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United Stationers, Inc. (NASDAQ:USTR)

Q4 2008 Earnings Call

February 13, 2009 11:00 AM ET

Executives

Richard W. Gochnauer - President and Chief Executive Officer

Victoria J. Reich - Senior Vice President and Chief Financial Officer

Patrick T. Collins - Sr. Vice President, Marketing and Sales

Analysts

Daniel T. Binder - Jefferies & Company, Inc.

Jonathan Lichter - Sidoti & Company

Greg Halter - LJR Great Lakes Review

Operator

Good morning, ladies and gentlemen and welcome to the Fourth Quarter and Year-End 2008 Earnings Conference Call for United Stationers. My name is Chardonay and I'll be your conference coordinator for today.

Before we begin, the management team of United Stationers would like to remind you that the information shared on this call may include forward-looking statements which are based on certain assumptions. What you hear today may be affected by the risk and uncertainties in United Stationers' business, markets and the economy.

Despite the company's best efforts, actual results may be different from what is said on this call. To learn why this may happen, please review the cautionary language in yesterday's news release and in United Stationers' filings with the SEC.

Also remember that the information on this call should be considered current only as of today. After this please use it for your reference and know that the company has no duty to update it. Shortly after the call ends, you may find an archived version of it on the Investor Information section of this company's website at www.unitedstationers.com. You'll also find a copy of the fourth quarter and year-end news release there.

As a reminder, today's call is being recorded for replay purposes.

I'd now like to turn the conference over to your host, Mr. Dick Gochnauer, President and Chief Executive Officer. Please proceed sir.

Richard W. Gochnauer

Thank you Chardonay. Good morning everyone and welcome to our discussion of United Stationers' fourth quarter and year-end results.

I'm joined by Vicky Reich, our Chief Financial Officer; Cody Phipps, who is President of United Stationers Supply; and Pat Collins, our Senior Vice President of Sales and Marketing for United Stationers Supply. Also here with us today is Steve Schultz, Group President of Lagasse and ORS Nasco. We plan to have Steve on these calls going forward. So that he can answer your questions on our jan-san [janitorial-sanitizer] and industrial categories.

Here is our agenda for this morning. I'll begin with a brief comment, which Vicky will follow-up with a recap on our key fourth quarter and full year financials. Then I'll talk about our on-going efforts to manage the business during this increasingly difficult economy. Following these comments, we will be happy to answer any questions you may have.

I don't have to tell you that these are challenging times. In spite of this very tough economy, United Stationers had a good year in 2008. Our sales reached nearly $5 billion and earnings per share were $4.13 versus $3.83 in 2007. Our associates worked extremely hard to achieve these results and I want to take this opportunity to thank them.

We believe one reason United could deliver this kind of performance is because of the strategies that we've implemented over time. These include diversifying our product lines and pursuing new business and growth opportunities. In addition, we have been proactive in taking aggressive cost reduction actions to align our expenses with lower sale trends.

These actions have allowed us to preserve our financial strength while putting us in a position to emerge from these difficult times in a stronger competitive position.

Now I'd like to turn the call over the Vicky, so she can provide financial details on the quarter and the year.

Victoria J. Reich

Thank you, Dick. And I'd like to add my welcome to everyone on the call.

I'll begin with a quick recap of 2008 results and then focus in more detail on the fourth quarter and current business trends. The full year results I will review, exclude two previously disclosed items in 2008. A pretax gain of $9.8 million on the sale of three buildings and an asset impairment charge of $6.7 million, as well as a $1.4 million restructuring charge in 2007. Please see the news release and ultimately the 10-K for the GAAP numbers.

As Dick mentioned, sales for the year reached nearly 5 billion, up 6.9% from 2007 on a work-day adjusted basis. The acquisitions of ORS Nasco and Emco contributed about $325 million of this. So excluding the impact of acquisitions, sales were essentially flat. We estimate the affects of price inflation on total year sales was about 3%.

Private brand grew across all product categories and reached 13% penetration. This is was up about 60 basis points from 2007 as customers used these products to stretch their dollar further. Jan-san products posted strong growth all year and were up 13%. This helped offset the impacts of the deteriorating economy on technology products, down 3% and furniture sales down 11%.

Core office product sales were flat for the year led by strong sales of cut-sheet paper Sales to national accounts comprised 16% of our total and were down by about 6% for the year. New national account business in the jan-san category helped offset a double-digit decline in other categories.

Independent resellers, which include our United Stationer Supply, LaGasse and ORS Nasco resellers as well as new channel customers contributed 84% of revenues and increased by 10% in 2008. Excluding ORS Nasco sales to this group were up 2% for the year.

Gross margin was 14.9% versus 15.2% in the prior year. ORS Nasco boosted gross margin by about 20 basis points. Positive inflation recovery in the second half of the year helped margins, but didn't fully offset the pressures we saw from our lower margin product mix and reduced supplier allowances.

Lower sales mix and the actions we took to reduce inventory contributed to the reduced supplier allowances. Operating expenses totaled about $551 million for the year or approximately 11% of sales versus 10.8% in 2007. Excluding the impact of ORS Nasco and an $11 million increase in bad debt expense, operating expenses as a percent of sales were flat to last year.

Cost containment actions, large savings and lower bonuses helped offset inflationary increases and expenses related to strategic initiatives. Operating margin for the year was 3.8%, down from 4.4% in 2007. Earnings per share of $4.05 were up 5% versus $3.86 in 2007, benefiting from the ORS Nasco acquisition, share repurchases and the lower tax rates.

Now let's focus on the fourth quarter. We experienced significant erosion in our sales trends during the quarter with reseller customers feeling the impact of business consumers slashing spending, taking extended shutdowns and shutting jobs.

Sales increased 2.3% in the quarter, but declined about 3.5% excluding ORS Nasco. Sales throughout fourth quarter weakened considerably from the third quarter growth rate of 10.5% with November and December showing the most significant declines. We estimate that price inflation added about 4% to our overall sales growth rate in the quarter, as we saw a significant number of price increases announced by manufacturers on the heels of similar activity in the third quarter.

National account sales were down 9% in the fourth quarter and comprised 16% of the quarter's sales. Sales to our independent resellers, including new channels represented 84% of the total and were up 5%, but down 2% excluding ORS Nasco.

Let's review sales results by category. Technology sales were down 8% and comprised 33% of our total sales. Some of the sales reduction in the quarter was timing related. In this competitive category we remained focused on profitable opportunities.

Office products were down 3% and represented 27% of the total. Consumers continue to buy the basics, such as cit sheet paper while putting off the more discretionary purchases. Jan-san sales, which were 22% of total revenues held up well and grew 9%. This reflects success with our OfficeJan program, ongoing efforts to convert direct sales to wholesale and national account business which began in December 2007.

Furniture's sales were down 20% in the quarter and represented 9% of total sales. This category has seen harshest impact from the recession. A bright spot for the quarter was double-digit growth in our private brand furniture as people focused on good quality value priced products.

And lastly industrial supplies comprised 6% of our total sales and contributed nearly 6% to our overall fourth quarter growth rate. ORS Nasco has a very good first year as a part of United. Their sales grew 9% for the year, but slowed to about 2.5% in the fourth quarter, reflecting the deteriorating economy.

Moving now to gross margin. Gross margin for the quarter at 15.4 was down from prior years 16.1%. Reductions was driven by a lower margin product mix as well as lower supplier allowances due to the impact of lower sales volume mix and inventory reductions. We also experienced some de-leveraging of occupancy expense due to the steep deceleration of volume in the fourth quarter.

These factors were partially offset by the addition of our ORS Nasco, lower freight costs driven by fuel... with fuel cost reductions and well program and the benefits of inventory cost adjustments related to the manufacturer price increases and selective investment buys in advance of price increases.

Operating expenses totaled $133.5 million or 11.7% of sales, versus 11.5% in 2007. Excluding ORS Nasco, expenses were down about 3% versus the fourth quarter of 2007 as we reacted quickly to cut spending in light of the deteriorating environment. Cost containment and lower bonuses helped offset an increase of about $6 million in bad debt expense.

Financing costs for the quarter reflected an average borrowing rate of about 5%, and average debt outstanding higher than the previous quarter due to the sales slowdown and inventory investment buys.

A tax rate of 33.4% for the quarter resulted from the usual year-end through-up of tax positions, which brought the full year rate to 37.3%. For planning purposes, we are using a 2009 tax rate assumption of 38%.

Let's move to the balance sheet. As planned, we reduced inventories in the quarter and those actions became even more pronounced late in the quarter as sales weakened. Unlike the typical investment buys we make at the end of the fourth quarter to reach supplier allowance tiers, the buys we did this year were earlier in the quarter and were driven by price increases rather then allowance programs. This combination of factors resulted in a steep cut to December purchases. And in a minute, I'll talk about the payables impact of that.

We were able to reduce year-end inventories by about 5% from 2007 levels, and position ourselves well for an expected tough 2009. Inventory turnover without ORS Nasco for the quarter was 5.8 times, a slight decline from 6.0 times in the fourth quarter of 2007. Despite the inventory management challenges in the quarter, we maintained outstanding service levels for our customers.

Payables for the quarter reflected the inventory purchase timing and balances I just described, and ended the year dramatically lower than the prior year at only 50% of inventory. Our goal is for payables to return to about 60 to 65% of inventory balances in 2009 when we smooth out inventory purchases. We've already seen positive movement on payables and cash flow in early 2009.

Receivables, excluding the effects of securitization, were down 4.7% for the year, while bad debt write-offs remained low, we established higher bad debt reserves due to slower payments and some specific account reserves. We believe our receivables portfolio is healthy, but we are closely managing this risk in view of the challenging climate for our resellers.

Day sales outstanding without ORS Nasco for the final quarter was 44 days compared with 42 days in the prior year.

Our cash flow for the quarter and year was depressed by the imbalance of inventory and payables, which mapped a lot good work to improve our working capital efficiency.

Net cash provided by operating activities adjusted for the effects of securitization was $96 million for the year. Capital expenditures were $31.7 million and we had $18 million in proceeds from dispositions.

Depreciation and amortization totaled $44 million. Share repurchases for the year were $67, all completed in the first quarter of 2008. We remained confident in and are placing a top priority on strong cash flow generation as we head into 2009.

Year-end debt met our targeted leverage at 2.5 times EBITDA. Liquidity remained strong. Our $625 million bank facility is committed through July, 2012 at attractive pricing. And our $135 million in private placement notes do not mature until October, 2014.

Our $250 million receivables facility expires in late March, and we are negotiating the terms of a proposed replacement facility. Because of lower anticipated borrowing needs, coupled with the relative attractiveness of our bank facility, we plan to reduce the size of the new facility to between 150 and $200 million.

At year-end with LIBOR being so low, we shifted the majority of our borrowings under the existing receivable securitization facility to our bank revolver.

As always, I welcome any question you've got on this information during our Q&A. In the meantime, I'll turn it back... the call to Dick to discuss our 2009 outlook.

Richard W. Gochnauer

Now that Vicky has set the stage, let's talk about our outlook.

We do not see the economy improving near-term, and we understand that conditions may get worse before they get better. Our objective for 2009 is to ensure that United maintains a solid financial position, good operating results and strong cash flow.

Our cost structure objectives and working capital plans for the year have been built assuming a sales reduction from 2008 in the high single digits. Sales for the first six weeks of 2009 are down about 8%, reflecting the deterioration in business conditions.

To help counter the difficult market conditions, we have a number of growth initiatives targeted for 2009 that are in various stages of implementation. Here are five examples: first, focus on new channels of distributions such as internet-based retailers, where we continue to add customers from the top 20 e-tailer's list, as well as other new routes to market.

Second, cross selling categories across our distribution companies. We have launches underway from selling and expand jan-san line to ORS Nasco industrial customers and making the entire industrial products offering available office products dealers, using our already existing special order process.

Third, expanding our cost to serve initiatives to additional suppliers in the jan-san business as well as using the same concept with our other industrial manufacturers. Fourth, redeploying resources to support sales to government and public sector resellers with product offerings from all our categories. And fifth, expanding our green product portfolio while continuing to provide resellers with the training and tools needed to increase sales of these environmentally-friendly products.

In this difficult environment, we have set clear financial objectives. One objective is to reduce costs as quickly as possible to align them with lower sales. This will be challenging, given the economic conditions but an important, given the uncertainty of our sales levels and the impact that declining revenues have on our financial results.

In addition to the work force reduction we announced on January 27, our management team has taken aggressive steps to manage costs. As mentioned in our news release, we expect to take the first quarter charge of 2.5 or $3.5 million and eliminate approximately 250 positions. We expect to save about $13 million in 2009 due to the workforce reduction.

Also, we expect to eliminate the equivalent of approximately 200 positions in 2009 through several other actions, including eliminate positions that opened up in the fourth quarter and those still by outside contractors, allotting replacing associates to leave to normal attrition in our hourly workforce, reducing use of temps and overtime and reducing staff needs to improve productivity.

Other actions we have taken include the following steps to lower and avoid cost increases. Increase the use of voluntary time-off without pay. Eliminate merit increases for senior managers and all officers and reduce merit increases for all other associates, eliminate incentive pay for senior managers and all officers and lower incentive pay for others.

These pension service benefits effective March 1st, reduced travel, including a freeze on non-sales associates through and potentially beyond the first quarter of 2009, reduce spending on professional services and eliminate expenses related to internal meetings wherever it makes sense.

As a result of these actions, we expect to save an additional $10 million in 2009, and avoid a portion of the normal cost increases associated with the typical merit increases and other related costs.

We're targeting further savings from our ongoing war on waste efforts. Here are some of the key projects already underway or nearing completion: lower print and mailing costs by using electronic self-service functionality, use order-filling quality initiatives to reduce costly arrears and improve customer order experience; reduced transportation cost, through cost reduction initiatives, we currently have more than 15 active projects to reduce these expenses; continued to roll out of our wise effort to process, design and engineer standards, initiatives designs to enhance associated productivity and reduce arrears. And implement process changed to reduce supplier cost which will contribute to our green efforts at the same time.

As in any other year, we're also faced rising cost on goods and services, such as Healthcare, warehouse supplies and third party services. In addition, given the economic climate we anticipate higher bad debt expense, similar to that which we saw in the second half of 2008. Our target again is to adjust our cost inline with lower sales. We are off to a good start in accomplishing this objective but given the economic climate it will be a challenge.

We're also expecting contraction of our gross margin rate in 2009. Product mix will unfavorably assets our rates on, most notably a more rapid decline in furniture than our overall sales decrease. As consumers look to cut there costs purchases may continue to shift away from higher margin discretionary items to lower margin value added oriented consumables. Price inflation will remain strong in the first quarter but is expected to decline in subsequent quarters as prices are rolled back on some products.

The sales decline will affect other margin components, including delivery, warehouse and advertising costs. We've targeted savings for these areas in our war-on-waste efforts but expect some de-leveraging. In addition to reducing costs, a second key financial objective in 2009 will be to generate free cash flow in excess of $125 million.

As a reminder in any downturn, as sales contract, working capital becomes a source of cash for us. Looking at our working capital, we have experienced pressure on our receivables, day sales outstanding in the short-term and expect this continue throughout 2009, as many of our dealers will likely be affected by the lack of available credit. To help offset this, we increased our focus on managing inventory and payables as well as collecting supplier allowances.

Fortunately the improvements, we have made in managing inventory and supply allowance collection back in the back-half of 2008 gave us a good head start. And as Vicky said we expect payables to return to about 60 to 65% of inventory, which would help us to achieve a strong cash flow in 2009.

Capital spending is targeted at 15 to $20 million for 2009 while depreciation and amortization should be approximately $40 million. Capital spending will be focused on the continuation of strategic projects such as e-business and other customer facing initiatives. Our plan is to weather this downturn in a strong financial position.

Free cash flow while will be used to reduce debt with a goal to maintain debt at about 2.5 times EBITDA. We are confident that the combination of the fiscal control, I just outlined, the continued focus on strategic initiatives and opportunities will position us to emerge from this economic downturn in an even stronger competitive position. I am sure you have some questions now. So Vicky, Cody Steve and Pat and I will be happy to answer them.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from line of Dan Binder with Jefferies & Company. Please go ahead.

Daniel Binder - Jefferies & Company, Inc.

Hi, it's Dan Binder.

Richard Gochnauer

Good morning Dan.

Daniel Binder - Jefferies & Company, Inc.

Good morning. I had several questions I'll ask a few and then I'll come back later in the call if there's time. I will just start with the top line assumption of negative high singe digit. Our model's roughly inline with that right now. But just curious with what we were not factoring in perhaps was the level of inflation that you saw in Q4 and I guess I am just kind of curious, what kind of inflation or potentially deflation, I am not sure, would you expect in '09. And given the way things are trending at negative double-digit right now, with unemployment moving higher. I guess I am just kind of curious what your assumptions are though the year on this negative double-digit top line growth number.

Richard Gochnauer

Well, we're in the same boat as everyone, trying to figure out where this market is taking everybody. And that's why we kind of told you what our planning assumptions are, which is the basis by which we're trying to manage our business at the moment and will of course adjust that as we know more information.

With regard to the issue of inflation, as we indicated we will have a positive impact of inflation in the fourth quarter. We have also heard about some increases that will take place in the second quarter, but there is also some products that have actually come down in price. Those are generally petroleum based products, although there is some indication, that was announced during the turnaround with some potential price increases.

Now it's a little bit of a mix bag, but our planning assumptions assume that the big impact will be the first quarter and little impact plus or the minus for the balance of the year, on the inflation question.

With regard with the total revenue other than the comments I made, it's difficult to predict the... you and others have correctly shown the impact on employment and how that affects overall office supplies and even jan-san supplies business. We are seeing obviously the impact on the industrial business take place as people have cut back on inventories and adjusted their purchases and factories have shut down. So that affected the supplies business there.

We are -- we will be adjusting things throughout the year. Our primary focus is to continue to find new avenues of growth as we mentioned and that will offset some of the... what may be happening in the market place. And then obviously to manage our cost aggressively in this environment.

Daniel Binder - Jefferies & Company, Inc.

Just for a little more clarification on the organic growth. In Q4 you had the benefit of not just Nasco, but I think EMCO as well. If we would exclude those was the sales down 5.5 or so. Is that rate?

Victoria Reich

No, was up five.

Daniel Binder - Jefferies & Company, Inc.

Up, okay. So then minus eight. Now we've lapped Nasco, we just have EMCO in there. So the minus eight plus four in Q1 is little more like a minus 10 or so?

Richard Gochnauer

No EMCO is not that big. Is a fraction of a...

Victoria Reich

It's was a little over a point on a quarters growth rate.

Daniel Binder - Jefferies & Company, Inc.

Okay, so it was like minus nine there. In other words from the organic side.

Victoria Reich

All right.

Daniel Binder - Jefferies & Company, Inc.

Okay. And then the growth rate that you were talking about in your top line, that's the total sales, the negative single digit plan?

Victoria Reich

That's it, yes.

Daniel Binder - Jefferies & Company, Inc.

Okay. And then the second line of questioning was around gross margin. I understand the dynamics there in terms of the mix and the supplier allowances. I guess this is the probably the area of my model for next year that I've struggled with the most and I just trying to really understand what kind of a hit do we get with the vendor allowances based on what you know today, if you're in fact planning down negative high single digit and I realized that it's... we don't know the mix, but the range of outcomes is probably wide, but directionally can you help us in terms of what kind of gross margin hit that would... that level of sales it mean for your lower vendor allowances?

Victoria Reich

No, as you said, Dan there is a lot of factors there with mix probably been the biggest one. And I would say going into next year, mix is likely to work against us from an allowance point of view with higher margin category being higher allowance categories typically. And those are expected to be down a little bit more than the overall mix.

I think if you look at allowances as we've said before roughly 15 to 16% of them are not volume related and the other 85% are tied into volume. So that's where mix comes into the equation and where growth tiers coming into the equations. And of those variable allowances about a third of them have growth tiers built into them.

Looking at 2009 versus 2008, 2008 wasn't a very robust year in terms of achieving growth tiers. So I would say year-over-year that not expected to be a big drag. The other factor to consider is that going into 2009 as with every year these programs get renegotiated and they're re-looked in light of the current environment that we and our manufacturing partners are facing.

Daniel Binder - Jefferies & Company, Inc.

So if I'm hearing you correctly. The fact that we're starting the year knowing things are tough and you go in and you renegotiate with the vendors, given that environment. Could we end-up with only a modest impact from the supplier allowance side in terms of that hit the gross margin exact?

Richard Gochnauer

While with regard to growth tiers?

Daniel Binder - Jefferies & Company, Inc.

With the growth tiers?

Richard Gochnauer

Well, that's... you will obviously, if you're talking about rate, the rate will kind of follow the volume, fastened any mix change. Really what Vicky is saying is the mix is our biggest issue. And obviously the overall volume at least in terms of dollars and not in terms of rate. But the tier issue, the volume tier issue is becoming and has been or year after year becoming a lesser and lesser component of the equation.

And everyone is obviously and that's why only few of them have the volume tiers in them. And many of those are either going away or being adjusted to reflect new realities because like any incentive program it doesn't send anybody if you start off the year with it being totally unrealistic. So manufacturers want incentive their customers to perform and so they got a set target to do that.

Daniel Binder - Jefferies & Company, Inc.

And so we should be extrapolating down 70 or so basis points in Q4 for the rest of... for next four quarters? I mean I don't think that's realistic, that's not how we are thinking about it I just want to make sure I said that.

Victoria Reich

That's not how we're thinking about it.

Daniel Binder - Jefferies & Company, Inc.

Okay, good.

Richard Gochnauer

And the point you are making is in the fourth quarter of '07 as we all know was a strong quarter when we proved up the volume period et cetera. So versus 2008 it wasn't a factor.

Daniel Binder - Jefferies & Company, Inc.

How much of the gross margin decline in Q4 was mix versus supplier allowance?

Victoria Reich

If you look at the, the Q4 gross margin there were two big sectors that were more or less offsetting. Inflation was a positive of a little bit over a point, the allowances were negative of little bit over a point, and then what ends up really netting out in the gross margin reduction year-over-year is the affect of mix. But half a point to there about on mix.

Daniel Binder - Jefferies & Company, Inc.

Okay, great. I'll let somebody else ask a question and come back later in the calls this time. Thanks.

Richard Gochnauer

Thanks Dan.

Operator

Thank you. Our next question comes from the line of Jonathan Lichter with Sidoti & Company. Please go ahead.

Richard Gochnauer

Good morning, Jonathan.

Jonathan Lichter - Sidoti & Company

Trying to thus far through the first quarter here did where they equally weak through out or --

Richard Gochnauer

Could you repeat that. We missed the first part of your question?

Jonathan Lichter - Sidoti & Company

How are sales trended through the first quarter?

Richard Gochnauer

Well, we reported the overall 8 and January was a tougher comp for us than February. So February is looking all stronger relative to last year, but again it's a comp issue. So it's... and I can add the fact that the office products if area that furniture continues to leave the downward movement, jan-san continues to be the strongest performer. And probably the big difference between kind of what you saw in the fourth quarter and now is the industrial side is particularly given the factory shutdowns et cetera was a weaker performer than we saw last year.

Jonathan Lichter - Sidoti & Company

Okay. Does it get any easier because of, if I remember the second half of the first quarter last year was quite weak as well.

Victoria Reich

Yeas. The comps get a little easier Jonathan.

Jonathan Lichter - Sidoti & Company

Okay. Do you have any margin goals for the year that you can talk about, either gross margin or operating margin?

Victoria Reich

Well, we said that we're expecting or anticipating with our sales assumption that gross margin could see some contraction. And really that mix related principally and the effect of the lower sales volume on some of our cost that are more fixed in nature. There are offsets that we're working on against that with fuel cost should help and all the cost actions and wild programs. As well as what Dick mentioned early in the year, we will expect to have some positive benefit of product inflation but that probably dissipates as the year goes on.

And then if you look at operating expenses they are really total costs. The object is to try to keep them as closely inline with the sales as we can. Now, when sales are declining that's always playing a bit of catch up. But we feel very good that the actions we just discussed are getting us off to a great start towards that objective and we're just going to have to make adjustments as we go throughout the year with that being the overriding objective is to keep them inline.

Richard Gochnauer

Things that and our cost initiatives is that lot of them show up in the gross margin costs and what you can see from the operating costs and we have a lot them, lot of the private objectives. For example one race objectives we have show up there. So, and so we have some I think some very good just like we've had in the past, that's some really good initiative this year again and we're off to got start in that area and another some of them will show up in the margin side and some will show up in the operating expenses.

Jonathan Lichter - Sidoti & Company

Okay. And are there any other any other areas that you could reduce cost, I mean are there any warehouses that could possibly be combined?

Richard Gochnauer

We're looking at that constantly and it's both a combination of looking at warehouses in total, but also across our three businesses we're finding opportunities to move businesses into unused space and leverage the cost that way as well.

So we actually have a number of initiatives looking at a variety of things that we could actually do two things at once, reduce the square footage that we have out there and at the same time increase service proposition to the customers. So, we think that's one advantage we have by having the three business units and the number of distribution sense we have. There are some opportunities there.

Jonathan Lichter - Sidoti & Company

Thank you.

Operator

Thank you. Our next question comes from line of Greg Halter with Great Lakes Review. Please go ahead.

Greg Halter - LJR Great Lakes Review

Yes, good morning.

Richard Gochnauer

Good morning, Greg.

Greg Halter - LJR Great Lakes Review

Just wondered if you could elaborate on the allowance for doubtful accounts. I know you increased it, but from what I understand you're not really seeing the deterioration or accounts going bad at this point, it's more a precautionary stance, is that a correct reading?

Victoria Reich

Well, it's the expense increase, the bad debt expense increase does reflect principally additions to reserves. And the reserves at year end were at about $32 million that compares to about $19 million at year end 2007. The write-off yes were relatively low. In 2008, about $4 million and that compares to about $2 million in 2007.

So what we are seeing is a slowing of payments and some customers struggling to make payments. So as receivables age, we provide reserves against them based on a standard methodology. Hard to say whether it's conservative. And I sure hope it will end up being conservative, we'll only know in the fullness of time if these receivables come back current and are collected or if more of them you turn into write-offs. But at this stage we do have the expense reflecting higher reserves.

Greg Halter - LJR Great Lakes Review

And those would be coming from your dealers, customers and the end-user of the products, who are not paying or slow in paying the dealers?

Victoria Reich

Well, it's the dealers not paying or slow paying I should say. In most cases that's what it is. The dealers are slowing their payments. Now, typically that happens because they are struggling to get payments from their own customers or their customers are slow paying.

Greg Halter - LJR Great Lakes Review

Okay. And if you could provide what the ORS accretion was in 2008 as well as what the dollar amount of sales they contributed in the fourth quarter?

Victoria Reich

Yeah. Let's see accretions for the year was about $0.23 and dollar sales in the fourth quarter was about $70 million. That's lower than they had been running as you would note and that does reflect their seasonal low period as well as some slowing of the sales trend in that business.

Greg Halter - LJR Great Lakes Review

Okay. And I notice that the accumulated other comprehensive loss line item in the equity area went from I think $14 million in the September period to $65 million, a sequential decline of about 50 million. I just wondered if you could elaborate what happened there.

Victoria Reich

Sure I can. That reflects two things. One is the adjustment to the pension liability, roughly $30 million increase to the pension liability to reflect the assets of market value and the discount net rates. Rate went down on the liabilities, so that was a $30 million differential and the interest credit swaps. We also recognized roughly a $30 million increase in the liability for interest rate swaps at year end.

Greg Halter - LJR Great Lakes Review

Okay, go ahead.

Victoria Reich

It's an interest rate. So those two things show up in the OCI.

Greg Halter - LJR Great Lakes Review

That explains it, but neither one of the present, I presume.

Victoria Reich

No.

Greg Halter - LJR Great Lakes Review

There was the fact that your debt to cap figure and even though your debt came down?

Richard Gochnauer

Right.

Victoria Reich

Correct.

Richard Gochnauer

Well, it's helping to swap for the right thing to do because it's just kind of picture, you now make sure your interest rate known and so even though rates are really low right now, if you got it already and if you're borrow... trying to borrow new money, rates are really low right now, it does show that you're under water on those swaps but they still make good sense. So I wouldn't kind of get too concerned about that.

The pension warrant... of course by freezing the pension going forward, that will allow us to work our way out of that over a period of time here and obviously it will... the market place at some point will come back and so we'll be going to the other direction hopefully on that. But, that explains what's going on there.

Greg Halter - LJR Great Lakes Review

Okay, obviously the mark-to-market on the swaps is more timing than anything else.

Richard Gochnauer

Yeah.

Greg Halter - LJR Great Lakes Review

And unrealized

Greg Halter - LJR Great Lakes Review

One other question, if I might. Relative to your debt, if you had to characterize the fixed versus floating piece in percent of the total, how would that fall out.

Victoria Reich

Of the debt, 435 million of it is fixed rate, but the swaps that we did averaged 5% all-in on that fixed rate debt. And then the balance is floating and very attractive rates. We move borrowings between the bank revolver, which is LIBOR based borrowings and our receivables securitization which is commercial paper based rates. Both of those are very attractive right now.

Greg Halter - LJR Great Lakes Review

Okay, great. Thank you.

Operator

Thank you. Our next question comes... follow question from Dan Binder with Jefferies & Company. Please go ahead.

Daniel Binder - Jefferies & Company, Inc.

Hi, just wanted to hit on the expense reduction plan for '09. I guess in our model, we're already building in $27 million of lower cost versus full year '08 and I guess what I want to make sure I'm clear on, when you talk about the 23 million plus in expense reduction, are you basing it on the full year '08 or you're simply taking the Q4 run rate, multiplying it by four and then subtracting 23 million off of that?

Victoria Reich

No, Dan we're comparing it to the full year '08 actual.

Daniel Binder - Jefferies & Company, Inc.

Okay, so, alright. So you've got the 23 million that you're pretty... feel pretty good about and you think there might be some more type of WOW sort of directionally?

Victoria Reich

Right.

Daniel Binder - Jefferies & Company, Inc.

How big could that be? 25, it could give us, just 25, 27 or you think better.

Victoria Reich

On the WOW we'll target usual 20 plus I think some of that... much of it frankly will be cost that appears in the gross margin line. So, distribution center cost, freight, advertising, production cost in addition to the operating expenses will all be WOW targets.

Daniel Binder - Jefferies & Company, Inc.

Okay, so the WOW thus is more in the gross margin an even if so than just for further clarity on that, if a lot is and I know that every you don't take full 20 of the bottom-line, is stuff that's get reinvested and you have to spend money there to take money out sometimes, but it would be what the WOW included in... a lot of it in the gross margin, is that included in the outlook for contraction in gross margin or is that put into potential for up gross margin over the year?

Victoria Reich

Yes and yes. It is some of it is included but we always have a list, a very long list of projects that we're going after over and above what's baked in.

Daniel Binder - Jefferies & Company, Inc.

Okay, and in term of the progression on the cost saving, how should we be thinking about that, is it more heavily skewed, do we get a lot of the 23 million, do you get on to that run rate early on in the year or...?

Victoria Reich

Yes we do, yes I think that should be pretty steady although you know the announcement was at the end of January, but the reduction in force, so there might be a little bit less in the first quarter. And than the only other differences I think quarterly would be the fact that bad debt is likely to be a little higher comparatively in the first half of the year, because we didn't see that increase until the second half of 2008, and we have the restructuring charge in the first quarter.

Daniel Binder - Jefferies & Company, Inc.

Okay, and then the bad debt, I don't have the balances right here, but I think you it was up substantially year-over-year, 32 million in reserves so, up from 19, so a pretty big increase. What kind of a rate are you targeting in terms of a write-offs so what do you thinking in terms of write-off rate for '09.

Victoria Reich

Well, I would say what we already ran in 2008 was about double our normal experience, so about 30 basis points as a percent of sales and that's the full year, was a little bit higher than that in the second half of the year. So hard to say but it's probably somewhere in that range.

Daniel Binder - Jefferies & Company, Inc.

And as a percentage of average receivables, tied to accounts.

Victoria Reich

That's a percentage of sales, that basis points as a percent of sales.

Daniel Binder - Jefferies & Company, Inc.

Right, I guess I asked, I think about write-off rates as a percentage of average receivables. I was just curious how that was trending

Victoria Reich

Still extremely low, 4 million in 2008.

Daniel Binder - Jefferies & Company, Inc.

4 million. And that's on an receivable average... do you have... all the receivables on your balance sheet are in all from accounts that are right, I mean do you have the average receivables for accounts...

Victoria Reich

600 million or thereabouts, Dan.

Daniel Binder - Jefferies & Company, Inc.

600. Okay, and then I guess for '09 you said first half a little bit higher so should we be thinking about... should we be taking another 20 million in reserves for '09 as you... how we should be thinking about?

Richard Gochnauer

Well that's the good question. I mean it's... we don't know.

Daniel Binder - Jefferies & Company, Inc.

Okay.

Richard Gochnauer

The only thing I can say is we tend and at least from my perspective to try to be as conservative as we can be and so I think that's what we are doing going into '09. We built up the reserves for... by looking as far as we could in to the future.

So, we think we are appropriately reserved, maybe conservatively so, but time will tell.

Daniel Binder - Jefferies & Company, Inc.

All right.

Richard Gochnauer

And it maybe that we still have to up those reserves a little more, but don't know.

Daniel Binder - Jefferies & Company, Inc.

All right.

Richard Gochnauer

They are reflective of kind of what we're seeing.

Daniel Binder - Jefferies & Company, Inc.

Given what you are saying, are you tightening terms with any of the dealers, whether they are small or large?

Victoria Reich

No, I think it's always a tough balancing act and I think our credit and sales teams do it extremely well. So I wouldn't say that we have not changed policies. I would say that we are managing this area very, very carefully and trying to support our dealers, but make good decisions in pretty tough environment for everybody.

Richard Gochnauer

I would say it's probably from a difference point of view a more the fact that we look at new business and as well as on business where we have an options which we do have a number of customers like that, where they come and go. And so we screen those more heavily now than ever before but we were always very careful about that, but in this environment you have to be even more so.

So, we'll be walking away from and not going after some business that maybe somebody else will and with their own view of the fact that, that will reduce our risk and actually I think we have pretty good track record in that in kind of making those judgment calls.

Daniel Binder - Jefferies & Company, Inc.

Okay. And then in terms of the shrinking the receivables securitization program, are you... I am not really sure exactly why you are doing that? Why shrink it, why just not leave it where it is?

Victoria Reich

As a matter of cost, these programs all have fees used and unused fees and so on and capacity needed. So, that's the balance we are trying to straight there and right now it looks like we will end up somewhere around 150 to 200 with the new program.

Daniel Binder - Jefferies & Company, Inc.

Okay. Last question regarding the Q1 trends, now January, big month for office products, Q1 I think in general; lot of discretionary in the mix I think more heavily in that quarter than others, correct me if I'm wrong.

Richard Gochnauer

Right.

Daniel Binder - Jefferies & Company, Inc.

But I am just curious, what your thinking is there? Is there a chance that Q2 or Q3 and it's a moving target I realize but is the discretionary piece in Q1 big enough such that as it shrinks we can actually see a meaningful benefit if you will to the sales trend as the area of the business that's hurting more so starts to shrink in the total mix?

Richard Gochnauer

Yeah, if you recall last year, Dan, the first quarter we talked about the fact that the discretionary spend did not happen as it typically does in January. And you're correct. It carries with it a higher margins and a higher sales rate in the January period.

So we did not see that last year. And to some extent from the margin comparison point of view, we took some of the big heavy win which rollback with last year. We're still sort out whether there is further deterioration this year. I think it's safe to say in general people are holding off pushing off any discretionary purchases they don't have to make right now.

And so I would expect that there is probably some continuation or some continued degradation in the discretionary purchases for January. But it won't be a dramatic experience from what we can tell as we saw in between '07 and '08. So '08, and '09 will quite look the same in terms of margins and from that point. Pat do you want to... is there anything you would add to that?

Patrick Collins

No. The trends are, as you described Dick, the furniture is probably the biggest, the single biggest year-on-year change that we do see. That does carry a higher than average margin. But the inside the categories, the trends that are consistent with what we saw last year from a percentage of discretionary spend standpoint.

Richard Gochnauer

And so, your comment about the rest of the year, that heavy discretionary purchases happens in the front end when people have budgets and then it does... it isn't that big of an impact in the subsequent quarters. And so that's in fact what we think we saw last year other than the general trend of people holding back anything they can possibly do.

At some point and we don't know when that point is, the pent-up demand, they are finally replace that chair and to buy desk pad and the other things will come around. But it's clearly not going to be probably in 2009 unless things start to turnaround here and the psychology improves.

But at some point, I think we will benefit from people coming back and finally starting to address the issues they held-off on doing that for two years.

Patrick Collins

I think the furniture is going to be slower though because of the origin second hand market.

Daniel Binder - Jefferies & Company, Inc.

Alright, okay. All right, that's helpful. Thanks.

Operator

Thank you. And there are no further questions at this time. I'd like to turn to Mr. Gochnauer for any closing remarks.

Richard Gochnauer

Okay. So, let me leave you with some closing thoughts. We delivered a good 2008 results in a very challenging environment. We have the ability to respond and adapt quickly to changes in the economy. We made tough decisions on cost and will continue to do so to align our expenses as closely as possible with sales.

We will carefully manage working capital to enable us to generate strong free cash flow, reduced debt and deliver a high cash flow yield for our shareholders. We will continue to make prudent investments in the business and we will continue to execute on our strategies and initiatives to build our organization with the focus on the future.

Vicky, Cody, Steve, Pat and I want to thank you for being with us today. We look forward to talking with you again in April when we report our first quarter results.

Operator

Ladies and gentlemen, this concludes the fourth quarter and year-end 2008 earnings conference call for United Stationers. You may now disconnect. Thank you using ACT conferencing.

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