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Executives

Sam K. Duncan - Chairman of the Board, President, Chief Executive Officer

Samuel M. Martin - Chief Operating Officer, Executive Vice President

Deborah O’Connor – Chief Accounting Officer

Bruce Besanko – Executive Vice President, Chief Financial Officer

Analysts

Oliver Wintermantel – Morgan Stanley

Mitchell Kaiser - Piper Jaffray

Brian Nagel – UBS

Matthew Fassler - Goldman Sachs

Michael Baker - Deutsche Bank Securities

Anthony Chukumba – FTN Midwest Securities

Christopher Horvers - J.P. Morgan

OfficeMax Incorporated (OMX) Q4 2008 Earnings Call February 18, 2009 9:00 AM ET

Operator

At this time I would like to welcome everyone to the OfficeMax fourth quarter and full year 2008 earnings conference call. (Operator Instructions) Representing OfficeMax on the call today are Sam Duncan, Chairman and Chief Executive Officer; Sam Martin, Executive Vice President and Chief Operating Officer; Bruce Besanko, Executive Vice President and Chief Financial Officer and Deb O’Connor, Senior Vice President, Finance and Chief Accounting Officer.

Certain statements made on this call and other written or oral statements made by or on behalf of the company constitute forward-looking statements within the meaning of the Federal Securities laws including statements regarding the company’s future performance as well as management’s expectations, beliefs, intentions, plans, estimates or projections relating to the future. Management believes that these forward-looking statements are reasonable.

However, the company cannot guarantee that future events will not impact the company’s access to cash or the funds available under its revolving credit facility, that it will successfully execute its turnaround plans or that its actual results will be consistent with the forward-looking statements and you should not place undue reliance on them. These statements are based on current expectations and speak only as of the date they are made.

The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of future events, new information or otherwise. Important factors regarding the company which may cause results to differ from expectations are included in the company’s annual report on Form 10K for the year ended December 29, 2007 under Item 1A “Risk Factors” and in the company’s other filings with the SEC.

It is now my pleasure to turn the call over to Sam Duncan, Chairman and CEO of OfficeMax. Mr. Duncan you may begin your conference.

Sam Duncan

Thanks and good morning everyone. On today’s call I will review our 2008 overall performance and Sam Martin; our Chief Operating Officer will discuss our fourth quarter operating segment performance and current conditions. Deb O’Connor, our Chief Accounting Officer will then review our financial details.

I’m sure it comes as no surprise to anyone that 2008 was a challenging year for the company. OfficeMax operated in a much weaker global selling environment for both our retail and contract segments. The fourth quarter trended worse than earlier quarters. Last year top line sales results reflect weaker demand trends compared to 2007 along with our own deliberate focus on profitable sales and contract and rational promotional strategies at retail.

For 2008 total sales declined 9% and we recorded an operating loss of $1.9 billion and a net loss of $1.7 billion or $21.90 per diluted share. These full year results included very significant non-cash impairment charges related to goodwill and intangible and other long-held assets as well as to the Lehman Guarantee portion of the temporary notes receivable.

Excluding these non-cash impairment charges along with other items, adjusted operating income was $192 million or 2.3% of sales and adjusted net income was $100 million or $1.30 per diluted share. Fourth quarter adjusted net income excluding these non-cash impairment charges along with certain other items was $1.9 million or $0.02 per diluted share. Deb will cover charges we are excluding from our adjusted number that include details of the non-cash impairment charges.

Turning now to a discussion of our performance, we believe that it is critical for us to focus on managing what is within our control and identifying our areas of opportunity to improve the business. This has been one of our over-riding goals since I joined the company.

In 2006 we closed more than 100 under-performing stores and began to take actions to turn the business around. Along the way we continued to uncover cost efficiencies in our business to improve our productivity and we continued to drive differentiation in our product and service offerings. In 2008 this became more important than ever. We recognized we had to take quick action to offset weakening demand and to protect our business profitability while maintaining the resources within our organization necessary to service our customers.

We made some tough, but necessary, decisions which resulted in a significant reduction of our workforce in 2008 and a shift to a higher proportion of part-time associates which enabled us additional flexibility to make adjustments based on consumer demand. We also reduced incentive compensation expense by approximately $35 million in 2008 versus 2007 and suspended the dividend on our common stock.

Additionally we continued to be prudent in our promotional investment to preserve gross margin where possible. At the same time we are focused on capital management and we remain committed to strategies designed to grow revenue long-term. While Sam Martin will go into some specific wins that we added for our contract and retail segments let me highlight a few broader successes.

First we continued to expand our private brand program with unique and appealing office products at every day values across the enterprise. Private label sales penetration increased by about 2 points in 2008 to approximately 24% due in part to some new brand introductions and product launches as well as continued growth in the OfficeMax brand. We continue to see plenty of opportunity for private brand growth.

Second, we joined forces with other well-known leaders which provides us with new opportunities. Our alliance with Lyreco enabled us to compete for business among contract customers we would otherwise not be able to service. As a result we have already secured several global accounts and have more in the business development pipeline.

Also, through a new arrangement with Safeway we began distributing OfficeMax products and school supplies to approximately 1,600 domestic grocery stores. Third, we improved our delivery to store fulfillment processes which allowed us to more than offset a greater than $11 million increase in fuel costs on delivery expenses in 2008. Finally, we rapidly adjusted our real estate program during the year to adapt to changes in the economic environment.

Since the beginning of 2006 we have closed more than 130 stores and have disposed of all but 13 of those leases avoiding approximately $143 million of lease liability. While we are continuing to monitor the performance of our stores, this prior store closure effort places us in a stronger real estate position today. We have also significantly reduced our new store plans and suspended our remodel program. We will continue to rationalize our store base on a store-by-store, lease-by-lease basis. The average remaining lease term of our domestic stores is between 5-6 years providing good flexibility going forward.

We expect that sales will decline in 2009 on a year-over-year basis and we continue to make the decisions necessary to conserve our cash in order to weather these conditions including suspending 2009 merit based pay increases, suspending matching contributions to our defined retirement plans effective next month and cutting discretionary spending wherever possible. We have also planned our 2009 initiatives with this context as Sam will discuss in more detail shortly.

We are pleased with the solid progress we have made on our infrastructure and operations and we continue to move OfficeMax forward.

Now I will turn it over to Sam Martin to review the details of our contract and retail operating segment performance for the quarter and discuss our areas of focus in 2009.

Samuel Martin

Thanks Sam. Good morning everyone. In our contract segment we continue to target customer expansion particularly among the large and middle markets by offering our customers total solutions with effective tools to manage their costs beyond traditional office supplies including furniture, technology and digital print. The more business customers do with us the more they save and customers are responding well to our value proposition in this challenging environment.

For the fourth quarter of 2008 our contract segment reported adjusted operating income of $23 million. As compared to the prior-year quarter contract experienced lower sales and de-leveraging of fixed cost of sales and operating expenses but we successfully reduced costs in the quarter. Specifically for U.S. contract, which represents 73% of total contract sales, fourth quarter sales declined 15% from the same period last year. There are a couple of specific U.S. contract segment trends that I would like to highlight.

First, sales from existing customers declined approximately 11% compared to the fourth quarter of 2007 reflecting lower employment levels and customers tightly managing their spending. Second, sales from new customers in the fourth quarter of 2008 were less than sales from lost customers in the fourth quarter of 2007 reflecting both the impact of a deteriorating economy and our disciplined approach to customer acquisition and renewals since the end of 2007. Generally we remain pleased with the quality of new customers we are signing.

Contract segment gross margin was relatively constant in the fourth quarter of 2008 at 21.6% in the fourth quarter of 2008 from 21.7% in the fourth quarter of 2007. We benefited from targeted efficiencies including optimizing delivery routes which enabled a 14% reduction in fleet count throughout 2008.

Contract operating expense as a percent of sales in the fourth quarter of 2008 increased to 19.3% compared to 17.3% in the fourth quarter last year due mostly to de-leveraging of contract segment operating expense from lower sales. While we cycled over some expense improvements we generated in the fourth quarter last year we benefited from targeted cost control including reduced payroll expenses. We continue to pursue incremental expense efficiencies.

Turning to our retail segment, in the fourth quarter 2008 we recorded break-even adjusted operating income. Retail results in the fourth quarter continued to be impacted by de-leveraging fixed cost of sales and operating expenses primarily as a result of weakening economy. Our same store sales decreased 13.6% in the fourth quarter. We maintained our strategy of utilizing appropriate promotional activity to drive traffic in the stores without sacrificing overall gross margin levels.

We continued to rationalize and refine our marketing mix through various channels. As anticipated we experienced a weaker holiday selling season. Our same store sales declined in the fourth quarter versus the prior-year quarter across all three major product categories; technology which includes ink and toner, supplies which includes end press sales and furniture.

In the fourth quarter we continued to experience our weakest comp in furniture and average ticket decreased as we saw an increase in cherry picking by customers strictly shopping promotional items. Retail segment gross margin in the fourth quarter 2008 decreased to 27% from 30% last year. Margins were negatively impacted by de-leveraging of fixed occupancy related costs and has continued since late 2007 for existing stores and the addition of new stores and by the sales mix shift towards lower margin, big ticket technology category sales and away from higher margin furniture and office supply categories.

Retail operating expense as a percent of sales in the fourth quarter 2008 increased to 27% from 26.2% in the fourth quarter of last year due mostly to de-leveraging of fixed operating costs and lower sales and new stores. This was partially offset by lower store opening costs, lower advertising expense and reduced store payroll expense.

This was partly from the retail store management reorganization we initiated in the second quarter and the restructuring of the field and end press management in the first quarter. Both were intended to reduce overlap and reallocate payroll towards key selling positions. Overall for contract and retail we expect that the improvements we have made and continue to pursue will benefit us longer term when sales trends improve.

I will turn now to our three areas of focus for 2009 which are all grounded in ways to grow targeted areas of our business, stand out in the crowd and maximize our resources. Some of these involve pursuing opportunities we have previously identified to which we will be applying more discipline in 2009.

First let me discuss some of our growth plans. As we have said, we plan to enforce tight expense management but we will maintain or modestly invest in areas that will help us grow. One of these areas is sales. We have proven that we do an excellent job serving large market customers and we will maintain our focus on growing and maintaining these customers. We continue to believe the middle market represents a significant opportunity for us and we have evaluated a variety of ways to grow.

We recently established a task force to help expand our middle market business through greater discipline and a qualitative assessment to determine what works best to attract and retain these customers. This task force has helped us determine the additional resources we need and how fast to align our resources to help us serve in this market.

This year the task force is testing and measuring several approaches and we have plans to roll out our best practices for 2010. Our new catalog, which I will discuss more in a moment, includes new, appealing brands targeted to the middle market at a good value. We also continue to pursue growth from alterative strategies. As you know, our products are now sold in Safeway grocery stores. It is a great way to expand our reach without the investment in brick and mortar. We will continue to explore similar opportunities.

Turning now to differentiation, you will see us intensify our focus on our core customers. As we have learned from extensive market research, our primary audience is typically women who are seeking stylish products at a good value. We recognize products that assist in organization and efficiency are in demand and these target customers want to buy from a company with expertise and whom they can trust. We are excited about our partnership with organizational expert Peter Walsh. We are collaborating with Peter on a new line of work organizational products featured exclusively at OfficeMax.

At the end of 2008 we also launched our new catalog with a new look and feel geared to be more appealing to its core customers. Within the catalog we introduced several new private brands that were already available in our retail business. We have received very encouraging customer feedback on this new catalog.

Finally, we will continue to focus on improving our productivity. We believe there are opportunities to enhance our selling activities and reach our customers more efficiently. For example, we are adding tele-sales positions in our contract business because it improves productivity, is well received by customers and it is cost effective. We are also continuing to apply discipline to our existing practices. For example, we are now coordinating store tasks with a centrally managed dashboard activity calendar from our headquarters to ensure that merchandising opportunities have greater consistency and better execution across our chain.

Note that we find it important to take a more customized approach based on stores that have similar sales volumes for some activities and here we are adjusting marketing and general store operating expense appropriately. We are also working to ensure that we maximize productivity for our real estate programs. Let me discuss this in greater detail for a moment.

We are currently planning up to 13 store openings. The store leases we have signed over the last year have been heavily scrutinized. We anticipate no net store growth because the planned store openings will be offset by store closures. Furthermore, we are proactively working with landlords to negotiate changes in existing lease terms for stores that do not meet our performance hurdles or where co-tenancy clauses have been triggered. We have already had some success in obtaining improved terms.

Finally, as previously indicated we have postponed our store remodel plan to conserve capital until the current economic environment improves. At this point I would like to turn the call over to Deb O’Connor to review the financial details.

Deborah O’Connor

Thanks Sam. Let’s start out with the P&L. For the fourth quarter 2008 we reported a net loss of $396 million or $5.21 per diluted share. For the full year of 2008 OfficeMax reported a net loss of $1.7 billion or $21.90 per diluted share.

Results for the fourth quarter and for the full year 2008 include significant non-cash impairment charges related to goodwill and other assets as well as other items like severance and site lease terminations. We have excluded these charges in the tables in the press release in order to calculate adjusted figures which are used for comparability.

Adjusted income or loss and earnings per share are non-GAAP financial measures which we reconcile to the GAAP financial results. Excluding the charges, adjusted net income in the fourth quarter 2008 was $1.9 million or $0.02 per diluted share. Consolidated net sales in the fourth quarter of 2008 decreased by 14.3% to $1.9 billion. Contract segment sales decreased by 18.4% to $954 million compared to the fourth quarter of 2007 reflecting a 15.4% sales decline in U.S. contracts and a 25.5% sales decrease from the international contract operations primarily due to an appreciating U.S. dollar.

In local currencies, international contract sales declined 5.1% compared to the fourth quarter of 2007. Retail segment sales decreased by 9.7% to $929 million compared to the fourth quarter 2007. That is a 13.6% decline in same store sales. OfficeMax sales to date in 2009 have declined slightly greater than the 14.3% we experienced in the fourth quarter and we anticipate sales will decline on a year-over-year basis for the full year 2009.

Gross margin was down 140 basis points for the fourth quarter 2008 from the prior year period primarily reflecting the significant de-leveraging of fixed costs due to lower sales levels. Operating expense continues to show significant de-leveraging as well to fixed expenses from lower sales and new stores partially offset by targeted cost reductions. As Sam indicated, we continue to review our cost structure at the corporate and field levels to ensure it is aligned with our reduced volumes.

Let me cover a few other financial areas and then I will conclude the discussion on the non-cash impairment charges. At the end of 2008, we had total debt excluding Timberland securitization notes of $354 million and cash and cash equivalents of $171 million. It is important to note that total debt number excludes the $1.5 billion Timberland securitization notes and the [three course] on the notes is limited to the Timberland installment notes receivable.

We also have about $547 million of available credit under our $700 million revolver. Our unused borrowing capacity as of December 27, 2008 reflects an available borrowing base of $614 million with no outstanding borrowings but $67 million of letter of credit issued under the revolving credit facility which reduces our capacity. Our revolver does not mature until July 2012.

As you know, we have full pension plans. As of the end of 2008 our under-funded status for these plans was $435 million. Plan assets at year-end were $841 million experiencing a negative 22.6% return in 2008. Given this market performance our under-funded status increased by $327 million during 2008. However, due to IRS funding policies and our favorable past funding practices our 2009 minimum cash contribution is expected to be roughly $8 million.

Given the accounting requirements, we are forecasting approximately $25 million of P&L expense in 2009 compared to about $4 million of expense this year. For the next couple of years beyond 2009 we currently anticipate annual cash contribution requirements to be between $50-70 million. Financial market performance could materially impact these expected payments. These projected contribution levels do reflect the positive impact of the worker retiree and employer recovery act of 2008.

Turning to the cash flow, for the full year 2008 we generated $224 million of cash from operations reflecting improved working capital management. By comparison, working capital in 2007 included several unique items that we have discussed previously. We ended 2008 with inventory $139 million lower than at the end of 2007 with lower inventory per store and per distribution center partially offset by new store growth.

Accounts payable at the end of 2008 was $105 million lower than last year while the leverage ratio remained consistent with the prior year. Receivables at the end of 2008 were also lower at $154 million than at the end of 2007 reflecting both volume decline from the contract segment as well as lower DSO’s due to improvements in monitoring and collecting receivables.

Capital expenditures totaled $144 million for 2008 and the largest component of Capex were investments in new and remodeled stores, supply chain and IT. For 2009 we are planning capital expenditures in the $50-70 million range, a significant reduction from prior years. We performed a rigorous review of the product pipeline and more discretionary projects have been cut or postponed until we see an economic recovery.

Now let me cover the non-cash impairment charges related to the second and fourth quarters of 2008. In the second quarter of 2008 OfficeMax reduced the carrying value of goodwill and other intangible assets due to impairment that was based on the company’s sustained low stock price and reduced market capitalization, macro economic factors impacting industry conditions, actual recent results in forecasted operating performance as well as other factors.

Many of these same factors continued to worsen in the fourth quarter 2008 which required the company recording an additional non-cash impairment charge. The cumulative impact of non-cash impairment charges associated with goodwill and intangible and other long [life] assets recorded in the fourth quarter was a $385 million reduction to net income or a reduction of $5.07 per diluted share.

This is net of $6.5 million of after-tax minority interest income related to the portion of fixed asset impairment charges at our joint venture in Mexico. As a result of these charges there is no more goodwill on the books of the company.

I’d also like to provide an update on the impact to OfficeMax from the Lehman Brother bankruptcy. As we discussed last quarter the Lehman Brother impacted half of the Timberland installment notes receivable which were established as part of our 2004 sale of Timberland assets. In the third quarter of 2008 we determined the portion of the Timber note receivables secured by a guarantee by Lehman Brothers to be impaired and took a charge to write it down to full value.

While we are required under current accounting rules to continue to recognize the liability related to the Lehman portion of the securitization notes, until that liability has been legally extinguished it is important to note that the liability under the securitization notes is non-recourse to the company.

The company expects that the liability will be extinguished when the Timber installment note is turned over to and accepted by the securitization note holders. We expect that this will occur no later than the date when the assets of Lehman are distributed and the bankruptcy is finalized. We incurred a pre-tax non-cash impairment charge of $736 million in the third quarter but we expect to have a corresponding one-time gain in a future period when the securitization note liability is extinguished.

In the fourth quarter of 2008 OfficeMax made accelerated tax payments totaling approximately $30 million related to one-half of the gain on this Timberland sale transaction. We anticipate that no further payments will be required on that half of the gain as we were able to utilize tax credits and other factors to offset the remainder of the liability.

The non-cash related impairment interest charge referred to earlier relates to the fact that we stopped accruing interest income on the note receivables but as we previously explained last November we were required under current accounting rules to record interest expense associated with the notes payable under the securitized note liability through the payment default date of October 29, 2008. We were required to do this even though we do not expect any future interest payments to be made. We eliminated this non-cash expense from the non-GAAP adjusted numbers.

Now I will turn the call back to Sam Duncan.

Sam Duncan

Thanks Deb. We remain focused on improving our infrastructure, driving enhanced operating performance and delivering solid operating results. While we are clearly operating in a very different environment from three years ago, OfficeMax has made progress and we are pursuing more opportunities for improvement.

Given the weak economic outlook we are cautious in our expectations for 2009. We will be impacted by two years of declining comp sales and we will cycle significant expense reductions. As a result of these factors we expect continued cost and expense de-leveraging for the full year 2009. We are taking a realistic approach to our business in 2009 given these challenging market conditions and continue to enforce tight cost controls and make the tough decisions necessary to maintain a healthy balance sheet and we are confident that our cash position and existing access to capital are adequate to address the challenges we face from the external environment.

Our expectation for the full year is for cash flow from operations to exceed capital expenditures and for our revolving line of credit to be utilized seasonally with little or no borrowings at year-end. Although we are tightly controlling expenses across our business and further improving our productivity we remain committed to driving differentiation in our product and service offerings and will not compromise customer service levels for short-term gain. We plan to continue to manage our business for the long-term.

Before we take questions I would like to introduce our new Chief Financial Officer, Bruce Besanko, who started this week. Bruce brings significant finance experience to OfficeMax most recently from retailers and consumer companies including Circuit City, Best Buy and Yankee Candle. Bruce will head up a strong finance team and will work closely with Deb O’Connor and Tony Guiliano, our new Treasurer. I thank Deb and others for stepping up and handling additional responsibilities while we conducted our candidate search. I would also like to thank all of our employees for their hard work and dedication during this challenging time.

Bruce Besanko

Thanks Sam and good morning everyone. I am delighted to be joining to management here at OfficeMax in large part because I respect the company’s commitment to serving its customers effectively and to building long-term, sustainable value for its shareholders. I have been particularly pleased with the way OfficeMax has adapted to the changing economic environment and applaud the management team’s efforts in containing costs, improving productivity and preserving capital. 2009 will no doubt be a year of further challenge and change and I am confident in our ability to manage and navigate our way through it.

I look forward to meeting our investors in the days and weeks to come and working with our analysts and investors in communicating our commitment to shareholder value. With those brief remarks I will turn the call back over to Sam Duncan.

Sam Duncan

Welcome aboard Bruce. Now let’s open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Oliver Wintermantel – Morgan Stanley.

Oliver Wintermantel – Morgan Stanley

Regarding the retail sector, could you give us some more details on the 300 basis points decline in gross margin and then maybe some color on ticket versus traffic? Then on a per store level how much SG&A could you take out in 2009?

Samuel Martin

On the retail sector the primary driver of the decline in gross margin is de-leveraging of our fixed overhead expenses including rent and other occupancy factors. Our per store SG&A we are always looking at ways to reduce and be more efficient but we do in the retail stores. We don’t provide guidance on these things but certainly we are always looking for ways to improve and be more efficient.

Oliver Wintermantel – Morgan Stanley

Can you comment on ticket versus traffic in retail?

Samuel Martin

Our traffic is declining in a similar fashion in 2008 our sales decline and our average ticket is off marginally.

Oliver Wintermantel – Morgan Stanley

Can you maybe comment on how you see the office product space developing in 2009 given that we have seen Staples acquiring Corporate Express last year and we have like six months of history there now? What do you think about further [consolidate]?

Sam Duncan

I really won’t answer your question because I don’t comment on consolidations. The only thing I will make a comment on is the office supply industry. We sell discretionary items in the office supply industry and we are a victim of the economy because of that. Where the economy goes we go meaning the office supply industry. We are the first ones to see the economic downturn which began in 2007 and as long as the economy continues to go on a downslide then we are going to see the impact of that. As soon as it makes the upturn, hopefully we will see the results of that very soon afterwards. I won’t make any comments on consolidation.

Operator

The next question comes from Mitchell Kaiser - Piper Jaffray.

Mitchell Kaiser - Piper Jaffray

Overall looking at contract markets here how do you feel you trended in the quarter?

Samuel Martin

On the contract market share I would tell you that over the fourth quarter we relatively held our own. We didn’t see an additional decline in our ability to attract new customers. We actually attracted a fair number of new customers and of course the major decline in our existing customer sales is driven by the lack of employment and reduction in customer spending, just their controlling their expenses was a major driver. That is how I would characterize it.

Sam Duncan

All you have to do is take a look at the businesses out there and look at the numbers they are reporting. These big companies are all looking for cost containment and we are in one of the areas that a company is going to look at first when it comes to office supplies and how to reduce costs. Therefore we are starting to see that in the reduction in existing customers. Hopefully we will see the economy improve but until then it is going to be a very tough battle.

Mitchell Kaiser - Piper Jaffray

You mentioned some opportunities on the rent side and that your typical lease term is about 5-6 years. Could you help us put some parameters around what you think the opportunity might be? Then just maybe where you are at in terms of store staffing levels? How many store levels are at minimums?

Sam Duncan

Again, if you look back I made a comment that when we closed 130+ stores we only have 13 remaining where we have lease liability. We have eliminated $143 million of lease liability. We did that through working with a company, HMS that is a tremendous partner that helps us go renegotiate leases with landlords. We have not stopped and we did not stop at looking at our leases. We are currently looking at all of our leases no matter how good or how bad the store does and looking for opportunity in improving lease terms. That is an ongoing battle that we have done not because of the economy. The economy of course has made that look even better but it is something we are constantly working on with HMS which does a terrific job for us.

Mitchell Kaiser - Piper Jaffray

Then the store staffing levels? Then I have just one quick follow-up if you don’t mind.

Samuel Martin

On store staffing it is an interesting question about store minimums because as we approach what we would consider our defined minimum we have been creative enough to find ways to restructure the staff in the store to identify new minimums. I would tell you today there is no store at an absolute true minimum and we have found ways to further reduce staffing and we are always continuously looking at improving efficiencies and structure to be able to continue the service level at our stores and at the same time using the efficiencies to reduce overall staffing.

Mitchell Kaiser - Piper Jaffray

Just a clarification, Deb you mentioned $50-70 million of contribution to the pension in 2010 and maybe go forward. Was that cash contribution amount?

Deborah O’Connor

That would be the cash contribution amount to get the un-funded pension plan liability funded.

Mitchell Kaiser - Piper Jaffray

So that might be a 4-5 year period then? I guess it would all depend on where the market shapes out?

Deborah O’Connor

Exactly. That is exactly right. That is a current assessment but depending on how market conditions go over the next couple of years it could help or hurt that. It is a frozen plan just so you remember that. The liability isn’t growing at all.

Operator

The next question comes from Brian Nagel – UBS.

Brian Nagel – UBS

First off, with respect to retail sales you mentioned in your press release and also in your prepared remarks the mix shift towards technology products. I guess the question I have there is just to get more color around that. Was that simply a function of incremental weakness in the consumable category or did you see some type of pick up in technology products? If you did see a pick up was that at all promotionally driven?

Samuel Martin

I think it is not one simple bullet here. There is a combination of things at work. Certainly there is softness in supply particularly in the furniture areas which go by balance. We also did recognize an increase in technology sales from promotional activities as well as I think from some of the competitive, if you will, closures and reductions in the tech area.

Brian Nagel – UBS

The second question I have is with respect to the Capex you gave of $50-70 million, down significantly from $140 million last year, my question is how close is that $50-70 million to a true maintenance type Capex? I guess another way of asking that is what really are the components of that $50-70 million you will be spending in 2009?

Samuel Martin

I’ll give you a little color and Deb might want to add to it. We have, as we mentioned, 13 stores that will open which will be a significant part of the Capex. Primarily the remainder of the Capex is indeed directed towards maintenance type activities.

Brian Nagel – UBS

The final question I have is more from a strategic point of view but really follows on as well but there has been a consolidation in the space. My question for you is have you seen any changes following consolidations that have occurred over the past several months…have you seen any changes in the competitive environment in your contract businesses?

Sam Duncan

Consolidation itself, as I said, I won’t make any comments on. What we have seen and the impact to our business is strictly from the economic environment that we are facing today.

Operator

The next question comes from Matthew Fassler - Goldman Sachs.

Matthew Fassler - Goldman Sachs

I just want to follow-up first on the earlier question about contract market share. It actually looks like as the economy has slowed down markedly the deceleration in your U.S. business has been fairly minimal. To the extent you feel you have gained momentum would you say that it is more on the new account win side or relative win side or in terms of retention of existing customer business? I know you said you were down 11 with existing customers. I don’t know how that number had trended over the course of the year.

Samuel Martin

I would say that the contract new wins have been accelerating for us and retention has also been something we have seen as relatively stable if you will rate. So there is no change necessarily in retention rates. We are retaining at a pretty fair rate particularly those accounts we have targeted as profitable for us. We talked in the past we have severed or forego some accounts. We are past that now and our retention is more stabilized.

Our actual wins have actually picked up a little bit particularly if you take into accounts those accounts we have been able to address in conjunction with [inaudible] and looking at the global piece of U.S. pie and the global piece of those businesses has been really beneficial for us.

Matthew Fassler - Goldman Sachs

It looks like the biggest hit or biggest deceleration came from international and frankly much more so from currency than from local currency numbers. If you could talk to the impact of the dollar’s appreciation perhaps on your earnings in the fourth quarter and compared with what you saw earlier in the year?

Deborah O’Connor

Obviously in the fourth quarter we did have the dollar strengthening so it did have an impact. It wasn’t really significant. A couple million dollars. We did not see that as much in the previous quarters so it really flung on us in the fourth.

Matthew Fassler - Goldman Sachs

On the contract side as well you took your expenses down roughly 9% and that was against your toughest cost comparison of the year and the year before in that business. I know you said you are cycling cost cuts in all of your businesses and it will perhaps be tough to maintain this kind of expense reduction momentum but how close are you? I know you were asked about minimum staffing in retail, how close are you to kind of expense bedrock on the contract side if we run these dollar numbers essentially at these levels?

Samuel Martin

We still have the ability to look throughout the country in the U.S. and of course the international businesses and take out some costs to serve if you will expenses in terms of if sales decline further, as we talked about there are transportation expenses. Fuel has become beneficial now as in comparison. We also have warehouse occupancy that we can look at, staffing in those buildings as well as pure payroll on the bill side. We still have some room if we need to take further expenses out. There are opportunities for us to do that.

Matthew Fassler - Goldman Sachs

Finally, you were nice enough to give us some color as to January and February in aggregate being a little bit softer. I am curious is there one business or the other where the deceleration has been more evident?

Sam Duncan

I’ll make a comment to that. When the economy first turned where we first saw the effect was on our retail side. The contract side lagged behind. Now we are seeing the contract catch up and our hope is we won’t see a dramatic downturn but again the economy is really the key. If the economy drops five points on GDP then every company in the United States is going to have issues. We hope our retail side has leveled off and contract hopefully will level off soon too. Again, that is just the economy is the key. It is nothing we are doing right or wrong.

Matthew Fassler - Goldman Sachs

It sounds like contract might be the area if you saw some incremental deceleration that would probably be where it was?

Sam Duncan

That is my concern. My concern is that if we see a big second wave of cuts coming from corporate America then of course that is going to affect our contract side.

Operator

The next question comes from Michael Baker - Deutsche Bank Securities.

Michael Baker - Deutsche Bank Securities

I just wanted to quickly focus on the balance sheet and cash. First of all, it was like half of the Timberland issue is taken care of now. Do you think there is going to be any payment or how can you assess if there is going to be any payment on the non-Lehman portion of that? Do you need to spend another $30 million there or perhaps even greater as you exhaust some of your tax credits?

So there is a $50-70 million pension hit in 2010 and then I think over the next two years you have $50 million in debt coming due. Can you discuss the plans on how you plan on paying all that down? Is it just through your letter of credit or will there be a need to refinance or take on more debt?

Deborah O’Connor

First, on the Timber notes the other half is with Wachovia. The Wells Fargo/Wachovia deal did close which further strengthens that side of the Timber note transaction. We are not anticipating any immediate concerns on that half. Going to the future funding requirements, right now as we look out over that 5-year period we are anticipating our cash flows to cover our needs and really to only have seasonal borrowing and really not go onto our revolver much at all. However, as I said before, it is completely outstanding right now with no borrowings against it so we are anticipating that to be in the near-term here as well.

Michael Baker - Deutsche Bank Securities

That includes the debt that is due; I think $36 million due in 2009 and $14 million in 2010?

Deborah O’Connor

That is right. That is correct.

Operator

The next question comes from Anthony Chukumba – FTN Midwest Securities.

Anthony Chukumba – FTN Midwest Securities

This is a little bit of a follow-up to the prior question. In terms of your revolving credit facility, is that a secured facility or unsecured and what are the major covenants? With these goodwill write downs has that created any sort of covenant issues for you?

Deborah O’Connor

It is a secured facility with our inventory and receivables which is why our borrowing capacity number will change based on our inventory and receivable levels. The covenants are pretty light. Really we have one fixed charge ratio covenant but that is only when we get 90% borrowed on the revolver so that hasn’t hit and we don’t anticipate that in the near future. The goodwill charges being non-cash really don’t have an impact on our covenants.

Operator

Your final question comes from Christopher Horvers - J.P. Morgan.

Christopher Horvers - J.P. Morgan

I want to follow-up on the earlier question about rent. We have heard a lot of different opinions out there in retail. Can you frame out what incentive there is for the landlords to adjust rent on ongoing leases? Does that come up in 2009 or is there an opportunity for renewals in 2010 and 2011 period?

Samuel Martin

Actually there are a number of factors that come into play on the rent side. There are certain areas where we have co-tenancy requirements and if those are violated then rent reductions are almost automatic and it is built into the agreement. There are also incentives for the landlord to have us in their center. If we have to exit a center because the performance of the store is such the landlord would much rather have a tenant in building than not. We found that they have been quite willing to negotiate additional terms and/or reduction in rent rates.

We have had some, I would characterize, as success in the near-term in terms of being able to stay in places where we might otherwise have had to leave because the rents were indeed renegotiated to more favorable levels.

Christopher Horvers - J.P. Morgan

Is that 10-20% of the base? Is that rent per foot coming down from $15-16 per foot to maybe a $10-12?

Samuel Martin

There has been a number of different ways it has happened. There is no good way to characterize an average because they are all unique in terms of how the rents are structured and how the deals are structured with tenancy, etc. Yes, there are definitely per foot differences. There are percentage rent options. There are actually a number of different ways to characterize it.

Sam Duncan

For example, when we have co-tenancy violations and say a big tenant leaves the mall like we have seen some big closures then in some cases our rent goes from a per square foot to a percentage rent which reduces our overall rent dramatically and we have seen some substantial reductions. We are also going in and talking to all of our landlords about reductions and we have seen some significant gains up to multiple dollars per foot reductions also brought on significant reductions. We are leaving no stone unturned. No matter how good or how bad a store has been doing on a performance basis now is a great time to be approaching landlords and looking for some concessions.

Christopher Horvers - J.P. Morgan

Pension expense, is it flowed through SG&A in the divisions or is that G&A? On the cash flow statement where will the pension contributions show up?

Deborah O’Connor

The majority of the expense will flow through the corporate segment in G&A. As far as the cash funding that has typically shown up in our working capital and cash from operations.

Operator

There are no further questions at this time. Presenters do you have any closing remarks?

Samuel Duncan

Thank you everybody for joining us today.

Operator

Thank you for participating in today’s OfficeMax fourth quarter and full year 2008 earnings conference call. This concludes today’s conference. You may now disconnect.

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Source: OfficeMax Incorporated Q4 2008 Earnings Call Transcript
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