/or candidates for the type of reduction that you guys have been talking about either to a 5K store or just something smaller than the current existing footprint?

So to maybe take a step back, we have about 100 stores a year that come up for lease renewal. So at a macro level that is kind of the size of the price each year that presents us with an opportunity to downsize the store. As it so happens some of the larger stores in our fleet which we refer to as the traditional store -- it's the concrete floors with the high bay racking -- a significant number of those stores come up for lease renewal over the next four years. So they are not only older stores but they are also some of the largest stores.

So they are in line -- a big opportunity for us to downsize and remodel, get a better customer experience and, of course, improve our occupancy cost.

What typically happens as stores come up for renewal is the very first thing we try to do is understand whether the store is in the right trade area. Assuming the store is in the right trade area then we will try to try to downsize the store in place. In some cases we are able to get landlord funding for that. In other cases, we are not.

If the store is not in the right trade area and we can't find a suitable alternative location, we will close the store. We called out that we are planning on closing 25 or 30 stores this year. Our downsizes and remodels or call it another 30 or so a year and then the balance absent any incremental capital has largely just been renegotiated in most cases, actually, at lower rent.

So, going forward we have two footprints that we are going to use. The 5K and the 15K. I think it would be fair to say that we would roughly need twice the capital that we have today to be able to downsize a greater percentage of those stores. Over the last two years, all of us have been focused on getting this business back to profitability and managing our free cash flow.

I think we are in a position now to take a harder look at the opportunities that might allow us to accelerate downsizes and remodels in 2013 and beyond. We hope that we will be able to get back to all of you in July at our next earnings update with more details around what that might look like.

Okay, thanks. That's important but it sounds like even this year you are touching maybe 50% to 60% of those 100 that come up for renewal through closings and --

That is true and we think we'll get about a $10 million benefit in occupancy costs this year.

I think when we put the plans together for 2011 and 2012, it was pretty clear that you had an economy that was not going to help. We had a turnaround here in terms of dramatically improving both our cost structure and the margin structure, and we laid out a number of initiatives. And what we also told the investment community, our shareholders, and our Board is we were going to absolutely be cash flow positive because we didn't know where the economy was. And maybe -- just maybe -- we played it too cautiously. And what we're looking at now is thinking about how we might dramatically accelerate rolling out 5K stores and downsizing our stores so that when we have 100 that come up we can impact most if not all of those.

Yes, I think that makes sense. If I could just do rapid fire a couple of housekeeping questions here. So real quick on the impairment charge, 50 stores. I think you said those aren't necessarily closing. In fact, are any of those 50 within the closings?

We might close two.

Okay right so I missed that. Of the 700 stores that are now have the better customer experience, you said they are better than the chain. We can't say if those are positive in terms of comps we can only say they are less negative. Is that true?

That is correct.

Okay. One more. You called out the impact of the holiday shifts specifically in terms of dollars to International and delivery. I don't remember if you talked about it for Retail. A lot of numbers flying around this morning. If you didn't just to complete the model could you give us that number?

We did not call it out.

It was a wash between the store closures throughout 2011 and the holiday should benefit it was a wash.

Right. Understood. But if we just want to isolate the holiday shift again you did tell us what it was for (multiple speakers) delivery. Right. I understand you didn't tell us, I am just asking if you could tell us now?

Don't have the number with us.

Great. Thank you for taking all my questions.

David Gober. (Operator Instructions).

Good morning. It's Morgan Stanley. A couple of questions on the International business if I could and just wondering if we could kind of touch on the guidance for the second quarter and dig into some of the components there. So, if I heard you correctly you are expecting International down 4% to 5% in constant currency basis in 2Q. Just curious if that is -- if you adjusted 1Q for the calendar shifts and all the changes there, is that roughly similar or is it a deceleration? And if it is a deceleration what are the components that are driving that?

Yes, the way I would characterize the following is that we really continue to see economic headwind across the European market. You saw that the UK went into recession. Spain just announced major economic issues and we are seeing that across all of Europe. We talked about in our discussion the fact that the direct business continues to have some headwind against it. So it is really a combination of the economic headwind and the addition to our Direct business -- which, again, we are working on trying to improve. But that is really what is driving our forecast at this point.

And within that comment and I know Neil mentioned some of the optimism around the direct business. You have noted for a while now that the Direct business has been a driver of some of the weakness there. Can you give us a little bit of the directionality around what the declines are looking like there? Are they improving, are they getting worse? And it sounds like that is expected to be dip a little bit in the second quarter but just want to make sure I am hearing that right.

Yes, what you see across Europe in the Direct business is your really see a change in the marketplace similar to what happened here in the United States is you are really seeing a transition from what I will call classic Direct business which is catalog, direct mail and e-mail obviously to e-commerce. And so you are saying that decline occur across the European business. We have a very strong business in Direct as a result of the Viking acquisition and that core piece of the business, assets declined. It is obviously moving to the web. And so what we are managing is that transitional process between those two different elements and that is really where you have seen the decline.

What we talked about, though, is we are seeing improvement in the trends. We have got resources and plans put in place to manage that and our expectations are that we will continue to see improvement in that business as we go forward quarter by quarter.

Kevin, just kind of following up on some of the comments that you made on the real estate strategy. I'm understanding that you are going to come back to us in July with an update. Is there an ultimate kind of footprint in terms of the number of stores that you guys are thinking of? Just kind of looking at the store closings on an annual basis, seems like you are pretty much on track for 23% a year. But just curious if there is an ultimate number that you have in mind there.

No. I don't think we have an ultimate number in mind. At the end of the day brick and mortar and the Internet have to find a way to play in the same field; and I think for us, brick and mortar will be about convenience, the [center] experience and for customers who need help navigating to solutions. And so as we think about downsizing our store footprint we are going to make sure that part of that process addresses those three attributes but also allows our customers who shop in the store or on the Internet to have a seamless experience. And so we'll let that kind of drive what the store count looks like.

Okay and if I could just squeeze one housekeeping item in there for Mike. On the preferred you had mentioned on the last quarter, quarter they called it, that you were picking the preferred and, obviously, that is what happened. Just curious now that you've [termed] that up a portion of the 2013 maturity are you going to continue to pick that preferred?

Yes, last call we gave guidance that we would pick for all of 2012 and that is all we really guided towards. So it's really -- really the decision to pick had a lot to do with our capital allocation discussion. Some of it had to do with taking out the rest of the bonds that we have come due in 2013.

But frankly more of it had to do with the investments that we would like to make in the business. We would like to accelerate the downsizing. As Kevin said we'll come back to you in another quarter or so. And there are other things in our business that we would like to invest in. We would like to invest more in e-commerce to drive that business.

So it would be hard for me to say what the guidance is beyond 12. But that was really what was behind it.

Great. Thanks.

(Operator Instructions). Anthony Chukumba.

Good morning. It is Anthony Chukumba with BB&T Capital Markets. Just had two quick questions for you. One was on the old US communities contract. Previously you had given updates in terms of how much of that business you'd be able to retain. I was just wondering what the update was there. And then the second thing, you talked a little bit about direct imports and what the penetration was there. I was just wondering about what your private-label penetration was and what your long-term target is for that. Thank you.

I think what we've talked about with regard to the retention of customers on the US communities contract is that we retained north of 85%. And so that continues to be where we are at today. In terms of direct import penetration, it varies a bit by channel, but I would say it is kind of in that mid-teen range for direct import and in the low to mid 20s for private brand penetration.

I don't know that we necessarily have a target other than we believe there continues to be opportunities to grow penetration both in direct import as well as private brand. I think that will be a source of gross margin expansion for us in the quarters to come.

And then in Europe on the private brand site our penetration rates are slightly higher than they are in North America. And as Kevin stated, we also see an opportunity to improve that penetration level going forward.

Okay. Thank you.

Aram Rubinson. (Operator Instructions).

This is actually Alisa Guyer on for Aram Rubinson of Nomura. Can you just help us out? I note that the income statement number for the pension item was different from the cash flow number because of currency translation. But what are the two different cash flow numbers? Why are we seeing the $49.8 million in investing and then the $58 million in operating?

Yes, this may take a while. Yes we had a cash flow settlement with the Company that sold us (inaudible) 2003 of $58 million. Okay we received part of that as a prepayment so you should see another item on the income cash statement. There is a $49 million and a $9 million which should add together to $58 million. The reason the income statement is different is we recorded $58 million of that as income. We also reversed $10 million of accruals related to other items that had to do with these settlements. That is $68 million that you see on the income statement.

And then we highlighted that there's about $5 million of legal fees that we had tied up on the balance sheet that we reversed at the time of the settlement.

So that's the difference between the $58 million received and the amounts on the income statement. Does that help you?

Yes but what's the $49.8 million?

Yes we received the cash (multiple speakers). We received $49.8 million in February and we received $8.5 million earlier. Those were both related to the same settlements. If you add those two together you should get something very close to $58 million.

Got it. And then, so, do we correctly understand that the -- there would have been no income statement effect at all had you not written down the good will, however, many years ago?

Correct. If we had not written down the goodwill a few years ago this would be treated as a purchase price adjustment. It would have gone against goodwill and we wouldn't be having all of this fun today.

And then the pension payment would have been an operating cash flow item like any other pension payment?

Yes. When the pension settlement came in, it was treated like a purchase price adjustment and ends up as an inflow in investing. And then, we paid into the pension fund, it ends up as an outflow for operating. So it has zero impact on the cash flow statement. But if you are looking at free cash, it shows as a negative. If you look at investing, it shows as a positive. If you look at total, it shows as a zero.

Okay and then just real quickly, the $23.6 million in P&L adjustment that is $18 million addback of your impairments and $5.3-ish million corporate?

That's correct, and of the $18 million in Europe about $11 million of it relates to the closed facility that is a warehouse in the UK.

Got it. Thanks so much.

Alan Rifkin. (Operator Instructions).

Thank you. It is Alan Rifkin with Barclays. Most of my questions have been answered but just have a couple. First for either Neil or Kevin.

You cite lower advertising costs as a source of gross margin gains on the Retail side. I was maybe -- but yet obviously your comps are still down significantly. Can you maybe speak philosophically as to how you are thinking about advertising going forward in terms of trading off some gross margin dollars for comp gains?

Yes. I will jump in and then let Neil answer. I think our comment was that advertising was down year over year. I think, again, it is tied to being a little bit more thoughtful and strategic about how we promote and I will give you an example.

When we looked at the utility of our inserts and determined that there were certain inserts and, in some cases, a broad set of inserts based on product mix and promotion that just quite frankly weren't -- they were driving traffic, but from a profitability standpoint they just weren't sufficiently profitable. And so, one of the things we have done is we've reduced the spend in those inserts and tried to repurpose those dollars into marketing activities that have better returns for us.

What I would add to that is that as you know we have got a new head of marketing, Bob Moore. And what we have started to look at is, as Kevin said, the utility of the inserts but also what can we do with broadcast advertising, both the mix of television and radio in specific markets, to see if that can drive sales. And I think what we've seen is that when we tested our Copy Print and Tech Depot in 2 different markets we found that advertising was able to drive comp sales.

You won't see it on a profitable basis in the year that you run the advertising. But there is a long tail and what we've seen in terms of our brand advertising and promotional advertising is that when we tag it with a technical or technology kind of product, it dramatically lifts sales.

So what we're doing is being a little bit thoughtful of a new agency that we hired less than a year ago -- Zimmerman. And I think together what we're finding is where and when we can run advertising that will drive the business profitably but also enhance the brand.

Okay and one follow-up if I may. On the 700 stores with the enhanced customer experience that you said is doing better than the corporate average but not willing to quantify it, would it be reasonable for us to assume that hopefully those these stores are comping positive? I believe you said in response to an earlier question that there may -- they will be negative. Can you just clarify that?

Yes, I don't think it would be accurate to assume every store is comping positively. I do think it would be accurate to say that of the 700 stores that are on the in-store customer experience, they are comping materially better than the control group. Some stores, however, were comping negatively and they have had a significant improvement in but still negative comps.

Okay. But the returns are sufficient such that you are going to continue with the program. Is that right?

We wouldn't rule it out if the returns weren't significant.

Okay. Thank you very much.

Joe Feldman. (Operator Instructions).

Telsey Advisory Group. Thanks for taking my question. I just wanted to go back to Europe for a minute and ask how are trends through the quarter. Did trends change at all, did they improve or get worse as far and maybe --? I understand that Northern Europe seems a little bit better but maybe you could take me through the flow.

The trends are actually right on in terms of what we thought the business would be. If you look at how we forecasted Q1, we are right on what we had forecasted back in Q4 from a revenue standpoint. The overall revenue trends are slightly down versus Q4 of last year. So we continue to see economic headwind. But it is something that we believe we have forecasted into the business right now and believe we have a good handle on where we think the business will be, assuming that no incremental economic impact hits us in 2012.

Got it. Thank you. And one other unrelated question. Wanted to ask about on the service side of the business I know Copy & Print is doing well. I didn't hear you guys mention Tech Depot at all or any other initiatives. Maybe you could talk about some of that?

I think in the US business Tech Depot, I think. has largely followed the trends of our laptop and desktop business. So still doing a nice job with attaching for services and product protection plans but the overall contribution is lower, given the decline in sales and units.

Okay. Thanks very much. Good luck this quarter.

Thanks, Joe.

So that is going to conclude our webcast and conference call this morning. Thank you very much for participating and I will be available to take your calls later today. Thank you.

That concludes today's conference. You may disconnect at this time.