United Stationers Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.15.13 | About: Essendant (ESND)

United Stationers (USTR) Q4 2012 Earnings Call February 15, 2013 11:00 AM ET

Executives

P. Cody Phipps - Chief Executive Officer, President, Director and Member of Executive Committee

Fareed A. Khan - Chief Financial Officer and Senior Vice President

Todd A. Shelton - President of United Stationers Supply

Analysts

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Oliver Wintermantel - ISI Group Inc., Research Division

Christopher McGinnis - Sidoti & Company, LLC

Gregory W. Halter - LJR Great Lakes Review

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Simon Porter

Operator

Welcome to the United Stationers Fourth Quarter and Year-End 2012 Results Conference Call. My name is Trish, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I would now like to turn the call over to Cody Phipps. Please go ahead.

P. Cody Phipps

Thank you, Trish. Good morning, everyone, and thanks for joining us. With me is Fareed Khan, our CFO; and Todd Shelton, President of United Stationers Supply. I'll kick off the call with some overall comments on our results for the quarter and the year and highlight the progress we are making against our strategy. Fareed will follow the an overview of our financial performance, some comments on the cost actions we are taking during the first quarter and our current outlook for 2013. As always, we will end with a Q&A session. And finally, I'll close with a few summary comments.

Summarizing the fourth quarter and year, 2 themes stand out: progress and momentum. A year ago, I told you that we were not counting on any improvements in the economy or employment in 2012, and that we expected the challenges in the office products environment would continue. For United, this meant that we have to drive profitable growth through internal initiatives without much help from the market. It's just what our associates did. Thanks to their efforts, our revenues grew faster than the markets we serve [indiscernible] platform. We strengthen our [indiscernible]. We increased operating income by [indiscernible] cash flows and we returned capital to shareholders. This progress and momentum shows that our near-term and long-term strategies are working. Here's a closer look at each.

As you will recall, we established 5 focus areas for our 2012 performance: one, investing in our growth businesses; two, optimize our distribution network; three, structure the organization for success; four, drive cost savings from our "War on Waste" or WOW program; and five, strengthen our value proposition and improve margins.

We made solid progress in each area. We made a number of investments in our growth businesses. Perhaps the most obvious was the acquisition of O.K.I. Supply in November. This acquisition increases our industrial sales by almost 40%, as we offer complimentary products in the welding and safety categories, increase our share of customers' purchases and reach new independent resellers. Additional scale that O.K.I. brings is also increasing the efficiency of our supply chain. As a result, our industrial business will contribute over 12% of consolidated sales, and we will continue to invest in this area to drive profitable growth.

During the year, we also further optimized our distribution network. This meant closing 5 distribution centers without exiting any of the markets we serve. This cost savings, supported by our margin expansion and approved -- improved the effectiveness of our network. As a result, we improve the level of service to our customers, became more effective at cross-selling products and made better use of our assets and infrastructure.

We continue to drive savings from our WOW initiative. Last year's successes included efforts by our transportation team to optimize delivery routes and assets. We continue to drive new cost savings, leveraging our shared services platform for further investment in technology. We are also continuing to add new resources and capabilities to accelerate online growth and Jan/San growth, this further solidifies our online strategy.

And finally, we strengthened our value proposition and improve margins by working with resellers and suppliers to sell a higher per value product mix across all channels. This included promoting higher margin products, supported by innovative marketing campaigns and manufacturing incentives, as well as more efficient online ordering processes. All of this progress and momentum came from accelerating our approach to long-term growth. We call our strategy, "Winning from the Middle". This strategy involves 2 key imperatives. First, is to strengthen and extend our core office products business. Second, is to diversify our portfolio into higher growth and higher margin channels and categories.

We remain committed to the office products category. As we have discussed on these calls, the market is facing 2 fundamental shifts that affects demand. First, is the digitization of the workplace, which is reducing the demand for traditional office products. And second, is the shift to online where end users are increasingly buying online instead of through brick and mortar stores. We believe United is in an excellent position to help our customers in this changing environment. We are taking the necessary actions to build our capabilities and reposition our company. This means we must make investments in technology, supply chain infrastructure and leadership in talent in key areas. We also see us being proactive in making tough choices to align our resources and our cost structure.

We continue to adapt and evolve our company and are making more structural changes this year to strengthen talent, align our resources and build capabilities to support our strategy. Our primary focus is on 2 fronts: one, rightsizing parts of our business to ensure strong performance; and two, fully integrating the O.K.I. acquisition into our platform. Fareed will provide a high level overall overview of these activities.

Taking these changes to reposition our company affects our associates, there are tough calls to make. And we are making these moves from a position of strength and they are the right moves for the business.

Now that you have the 10,000-foot view, I'll turn the call over to Fareed. He will take you through the highlights of our fourth quarter and full year performance and add his thoughts on the financial implications for the actions we're about to take. Fareed?

Fareed A. Khan

Thanks, Cody, and good morning, everyone. As a reminder, the numbers we're about to review are adjusted for certain items. For 2012, this included a $6.2 million network optimization and restructuring action in the first quarter and there were items for 2011 as well. You can see the reconciliation to GAAP numbers in our earnings news release and in the 10-K. Also as the reminder, our results for 2012 include the acquisition of O.K.I. Supply, transaction closed on November 1 and added roughly $20 million in industrial category net sales to our results. With that, here's a closer look at the fourth quarter.

Earnings per share were $0.81, up 25% from last year's $0.65 level. This is a record result for us and was made possible by 3.6% top line growth, margin expansion in several areas, lower interest expenses and share repurchases.

Let's dig into these items. Total sales for the quarter were $1.24 billion, up from $1.2 billion last year on the same number of selling days. Looking at category results, industrial sales rose 30.4% during the quarter to $112 million. Without O.K.I., the increase would have been roughly 7%. As we have discussed during the past 2 quarters, there's been a moderation in the underlying demand for industrial products. Third quarter sales growth was 7% and second quarter was 13.2%.

Janitorial and breakroom revenues rose roughly 3% to nearly $311 million. This category represent a 26% of our sales in the quarter. We saw a limited inflation and the underlying market demand growth remains flat overall. Sales from our 3 office products-related categories came in at a total of $785 million for the quarter. This represented a workday adjusted increase of 0.8% from the prior year. Technology sales were roughly $389 million for the quarter, flat to prior year. Traditional office products categories were up 1.2% to $319 million. The furniture sales of $76 million rose 3.9%.

Turning to channels, our business with independent resellers across all categories grew 3.8% for the quarter. Sales to national account customers, a channel that accounts for 12% of our total sales, increased by 1.9% from last year's fourth quarter.

Gross margin was 15.2% of sales, up 175 basis points from the prior year. Sequentially, gross margins are up 140 basis points from the second quarter and 40 from the third. Gross margin gains were driven by a number of factors. These included programs and product purchases that yielded strong supplier allowance and rebate, improved mix and value initiatives, lower LIFO costs and the impact of ongoing WOW savings initiatives and network optimization efforts.

Operating expenses were 11.8% of sales, up from 10.6% in last year's fourth quarter. Travel factors drove this. We had a difficult comparison given the strong performance we had in 2011 which was helped by several onetime items. We continue to make investments in our growth this year, which primarily focused on hiring front line and inside sales resources in our industrial business at Jan/San platform. We also strengthened key supporting functions such as pricing and e-business. Our cost actions are helping fund these investments but did not offset other factors in the tough comparisons in this particular quarter.

Pension expense, workers compensation and group insurance expenses were unfavorable, and variable management and compensation rose from the prior year. We also experienced higher depreciation inventory capitalization and other items.

Operating income was $55.4 million. As a percentage of sales, this was 4.4% up from 3.8% in last year's fourth quarter. Our effective interest rate decreased roughly 250 basis points, which resulted at $2.9 million benefit. Fixed rate at swaps that expired at the end of the second quarter is a primary factor. Our tax rate was 35.5% versus 31.8% in 2011. A year ago, a favorable state tax incentive contributed to unusually low tax rate. Net income of $32.9 million was compared to $27.9 million last year, this was an increase of 18%. As mentioned earlier, earnings per share for the quarter were up $0.16 or 25% from the prior year and the impact of share repurchases accounted for roughly $0.05 to this growth.

Let me now highlight full year results. Like most companies, we did not get much help from the economy in 2012. We started the year knowing that the lost national accounts business would be a headwind. We were also facing challenging market dynamics, including soft demand and mix shift that were putting pressure on our margins. In the second half of the year, we saw a slowing market growth in industrial and janitorial and breakroom categories up but with very little inflation. So as Cody mentioned, we focused on our operating initiatives. In Q1, we announced a series of actions that allowed us to invest in our growth initiatives while cutting costs and optimize our submission network, and we took a charge to cover the exit cost associated with closing high facilities and reducing headcount. These cost actions coupled with several other cost and margin efforts, helped us stabilize and then reverse margin erosion that we've been seeing last year.

We made investments, but we also took cost to fund them. Cash flows remain solid, so we increased the dividend by 8% and repurchased $70 million worth of shares, mostly during the first 3 quarters. O.K.I. was acquired for $90 million in the fourth quarter and we finished the year at the conservative end of our desire capital structure.

Overall, for the year, net sales rose 5.1 -- rose to $5.1 billion, a 1.9% increase after adjusting for one less selling day. Our industrial category grew 12% organically and by 18% after adding O.K.I. in the middle of the fourth quarter. Janitorial and breakroom sales were up 5.3% despite low inflation and some headwinds from our lost national accounts business. Office products-related categories were down about 1% with the prior year. From a channel perspective, national accounts sales fell about $50 million and we were off 8.4%. Sales to independent resellers across all categories increased $134 million or 3.5%. Gross margin was 15.2% of sales, margins rose roughly 40 basis points from prior year results, helped by stronger supplier allowances and our network and WOW efforts in lowering warehouse cost and drove better freight results. Adjusted operating expenses were $567 million, up from $536 million in the prior year. Adjusted operating income for the year was $201 million, an increase of $2.6 million from the prior year and flat as a percentage of sales. Adjusted net income for the year was $115.7 million compared to $113 million last year. Our tax rate was essentially flat at 37%. We did benefit from lower interest expenses as mentioned as our fixed rate swaps rolled off during the year and as we optimize our debt structure. Earnings per share for the year were $2.82, up $0.31 or roughly 12% from the prior year.

Here's our cash flow and balance sheet items for the year-end. Net cash from operations was $190 million. Our capital expenses was $32.8 million. Share repurchases totaled $70 million and we paid $21.3 million in dividends. Inventories at LIFO were $767 million for the quarter, up from $742 million last year. These changes reflect the timing of purchases to capitalize on a very positive rebate and allowance environment during the fourth quarter. The team executed these buys exceptionally well, setting record performance. Receivables and credit picture continues to strengthen with improving customer aging profiles. Our debt-to-EBITDA was roughly 2x at year-end, which is on the conservative side of our 2.0 to 2.5x target. So as you can see, we're able to close the O.K.I. acquisition and remain comfortably within our current capital structure framework. Total debt was $524 million, up from $490 million last year.

When we released third quarter results, we announced an agreement to acquire 100% of O.K.I. shares for a purchase price of $90 million. At that time, we believe that the business case was very strong and we believe that today. We expect that the transaction to be accretive to EPS by approximately $0.07 in 2013. [indiscernible] transaction and restructuring cost, the ongoing EPS impact will be greater, and there's a negligible impact on our earnings in 2012 from the acquisition. Integration efforts are progressing well. We've already innovated back office functions into a platform and are well integrating the facilities. Our view of the benefits have not changed and we are in a very good position to capture the upside from this acquisition.

From that background, let me briefly comment on the cost reduction program we mentioned in the news release. Because of these actions are currently underway, I'll provide high-level comments and we'll provide more details once the steps are complete in capturing our first quarter results. As Cody mentioned, these actions relate to workforce reductions and facility closures associated with the O.K.I. integration. We expect a onetime pretax charge of $9 million to $11 million in the first quarter recorded against operating expense. The actual cash outflows will occur during 2013 and 2014. We expect the ongoing annual benefits to exceed the onetime cost of these actions. As Cody said, we're repositioning the company through investments, building content capabilities, our supply chain infrastructure and in the leadership of the company. We'll continue to focus our resources on the part of the business that's providing the best opportunities to achieve our strategic objectives, while driving solid results and continue to be disciplined in cost.

That said, let me turn to the outlook. We know that the demand picture for office products will remain challenging and we're expecting a flat to a low growth environment for the year overall. We see little inflation, and so top line growth will have to come from our own initiatives. We expect to participate from the shifts to bricks and mortar -- from bricks and mortar to online purchases and increase the role that we play as a wholesale distributor and capture a greater of wallet from our key customers and suppliers, to continue to counter cost and efficiency benefits from repositioning our position -- our business from our growth and cost reduction initiatives.

For 2013, we target sales increases in the 3% to 4% range, helped by a larger industrial footprint and our ongoing efforts in other areas. As you know, our long-term goal is mid-teens EPS and we hope to make progress against that this year. We plan to maintain a consistent approach to our capital structure and capital deployment.

Thank you. And with that, I'd like to turn it back over to Trish, to kick off the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dan Binder from Jefferies & Company.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

I have a few questions. Let's start with the gross margin. You outlined a lot of the benefits that you saw in the quarter. As always, the Q4 period has got a lot of swing to it, so I guess what I'm trying to understand today is as we look forward -- obviously, you're doing a lot of things to try and manage the margin in a tough environment. I mean, what is a reasonable sort of gross margin level as we look out to next year? I mean, even if it's within a range? Is it a lot closer to this 16-plus level? Or is there a more sort of normalized way we should be thinking about?

Fareed A. Khan

Dan, hi, it's Fareed. Let me answer it in a couple of ways. As you saw by our fourth quarter result this year, we had a very strong year-end buying result and that came from a couple of factors. First, I think the overall environment for buys was positive. might have been just the soft economy overall. Second factor is we really went into the fourth quarter looking to optimize any opportunities that came up. And so in the third quarter, we started to draw down our inventories, our merchandising and sourcing teams work very closely with our suppliers, partners, as well as our customers, and through a really solid execution, delivered very strong -- and record year-end buys, which obviously have a big impact on margin. So fourth quarter benefited from those. They're hard to predict year-to-year as you know. The WOW phase we had solid results and it came from solid execution in just a good environment. Now the other factors in our margins, were just some of these ongoing improvements that you may have seen over the past few quarters around mix improvements, really selling the value of the company. And if allowances were in 100 basis points range of our gross margin lift, we probably had about 50 basis points from mix and pricing initiatives that we had with customers. We also saw some benefits on warehouse occupancy cost and freight most in from our WOW initiatives, as well as from the cost actions that we took at the beginning of the year. So what you're going to see is our continued efforts around optimizing the network, being efficient in our transportation, continue to sell the value and to mix the business. Those are all going to help margins and we think those are the things that can incrementally improve. As we build out some of our growth areas, we will continue to margin up the business that way. And then the variable as always, these buying opportunities that we see in the quarter. So I'd say, we want to show margin progression but in a challenging competitive environment that's not easy. And I think we saw some of that in 2011. So we're cautiously optimistic, but we're trying to work every lever to continue the progress that we've seen in the past few quarters.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And just 2 follow-ups on your comments there. I guess first, when you talk about the buying opportunities, I mean, why -- I guess normally when you talk about that and what we've seen in the past is that, that usually does result in a bit more inventory growth, where this quarter it didn't seem to be the case. I mean, your inventory was up pretty much in line with sales. So I guess I was surprised given the comments about the inventory buys. So if maybe if you could just reconcile that? And then also, what was the LIFO credit worth in gross margin this quarter?

P. Cody Phipps

And let me just -- it's Cody. Let me just comment now, let Fareed get back to the numbers. As we look toward the year-end, we saw kind of a demand outlook. And one of the things we challenge our teams to do is start earlier, get ahead of this and as Fareed mentioned, it was the best execution I've seen across our various functions. And we have a pretty good modeling approach that when we make these buys, we know they're economic profit positive. We know they're going to contribute. And because we started earlier, are able to work with manufacturers and really, really optimize that. And I've really applaud team's efforts for that. So part of what you saw there was just really good execution. As Fareed said, also year-on-year when you net out the inventory increases from our acquisition, we held inventories. So that was really, really good execution. Fareed, do you want to comment on that point?

Fareed A. Khan

Yes. Just 2 other factors and as you mentioned one in your question, the LIFO benefit actually came from inventories' decrements. So that just shows our balancing buys what we're also selling through. I'd say about 40 basis points of benefit came from LIFO decrements in the quarter.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Yes, you did a great job on the inventory side, so congratulations. If I could just sneak one and I'll -- it was on the national accounts business. I know that, that was a challenge. In aggregate, you had some negative growth there. In the first 3 quarters of the year, as you were wrapping some changes that one of your customers was making on sourcing, that's now turned back to positive territory. I was wondering if you can just add a little color around how you've lapped that and out what you're seeing from the nationals? It seems like some of them, at least, are moving toward this endless aisle and curious how you're participating in that? How that's going?

Todd A. Shelton

Yes, Dan, this is Todd. We would -- I think you've picked up correctly that we did lapped those losses in the fourth quarter. And we like our position. We think our networks sets up very well with the broad breadth of SKUs, our service capabilities, to participate as many of our resellers start to move forward with a broader category selection in an endless aisle concept. We like the way our infrastructure sets up and we've focus resources throughout last year, and its accelerating this year is an opportunity for us.

Operator

Our next question comes from Brad Thomas from KeyBanc Capital.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Yes. This is actually Jason Campbell standing in for Brad this morning. We obviously had a pretty active flu season this year and I was wondering how much of that really -- how much of a benefit that was to you guys? And into go along with that, whenever you see these types of events, how much of that is generally pull forward from future quarters and how much of that demand is really additive to your business?

Todd A. Shelton

This is Todd again. And it is really difficult to tell how much is the pull forward but it -- from across the industry, the feedback we're hearing is that, that was only consumption-based. It's making its way out to the end consumer. It's not atypical, during flu season to see, being -- manufacturers and distribution scale up for that. This one was moderately productive for us. Fareed, I'd leave it to you -- I don't think we can really put an exact number on it. But it was a positive for us, and we've seen it a couple of other times before.

P. Cody Phipps

Nothing like the H1N1 event.

Todd A. Shelton

No, nothing like the H1N1. And so the size and scale didn't -- doesn't cause a lot of concern for us, but it worked through the inventories to the marketplace.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Okay. And then your SG&A is up quite a bit. I'm sure some of that is integration cost and with the acquisition. I was wondering if you can just give us some idea of how much of a headwind that was to your fourth quarter and then what types of cost you'll see maybe in first half of next year?

Fareed A. Khan

Sure. It's Fareed. Two things to point out. One is that we had a tough comp with 2011 where we had a very strong SG&A performance and now it's topped by a couple of onetime benefits there. But I'd say that the main moving parts were year-on-year differences and variable management comp. So we're doing a better job of getting close to our goals this year than last year of maybe 30 bps of the increase. There was some benefit costs inflation related to things like workers comp, insurance, pension, call it another 20 basis points. We had some inventory capitalization coming back into expenses again, coming through it are the intensive buys but that comes from bringing down inventory at the same time, that's probably another 20 basis points. And then some other factors, we had some facilities in moving expenses tied in with the O.K.I. integration and things like that. So I'd say that the expenses in the fourth quarter probably a little higher than let's say our run rate would be, our tough comps with last year and again some onetime items that came in that wouldn't repeat.

P. Cody Phipps

I guess now, I was just going to comment that we're committed to continuing to drive our cost structure and we believe, particularly office products, is that an inflection point where we need to reposition the company. So our costs are going to advent flow a little bit as we move to reposition the company but our long-term trend will be to drive down our operating expenses.

Operator

The next question comes from Oliver Wintermantel from ISI Group.

Oliver Wintermantel - ISI Group Inc., Research Division

Cody or Fareed, I can't remember who mentioned it. But in your prepared remarks, you said that there's a shift towards online away brick and mortars in office product. Can you comment --

P. Cody Phipps

Yes, Oliver, I mentioned that in my script. Can you repeat the question? I'm having trouble hearing you.

Oliver Wintermantel - ISI Group Inc., Research Division

Sorry. Yes. You mentioned that there was a shift towards online away from brick and mortar. Can you comment on that and give us some specifics where you've seen that?

P. Cody Phipps

I think it's what we're seeing -- and we've studied this, I'm not going to quote specific statistics. But we believe what's underfoot is all of these products that we deal in are becoming digitized and their moving online. So we also believe that consumer demand and consumer purchasing behavior is leaning to more of these products being purchased online and delivered directly. And so our belief is that is shifting purchases away from brick and mortar stores into a more of an online purchase. And we believe we're well-positioned to help our customers and suppliers participate in that.

Oliver Wintermantel - ISI Group Inc., Research Division

Okay. And my follow-up is on the pricing environment. Can you talk about a little bit about what you're seeing in especially in paper pricing or ink and toner? If it's rational right out there? Or if it's -- this is getting more aggressive?

Todd A. Shelton

Hi, this is Todd. Overall, it's been a fairly stable environment over the last couple of quarters. We haven't seen, as we've commented, much price inflation. And I think that's stabilize the market a bit.

Oliver Wintermantel - ISI Group Inc., Research Division

And lastly just the buybacks. I think you suspended them in the fourth quarter because of the O.K.I. acquisition. Is that something that you are going to ramp up again in 2013?

Fareed A. Khan

Oliver, it's Fareed. We're going to keep a very consistent capital deployment strategy. When we brought in O.K.I., that I'll see our cash transaction will scale back in repurchases. We had about $70 million in repurchases. I think that was pretty much in line with our target for the year, maybe a little bit on the lower end. We want to make a very consistent approach. We're committed to the dividend, committed to buybacks. But we'd also like to see accretive acquisitions like O.K.I. in our mix as well.

Operator

Our next question comes from Chris McGinnis from Sidoti & Company.

Christopher McGinnis - Sidoti & Company, LLC

I guess can you just give us an update in terms of on the industrial side? Where the rollouts at in terms of how many DCs and how close the plan you are to having in throughout the -- where -- I guess, it originally was, I think it was 25 hubs or 25 distribution centers. Can you just give an update on that, please.

Fareed A. Khan

Just saying, Chris, I'd say we have a very good nationwide coverage with our industrial platform and as we roll that business out, really leverages the existing infrastructure that we already had in the business. And what we're going to see is just continued integration, and the industrial platform and our existing platform becoming more and more in line. So things like transportation management, things like inventory management, sharing facilities, opportunities there. So I think the business is very well positioned to cover customers with a very high service level. And we will -- as we grow that business, it will start to grow on a sort of an established base. So what we'll expect to see from that is just better asset efficiencies and rolling coming from that. We currently have about 17 facilities. We added 9, with the O.K.I. acquisition. We'll take 7 out, so that'll be a net of 19.

Christopher McGinnis - Sidoti & Company, LLC

And this is maybe a little bit too granular but with the benefit in the gross margin in the quarter, did some of it come from now this kind of increase -- I know in 2020, I think you, said $20 million. As you start to shift to the higher margin industrial side of that? Is that kind of balancing itself as well?

Fareed A. Khan

That's definitely a factor. All of our growth platforms have kind of better margins than the average. The O.K.I. acquisition looks a lot like our industrial business, a very complementary types of products, very complementary types of customers. And so what you'll see is us continue to -- as we diversify the business, are really push for higher margin, higher growth categories and we feel industrial is definitely one of those.

Christopher McGinnis - Sidoti & Company, LLC

And then just a follow-up on the gross margin will be the last question. I think you mentioned 50 basis points was kind of the mix enrichment -- your mix enrichment program. Can you just talk about what really was behind that? And I think that came in around Q3, so we should be able to I guess kind of lap that or get the benefit for the next couple of quarters, is that right?

Fareed A. Khan

There are a lot of factors. It's usually you can see the results that the traditional office products, furniture categories being positive, that also helps with the mix as well. And we're really looking at kind of our value, what we bring to the marketplace as well and just offering customers the value that we bring. So it's a lot of initiatives that are underneath that effort.

P. Cody Phipps

And a big focus is really being proactive with our customers and our suppliers on driving the right mix, because none of the market forces are really promoting that. So we've got to drive that with them. That's a big focus for us.

Operator

Next question comes from Greg Halter from Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

First off, I wonder if you could elaborate on the competitive environment relative to your own business on the distribution side?

P. Cody Phipps

Yes, I think, as -- like as Todd mentioned, I think we feel the environment is rational right now. We're not seeing a crazy behavior. But as in all cases, it's a low demand environment. So everybody's chasing the same pot of share out there. Of that standpoint, it's kind of has it has been for a while. We don't see any big movement right now. I think people are rational. But there's just not enough market growth out there.

Gregory W. Halter - LJR Great Lakes Review

All right. And I think in the past you commented on your e-rate retailer growth has been in the double-digits -- maybe high double digits to guys like Amazon and costco.com and Walmart and Sam's and so forth. Just wondering if you could provide a discussion on how that went in 2012? And how you see that playing out in '13 and beyond?

P. Cody Phipps

Yes. And we don't comment on specific customers. But we believe, again as I mentioned, there is a shift online and we have a big focus, and part of our strategy is explicitly to win that shift to online. And so we continue to see strong growth from online retailers.

Gregory W. Halter - LJR Great Lakes Review

Okay. In the past, your big accounts had been OfficeMax, Depot, Staples, and so forth. I think it maybe an East Coast guy now. Just wondering if they are accounted in your national accounts business?

P. Cody Phipps

The big guys are. They continue to be some of our -- go ahead, Fareed.

Fareed A. Khan

Yes. In our national accounts, it's our office products retail customers in there. So we disclosed W.B. Mason as our top customer. They are not in our national accounts number, they actually sit in independent resellers. That reflects more of their type of business. They are privately held, B2B direct kind of reseller.

P. Cody Phipps

And those national accounts are still some of our largest customers.

Gregory W. Halter - LJR Great Lakes Review

Okay. And how big was W.B. Mason for 2012?

Fareed A. Khan

We really don't get into individual customers, but the key customers they continue to grow in the marketplace. We'll continue to support them. But really hasn't given any numbers.

Gregory W. Halter - LJR Great Lakes Review

Okay. And I didn't see or maybe I missed it, your capital spending plans for 2013?

Fareed A. Khan

Capital spending?

Gregory W. Halter - LJR Great Lakes Review

Yes.

Fareed A. Khan

For '13, we expect it to probably increase a little bit from 2012. I think the general guidance we gave this year was about $30 million to $35 million. Next year, we could be more in the $35 million to $37 million range. And it really doesn't reflect the change in strategy. It's really a timing of some of the tractor-trailer purchases that we've made toward the end of the year. I think we might have mentioned that in the last call. Basic focus areas, types of capital spending, pretty consistent with what you've seen us doing. That will have a little bit of an impact on depreciation. You'll see in the numbers we have a little bit of an increase in the fourth quarter from early in the year. That just reflects the increasing CapEx going into this year. And that fourth quarter run rate is likely to continue in the G&A side.

Gregory W. Halter - LJR Great Lakes Review

And the $35 million to $37 million is for 2013, correct?

Fareed A. Khan

Correct.

Gregory W. Halter - LJR Great Lakes Review

Okay. I want to make sure because we're overlapping years here. Question's about your public sector business. And I think you won a contract with the U.S. communities, LA County. I just wondered how that sector did generally in that specific contract?

P. Cody Phipps

All right, Todd?

Todd A. Shelton

Yes. This is Todd. We haven't and continued to not comment on this specific size, but we continue to service that contract with a number of independents who won that 2.5 years ago. So it continues to be a sales opportunity out there.

P. Cody Phipps

I would say, overall though, our public sector initiative we're very pleased with the progress there. We believe the government wants to buy from small business and we're in a very good position to help them and that's part of our strategy.

Gregory W. Halter - LJR Great Lakes Review

All right. And obviously, Hewlett-Packard, I think is the company that you disclosed as someone you buy a lot of products from. And I just wondered how that -- the situation worked out in 2012? And what you see there going forward?

Todd A. Shelton

We continue to have a very proactive engaged relationship with HP. And I think we'd count this as a positive year in our relationship with them.

P. Cody Phipps

I think, and I would comment that one of the roles we play as this is our supplier partners are under the same pressures we are. We're in a good position to help them. We can reduce their working capital, improve their supply chains and that's all for part of our strategy.

Gregory W. Halter - LJR Great Lakes Review

Hope, I guess, last question. Any thoughts to the rebranding of U.S. TR and in terms of name and so forth, given your change in focus to janitorial sanitation, as well as the industrial side of things?

P. Cody Phipps

No, I'm not going to say a whole lot about that right now. But I can tell you, we are repositioning the company. And we will be talking more about that in the future.

Operator

Our next question comes from Brent Rakers from Wunderlich Securities.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

I guess I wanted to focus a little bit more on O.K.I. And if you could maybe clarify a couple of things. The cash flow statements seems to indicated a $75 million purchase price. Could you maybe provide the connection with the earlier disclosed $90 million and the $75 million on that cash flow statement?

Fareed A. Khan

Sure thing. You're right. The major differences was cash outlay of $75 million. There was about a $5 million hold back, that's associated with the transaction and about $10 million in cash that came with the company. So that's reaching to $75 million in cash outlay.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Great. And then I guess the whole bout -- the whole back is an earnout. Is that -- I would assume is that correct?

Fareed A. Khan

It's just strictly time-related, liabilities or other...

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay. Great. And the -- you talked about the $0.07, I guess with the original guidance and the updated guidance for accretion for O.K.I. in 2013. With the cost savings initiatives, can you give us a sense -- I mean, are we -- unless my math right, coming it more like a $0.35, $0.40 kind of accretion number after the synergies are baked in for 2014?

Fareed A. Khan

Well, we definitely believe that the run rate synergies are going to be better than the guidance we gave. That was sort of a number net of integration and restructuring costs. Yes, I don't want to get into exactly what their number is. But we see this business really being tightly integrated with our industrial platform. On the back office areas, that's already been done. The network area is pretty much finished in the first quarter working to realign the sales organization. So the integration efforts are progressing well. We're very pleased with the business, really strong company, excellent associates and it's a great fit with our industrial business, so we see lots of opportunities going forward. But I would be hesitant to comment on anymore on where we see the upside. But I think those benefits will grow.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

And then, Fareed, maybe last question on the O.K.I.. In light of these pretty strong synergy opportunities as you go forward, as you look at future acquisitions within the industrial space, do you still have the available capacity to be able to capture these kind of synergies with future transactions or as well? Or is this kind of bringing your facilities up to 80%, 90% plus capacity where you're going to have -- you're not going to get these kinds of gains in future transactions?

Fareed A. Khan

No, I think -- it's a great point. I think there's lots of room to continue to bring products into our network. We're going to continue to optimize them. And I think part of what you may see too is the shift. There will be part of our business going faster than others. And what's common across all of our platforms is the nature of the business, your user consumables, a rapid sort of response time, smaller order quantities. We're really geared up well to do that. And what you see us do as these businesses getting more and more integrated is we're leveraging a larger automated facility, where we put a lot of capital in already. So I don't think we'll run into those issues for a while.

P. Cody Phipps

And Brent -- and really an explicit part of our strategy is as we see demand for our office products declining, we really like the strategy of integrating these facilities into our existing facilities. So we believe we can offset any of that deleveraging and we're not worried about capacity constraints right now.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay, great. That's just great answers. And then, I guess just one final question on the revenue guidance for the year, the 3% to 4%. I guess that works out to maybe 0% to 1% organically and then later on maybe the O.K.I. deal on top of that. Can you maybe try to kind of a brief contrast between these 2013 organic expectations and how 2012 played out in terms of what you're macro thinking is? What your prices? And then some of the headwinds, particularly that existed in 2012 with some of the customer losses, versus what you might expect on that way for 2013?

Fareed A. Khan

Brent, I'll be pretty high-level. I guess from the macro side, we're not seeing a lot of inflation benefits going into this year, that could change. But from where we sit now, I think the demand environment, you will probably be looking at a fairly low growth kind of environment this year as well. As we talked about, we saw industrial demand softened a little bit through the year. We probably see that going sideways, going forward. We think each of our businesses can outperform their underlying market because in each area, we see opportunities to work with customers to either help them grow their businesses, to be positioned with customers that are kind of in growing segments. And so underneath that number, I think is our performance in each of the areas that we participate in. There are probably greater opportunities in the platforms that are emerging to outperform. What you'll also see in there is, us continuing to look at the portfolio and how to get the mix right. How to bring in products that are going to help us grow and maybe prune some things that aren't contributing as much as we'd like. So you have that that's into your numbers. It might be a little bit higher than you just mentioned on the organic growth but quite the right zip code.

Operator

Our next question is a follow-up from Dan Binder from Jefferies & Company.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

You guys probably more than most in the industry recognize the secular headwinds in office. And I'm -- and you've taken action to diversify the business and obviously with O.K.I. acquisition being the latest move. I'm curious, from a capital structure standpoint, if you wouldn't consider doing something more aggressive in order to diversify even more quickly presumably through larger acquisition than even this one?

P. Cody Phipps

Dan, I'd say we were considering all options. We certainly like the tuck-in acquisitions and you see the value they can create. So we think there's some more headroom there. But we do think, as I mentioned earlier, the 2 core parts of our strategy are the strength and core office products by playing to those areas where we have unique strengths and where we think we can grow the markets. But then diversification is the second plank of that strategy. And so in that vein, all options are available to us. We liked the tuck-ins but we would consider other things as we play out the strategy. It's a very explicit part of our strategy.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And are there a lot of -- without getting into specific names, do you find that there's a lot of opportunities out there for tuck-ins?

P. Cody Phipps

We think there's a -- certainly over our timeframe, we think there's plenty of opportunities for tuck-ins. Obviously, you tend to look at them over time and when the time is right, you act, and that's what we do with O.K.I.. So we think there's room there. But also with the shifts in the market, there's new market opportunities emerging all the time.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And then a different topic. You talked about driving heads and mix benefits by driving some higher margins sale. But if we flip back on several quarters, really since the recession, the mix was consistently a pressure even outside the category shifts. But even within the categories, as folks were buying more basic items and staying away from some of the higher margin stuff. So I guess I'm curious what has changed? Is it simply that you are promoting them more aggressively to move them? Or are you finding that there's an underlying desire to buy higher margin product within the categories?

P. Cody Phipps

We believe there's still a consumer shift to value items and that plays out across most of our businesses. I think the quickest way I can answer that is we just realize we're going to have to drive mix. We can't sit to be a victim of mix. So our initiatives are driving -- working with suppliers and customers to promote a higher margin mix within our existing lines. And then as Fareed mentioned, we also think there's portfolio lever was available to us where we can shift our portfolio. And again, we're pulling all those levers. So it's a very explicit execution initiative for us versus we don't think the markets are going to drive that at this point.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And Fareed you mentioned -- you highlighted your mid-teen EPS growth over time and that you're trying to execute towards that goal like in the coming years, which is I'm sure intentionally vague. But I was curious is that before or after the $0.07 of accretion that you're expecting from O.K.I.?

Fareed A. Khan

That would include it.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Okay. And then somebody asked about the alternate channel business and you said that it was still seeing strong growth. I was just curious, how did you end the year in terms of as a percentage of sales, where does that stand now?

Fareed A. Khan

Dan, we basically just keep breaking out the business in the same way. I mean, if you look at industrial, you look at Jan/San, those 2 growth platforms you're seeing continued growth. We didn't get the inflation benefits in Jan/San. So if you look year-on-year, you see some of that last year which we didn't have. In the fourth quarter it was a tough comp in last year's Jan/San number as well. The online shift, really difficult to sort of put a box around it because we see all of our customers moving online and they're moving online in different ways, and I think we're helping them all. I mean, it's sort of a broad trend. And we're seeing pure-play retailers do well. We're seeing our IDC customers or independent customers shifting their business online. And we're seeing our nationals and being part of their online initiatives as well. So it doesn't fall neatly into the categories.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

So I guess, I was always under the impression you have some of this sub-group of customers that you look at, that were -- more of the -- sort of the B- to C-type folks that you're serving. I'm really not talking about specific customers but in aggregate, the sort of the bricks and mortar retailers that were going online, some of the pure play -- I think I've heard you talk to that subsegment before and it used to be like 6% and it was growing double digits. And I just was curious are you not slicing and dicing it that way anymore?

Fareed A. Khan

Certainly not with any detail. But I would say that we serve a lot of different customers. The ones that are kind of positioning with the shift online are growing much faster than the overall market. And many segments we're seeing double-digit growth rates from that portion of the business. Other portion of their business maybe down offsetting that. And for pure play customers, they're benefiting entirely from the upside. So we really not going to give a lot of detail beyond kind of what you see in our disclosures. But we're still pleased with the progress in those areas, and that's up if you're one in the places we're investing. And that includes a top-down until we bring into the organization, as well as some of the underlying capabilities like content and better online pricing, those types of things.

Operator

Our next question comes from Simon Porter from First Manhattan.

Simon Porter

Just a couple of small ones. Private label, how did that end up of the year -- on the year, and what sort of benefit add if you got on to gross margin line?

Fareed A. Khan

I'd say, private label didn't show a big swing one way or the other, versus prior year it's been at about 17% of sales. Again, it varies by business how we use private labels. It's really how our customers want to use them. So we have higher percentages and for example, our Jan/San business. So we think overall, it could be an opportunity. We'll work with our customers to drive it. So I'd say there's nothing really different about our strategy towards our private labels or the mix in the business.

Simon Porter

And maybe digging down and more broader question. Basically, on the health of your reseller customers is obviously a key. And if you see office product category more or less flat to negative, I guess they're benefiting from some cross-selling of industrial and getting a lot industrial and Jan/San and winning some government. And I guess with Amazon supply out there trying to gain some traction, what sort of feedback are you getting from your customers as to how they see the current environment and how they look up out the next couple of years?

Todd A. Shelton

This is Todd. I think our particular best customers like their situation. You hit it exactly that they're diversifying their portfolio. They're leveraging their relationships in local markets. They're leveraging their local presence. The continue, as Fareed said, to get online and service products, and really leverage the fact that they're known in their communities, that they -- people know who they are. They like their brand. And while some of the bigger players that you mentioned are coming into the space, they still feel and the results we see from them would document that they continue to be relevant in the space.

P. Cody Phipps

Simon, I just want add too. One of the things we're impressed with these independents is they're just -- they're scrappy and they move quick. And what they see is the opportunity to cross-sell more products, to go online, to get into more categories. And that's kind of a general trend everywhere. But our best independents are certainly capitalizing on that opportunity. And that's a growth opportunity for us.

Simon Porter

Are you seeing much consolidation within the reseller base?

P. Cody Phipps

We're seeing some consolidation both from the supplier base and the reseller base. I can't say right now that it's accelerating. It'd about what we've seen. And we expect some of it.

Simon Porter

Okay. And, Cody, maybe you can give a little bit more color on the new hire announcement that you made. I think you added 3 new heads and what their role is? And who are they reporting up to?

P. Cody Phipps

Yes, I'll be glad to comment on that. And first, let me comment you saw the departure of Steve Schultz, a 14-year veteran of the company. Steve moved on to another industry player and a great move for him. And as a result of that, the 2 -- 2 of the businesses that report to him, the industrial and Jan/San had presidents running those businesses, so those folks now report directly to me. And I don't think we'll miss a bit on execution there. One new hire was -- which is very consistent with our strategy of winning online is we brought in Rick Phillips, who as President of Online and New Routes to Market, he's going to lead that business. He's a direct report to me. We bought -- brought in a new Vice President of Digital Commerce to drive those initiatives and those are capabilities we see explicitly linked to our strategy. And we brought in a new Vice President of Marketing in the Supply Division also geared toward online and digital marketing. All key links to our strategy, all great new hires. I have great expectations for those folks.

Simon Porter

And Cody or Fareed, in the first quarter with the exit of Steve and any sign on sort of bonuses, is there going to be much impact on SG&A in the first quarter?

Fareed A. Khan

I think there'll be those factors. I think we'll probably going to show a little bit of improvement from where we ended the fourth, just for the onetime item that I mentioned. But like last year and the early part of the year, where we've got investments that we're making the business, we're bringing in talent. And so we may see tougher comps in the early part of the year -- this year so.

Simon Porter

Okay. And then maybe for Cody again. Just broadly speaking, if even after the O.K.I. acquisition, you're pretty comfortable with your leverage currently and your executing great -- generating a lot of cash flows. So I know you're looking at the acquisition opportunities and if it's a key part, I guess share repurchases has been a big part of the story over several years as well. And maybe you can comment on the board's willingness to perhaps get more aggressive in share repo as well?

P. Cody Phipps

I think as you've seen in the past, we're going to continue to keep a balanced focus of returning value to our shareholders. And the 3 vehicles for that are the repurchase, now the dividend and, of course, when we get accretive acquisitions, we're going to move on that. So I do think there's anything new to report there. I think that balanced approach is right, right now. And we have a constant dialogue with the board on share repurchase and I don't -- we'll keep that in line with the past actions.

Operator

And we have no further questions at this time.

P. Cody Phipps

Thank you, Trish. 2012 showed us that United can make progress against its strategic objectives even in this challenging market environment. I'm optimistic about 2013. Here's what my team and I see it and how we plan to drive our strategy forward to build on our current moment.

First, just like 2012, we're not expecting any meaningful help from the market this year. But we expect to be able to outperform the underlying market growth in our key categories and channels. Although we expect industrial market growth to be slower this year, we remain excited about the growth potential in our business.

In the janitorial and breakroom category, we continue to see opportunities to cross-sell in the nontraditional channels and to support the online growth of our customers. In office products, secular demand headwinds and the shift to online will create both challenges and opportunities. We are well-positioned relative to most players. The growth will be challenging to achieve. We remain focused on improving margins driven by the success of our growth initiatives, our ongoing cost reduction programs and further optimization of our distribution platform, including the integration of O.K.I.

Lastly, we remain committed in generating solid free cash flow, which will allow us to reinvest in growth while still returning capital to investors through dividends and share repurchases. We look forward to giving you another update in April when we will discuss our first quarter performance. In the meantime, we thank you for joining us today, and thank you for your support of United Stationers.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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