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Office Depot (NASDAQ:ODP)

Q2 2010 Earnings Call

July 27, 2010 9:00 am ET

Executives

Brian Turcotte - Vice President, Investor Relations

Charles Brown - President of International

Kevin Peters - President of North American Retail Division

Steve Odland - Chairman and Chief Executive Officer

Michael Newman - Chief Financial Officer and Executive Vice President

Steven Schmidt - President of North American Business Solutions Division

Analysts

Colin McGranahan - Bernstein Research

Daniel Binder - Jefferies & Company, Inc.

Kate McShane - Citigroup Inc

Gary Balter - Crédit Suisse AG

Matthew Fassler - Goldman Sachs Group Inc.

Stephen Chick - FBR Capital Markets & Co.

Christopher Horvers - JP Morgan Chase & Co

Mitchell Kaiser - Piper Jaffray Companies

Michael Baker - Deutsche Bank AG

Operator

Good morning, and welcome to the Second Quarter 2010 Earnings Conference Call. [Operator Instructions] I would like to introduce Mr. Brian Turcotte, Vice President of Investor Relations, who will make a few opening comments. Mr. Turcotte, you may now begin.

Brian Turcotte

Thank you, Michelle, and good morning. Before we begin, I'd like to remind you that our discussion this morning may include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the SEC.

In addition, during the conference call today, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the directly comparable GAAP financial measures, as well as our press release and accompanying webcast slides for today's call, are available on our website at www.officedepot.com. Click on Investor Relations under Company Information.

Office Depot's Chairman and CEO, Steve Odland, will now summarize our second quarter 2010 results. Steve?

Steve Odland

Good morning, and thank you for joining us for Office Depot's Second Quarter 2010 Earnings Conference Call and Webcast. With me today are Mike Newman, Chief Financial Officer; Kevin Peters, President of North American Retail; Steve Schmidt, President of North American Business Solutions; and Charlie Brown, President of International.

The second quarter is traditionally our weakest sales quarter of the year and 2010 followed that trend. Total company sales were $2.7 billion, which is a decrease of 4% compared to our second quarter results last year. Although it's still negative, this is the best sales trend that we've had in eight quarters, and I should note that foreign exchange and business restructuring activities impacted sales by about 200 basis points in this quarter.

The second quarter loss was $19 million or $0.07 a share versus a loss of $82 million or $0.31 a share in the same period a year ago. Second quarter 2010 results included significant tax benefits, while second quarter 2009 included charges related to our restructuring activities which negatively impacted earnings by $0.09 per share.

Total company operating expenses in the second quarter of 2010 decreased by 8% or $68 million from the second quarter of 2009. This decrease primarily reflects charges related to the restructuring taken last year in 2009 and lower distribution costs in the second quarter of this year 2010. EBIT was a loss of $23 million in the second quarter and a $39 million improvement over EBIT adjusted for charges reported in the same period last year.

Total company gross margin increased by 130 basis points in the quarter versus last year. This is the fourth consecutive quarter of year-over-year gross profit margin improvements. All three divisions were again successful in increasing their gross margin profits in weak sales environments. We beat our expectations for the quarter, and we're pleased with our execution across the company.

We know, of course, we can't control the economy. But what we can control was executed well, and I'm proud of our team. Now I'll ask Kevin Peters to talk about the North American Retail second quarter performance. Kevin?

Kevin Peters

Thanks, Steve, and good morning. In the North American Retail division, sales for the second quarter were $1.1 billion, down 2% versus the second quarter of 2009. Our comparable store sales in the U.S. and Canada decreased 1% versus the second quarter of 2009, the same rate of decline as the first quarter.

The comp sales decline showed mixed results across the U.S., with some areas showing signs of improvements, such as California, though this region still faces many challenges. Our best-performing sales markets continued to be the Northeast and Midwest, which again achieved positive sales comps. Additionally, the Gulf Coast market has posted four consecutive quarters of sales comp improvement.

Second quarter customer transactions were slightly negative compared to last year and continued to drive the overall comp decline. Our average order value increased versus the prior year for the second consecutive quarter. Sales on our supplies and technology categories were relatively consistent with the first quarter, with furniture maintaining positive comps though lower sequentially.

In the second quarter of 2010, we opened seven stores and closed four, bringing our total North American store count to 1,152 at quarter end.

Operating profit in the second quarter of the 2010 for North American Retail was $9 million versus a loss of $13 million a year earlier. And our operating profit margin was up 200 basis points from the second quarter of 2009. The increase in operating profit was driven by favorable product margins due in part to the ongoing line review process and increasing our direct import penetration.

We have improved product margins over the last eight consecutive quarters, but this benefit will diminish as we anniversary these improvements. I should note that the second quarter results last year included a $5 million charge to reflect updated assumptions on subleases of closed stores.

We continue to implement sales driving and cost-reduction activities, as well as make prudent investments in both our infrastructure and customer-facing activities. First, we believe that we can drive profitable sales through a number of initiatives. These include offering an exciting new assortment in technology, increasing brand awareness through direct mail and broadcast media and rolling out the U.S. Postal Service offerings in our stores.

Second, we're opening a new state-of-the-art, combination distribution facility in Pennsylvania. This facility will provide world-class service to both our retail stores and BSD customers in the Northeast.

Third, we're investing in Copy & Print Depot and Tech Depot Services. Our efforts to market these services to increase awareness, train our associates and invest in the infrastructure are producing favorable results. As a result, we are seeing positive incremental sales growth compared to last year.

Fourth, we're implementing a new point-of-sale system in all of our stores, which will give us much needed customer recognition, including our Worklife Rewards loyalty program members and enhanced selling functionality.

And fifth, we're continuing to test our new smaller store format. These tests have showed positive results with this format, including an enhanced customer shopping experience. This smaller format could lower occupancy costs and improve our sales productivity. We will keep you updated on this initiative as we move forward.

In summary, we feel our associates executed well throughout the quarter and as a result, the North American Retail division performed well as we look profitable in our most challenging sales quarter of the year. We continue to focus on reducing our cost of sales, improving store productivity, improving category management and investing in our people and the business.

We anticipate the back-to-school season to be very promotional this year and our competition to be very aggressive. We plan on offering our customers the best value possible and to invest in more marketing to support the plan to gain our share of the School Supply business. Our mission is to become the primary school supply destination of our existing customers and to attract new customers. We will accomplish this by creating a compelling and differentiated value proposition, and we will enhance margin and build the market basket as a result. We will employ our smart brand positioning as a key element of creative messaging for our Go Back Smarter campaign.

We've got some exciting new school products this year, including fashion-oriented private branded products and exclusive national brands, including unique designs and licensed brands. We're also promoting exciting activities like hosting 180,000 teachers at our retail stores in July and August as part of Teacher Appreciation Week and breakfast events across the U.S., Canada and Puerto Rico. In its seventh year, you Office Depot's Teacher Appreciation celebration will recognize teachers for their ongoing commitment to the classroom and today's children with discounts, special offers and a breakfast in their honor.

Looking at the third quarter, we expect our sales to be about flat versus the prior year, and operating profit could be down a little to last year due to increased marketing expense to drive awareness.

Steve Schmidt will now review the second quarter results for North American Business Solutions. Steve?

Steven Schmidt

Thanks, Kevin. In the North American Business Solutions division, second quarter 2010 sales were $820 million, down 6% versus the second quarter of last year. This was the lowest rate of decline since the second quarter of 2008. Excluding the impact from restructuring certain non-core businesses in late 2009, sales were down 4%.

Our average order value for the second quarter was relatively flat versus the same period last year. Fewer customer transactions were the main driver of our sales decline this quarter, although the rate of decline has actually improved sequentially over the last five quarters.

Our strongest product category in the second quarter versus the same period last year was Copy & Print Depot. Cleaning and breakroom supplies also performed well, both of which are areas of focus for our business.

We're very pleased that sales in our Direct channel in the second quarter were relatively flat versus one year ago, with many product categories showing very positive growth. This is a direct result of our very disciplined approach to our Direct business and the success we had with the increased effectiveness and efficiency from direct mail, e-mail and catalog as well as our improved websites. Driving this effectiveness and efficiency is our IT investment behind our knowledge management systems, enabling better targeting with relevant marketing communications.

Sales in our Contract channel continued to decline in the second quarter versus last year, although we did see the rate of decline improve from prior quarters. The government sector remains challenged, and sales to small- to medium-size business customers were somewhat weaker than expected. The good news is that we continue to grow our customer file as we opened up to over 2,000 new accounts in the second quarter. We also had positive improvement in the area of customer retention during the quarter.

I know there's been a great deal of interest in the U.S. Communities business, and I'll give you an update on recent events. As we stated in our 8-K filing on July 16, we chose not to bid on the L.A. County contract for office supplies under the U.S. Communities Government Purchasing Alliance. We believe that the contract contained terms that are problematic, and performing under it could negatively impact Office Depot's profitability. We will aggressively work to retain our customers related to this particular business and grow the business directly and prove new cooperative agreements, either with U.S. Communities or other associations. We can also manage our cost as needed to mitigate the potential financial impact of current business not retained. The key takeaway here is that we plan to keep our customers using multiple consortiums that have better terms and provide much less risk to our shareholders. We will keep you updated on any new developments as we go forward.

In the second quarter, 85% of total BSD sales were online, which is up from 82% for the same period a year ago. And our global company Internet sales for the past 12 months totaled $4.2 billion.

Second quarter 2010 operating profit for the North American Business Solutions division was $14 million versus $23 million last year. The operating profit decline from the second quarter of 2009 reflects primarily the flow-through impact of lower-than-expected sales, as well as shrink and customer volume rebate benefits from last year. However, we were successful in increasing our gross profit margin by 90 basis points in the second quarter versus last year due primarily to better pricing management.

Even though business conditions remain challenging, the North American Business Solutions division continues to focus on executing on its key initiative to grow sales, reduce costs and raise margins. The sales growth initiatives within the Contract channel include the following: first, the implementation of large market business development teams; second, a stronger focus on national account business development; third, a continued focus on growth in small- to medium-size business customers; fourth, continued growth in our federal government sector; fifth, a further buildout of the sales team in the area of cleaning and breakroom supplies; and sixth, continued growth and increasing momentum in our Copy and Print business.

In the area of margin expansion and contract, we continue to grow our margins through a focus on our newly launched customer savings plan, which incorporates savings for our customers and improve margins for the company. We're also focusing on the expansion of our private label program, renegotiate low-margin contracts and reducing our supply chain costs to serve our customers.

In summary, I'm encouraged by how well the Direct channel is executing. And I see many opportunities to drive profitable growth in the Contract channel throughout the balance of the year. We were successful in winning new business and retaining existing business with large global customers in the second quarter. We were also successful in reducing small orders in our Contract channel by 300 basis points year-to-date as a result of our sales efforts.

Looking forward, we expect our third quarter 2010 sales and operating profit to improve slightly versus last year. Charlie will now discuss second quarter 2010 results for the International business. Charlie?

Charles Brown

Thanks, Steve. The International division reported second quarter 2010 sales of $778 million. That's down 6% in U.S. dollars for the same period in 2009. However, our local currency sales were only down 3%, with a rate of decline improving over the last five quarters. If we exclude the closed Japanese Retail business, the sales decline was actually under 2%.

The second quarter sales decline rate vary from country to country. The U.K. and Germany continued to improve sequentially, and some smaller European markets attained positive sales growth. Our Asian region performed very well with double-digit sales growth, excluding the closure of Japan Retail, driven by South Korea, India and China. We continued to see consistent growth in this region, and we remain focused on improving its profitability.

In the Contract channel, sales increased slightly compared to last year, with the sales rate continuing to show sequential improvement over the last several quarters. This performance was driven by strong sales growth in Asia and somewhat mixed results from Europe.

Our Public Sector business has been negatively impacted by the budgetary constraints and austerity actions taken by the governments across Europe in response to the recent debt crisis. Even though we see increased pressure on public and large accounts, our focus on regional customers and the addition of more sales reps early in this year is paying off with the increased levels of purchasing activity and higher profitability.

Sales in the Direct channel were lower than one year ago, but the rate of decline has improved compared to prior quarters. We attribute this positive trend to specific programs that we've put in place to reactivate customers in some of our major markets. These include competitive pricing on certain supplies under our Viking brand, where we will not be beaten on price. We have also introduced new private brands to combat the emergence of Internet brands focused primarily on price.

Our Retail channel achieved positive sales growth versus last year, excluding the Japanese Retail closures in 2009. The improvement in Retail was primarily driven by the execution of our key initiatives, especially in France, where we experienced mid single-digit positive comps. In April, we held our anniversary sale, while June benefited from the launch of Microsoft Office 2010. Our promotional activity drove sales in the furniture and technology categories.

The International division's operating profit was $19 million for the second quarter 2010, up from the $3 million reported in the same period of the prior year. Operating profit margin was 2.4% or 200 basis points better than prior year. The operating profit increase this quarter was driven by improved gross profit margins and lower SG&A expenses compared to last year.

Our gross profit margin increased over 130 basis points compared to last year because of better pricing management, which more than offset the negative flow-through impact from lower sales. The division's operating expenses were lower, mainly from a reduction in distribution costs as part of our supply chain rationalization and exiting the Retail business in Japan last year.

Additionally, we reduced G&A expenses by over 10% in the quarter. The change in exchange rates negatively impacted operating profit by a small amount, as the euro and pound began to weaken against the dollar late in the quarter.

We remain focused on implementing many of our strategic initiatives to deliver improved and sustainable results for the International division. I'd like to update you on two of our main initiatives.

First, we have developed enhanced key performance indication reporting through our balance scorecard. The scorecard provides awareness, alignment and action to ensure continuous improvement. We initially rolled this out in the U.K. and have seen great operational improvements there, especially in our customer service metrics. We have now produced the scorecard across Europe and Asia and look forward to better operational effectiveness across the division as a result.

Second, despite the continued slow pace of the economic recovery in Europe, we have introduced a number of initiative designed to grow our revenues. As said earlier, we are being price competitive on certain supplies that drive a larger basket and higher average order value.

The sales reps that we added early in the year are showing great results. We plan to add more reps in the second half of this year. These selling resources are supported with better training, and we aligned our commission structure to ensure superior performance. Finally, we've upgraded the functionality of our websites and we're receiving very positive comments from our customers.

In summary, the International division performed well again this quarter, with higher gross margins, lower operating expenses and improved operating profit compared to last year. We continued to improve our execution, reduce costs and build stronger relationships with our customers.

Looking forward, we anticipate that our third quarter 2010 sales will decline slightly but improve sequentially compared to last year and last quarter. We expect that movements in foreign exchange rates will continue to negatively impact our results, although rates have improved during July compared to last month. As a result, our operating profit is projected to be about flat.

I'll now turn the call over to Mike, who will review the company second quarter financial results in more detail. Mike?

Michael Newman

Great. Thanks, Charlie. As Steve mentioned at the outset of the call, the second quarter 2010 earnings loss was $19 million, $63 million better than last year and ahead of where we had projected in April.

During the second quarter of 2010, we recognized tax benefits of $29 million, which resulted in a tax benefit rate of 75% on the second quarter loss. This benefit includes discrete items of approximately $13 million from the release of a valuation allowance in Europe because of improved performance in that jurisdiction and settlements with certain taxing authorities.

Additionally, based on our latest estimate of the full year effective tax rate, the current interim period includes a catch-up effect of prior-quarter results. As we mentioned on past calls, changes to temporary differences, combined with the need to recognize valuation allowances on our deferred tax assets in the U.S., will create volatility in our quarterly effective tax rates. Due to our company's mix of earnings and fluctuations in these temporary differences, we now expect our annual effective tax rate to be a benefit of approximately 10% and our cash tax rate to be a slight benefit for 2010.

Another benefit to second quarter 2010 earnings was a decrease in corporate G&A of approximately $7 million compared to the same period last year. This decrease primarily reflects an adjustment to variable base pay that is influenced in part by unfavorable exchange currency rates. And that was partially offset by increased depreciation expense related to the company's implementation of a new enterprise software system in the third quarter of 2009.

Taking a look at cash flow. We ended the second quarter of 2010 with a free cash flow use of $62 million compared to the second quarter of 2009, which was a use of $14 million. This use of cash reflects a back-to-school inventory ramp-up net of payables, higher capital expenditures from our new growth initiatives and cash payments related to prior restructuring efforts as well as other accruals.

We now expect 2010 free cash flow to be in the $50 million to $70 million range, lower than our previous guidance due mainly to unfavorable currency movements and our decision to delay the election to carry back tax losses from 2009 to the 2010 tax year. The decision to delay the tax loss carryback election will maximize the cash flow benefit to the company in the first quarter of 2011.

During the second quarter, we recorded dividends on our convertible preferred stock of approximately $9 million which were paid in cash in July.

Moving to our balance sheet. We ended the second quarter with $578 million in cash which was $19 million higher than the same period in 2009. And including availability on our asset-based loan facility, liquidity totaled about $1.3 billion at the end of the second quarter of 2010.

Inventories totaled $1.2 billion globally, down 7% from the second quarter of 2009. And our days sales outstanding improved two days versus one year ago. Receivables of $920 million (sic) [$925 million] in the second quarter were down 19% or $202 million (sic) [$212 million] versus the second quarter of 2009.

Next, I'd like to update you on our Business Process Improvement initiatives. In February, we launched a new effort to reduce costs in areas such as indirect spend and other noncustomer-facing functional cost areas. This decision was driven by the results of our finance and IT benchmarking efforts, which highlighted an opportunity to significantly increase our execution discipline while improving our cost competitiveness. We would like to share some of the details with you today.

We created a business process improvement organization or BPI, which is comprised of both internal subject matter experts and new associates with extensive lean and Six Sigma experience and an outstanding track record of success. The mission of this organization is to drive a culture of superior execution that accelerates customer and shareholder value. Our current strategy continues to emphasize improvement by focusing on taking a systematic approach to building cross-functional capability to drive higher performance. We are deploying lean principles and tools to build that new capability.

BPI will pursue a dual strategy in pursuit of both near-term and long-term goals. The near-term transformation strategy focuses on delivering near-term benefits by driving efficiencies and SG&A and continuing to enhance and leverage our existing enterprise resource planning platform for improved efficiency. The long-term continuous improvement strategy focuses on working cross-functionally to define and build a culture of continuous improvement in a lean operating system. This will enable the business to continue to identify, implement and sustain ongoing process improvements over the longer term. Our goal is to build world-class finance and IT functions.

We're very excited about this business process improvement initiative. But shifting to culture and building such capabilities takes time, which is why we are also driving the SG&A transformation program to address our near-term financial needs. We are targeting a $100 million cost savings annual run rate by the end of 2013 and have currently identified $80 million in the areas of indirect spend reductions, finance process improvements and IT integration. We are optimistic that the balance of these savings will be identified and delivered as we ramp up our continuous improvement strategy.

To put this in perspective, our global indirect spend is about $1.6 billion, of which $1.3 billion is in the U.S. Also, global finance and IT costs combined represent an annual spend of over $300 million. Key enablers to help us deliver these savings will be leveraging our existing domestic ERP system, which we went live with last summer, installing a common European platform and further leveraging our existing investments and successes in global shared services.

Additionally, through this initiative we have identified working capital reduction opportunities of about $50 million. Although I'm not in a position today to provide the benefit breakdown by year for modeling purposes, I can tell you that the benefits in 2010 will offset any investment the company is making in this initiative. I look forward to sharing the progress with you as we move forward. I'm very excited about this. And now I'd like to turn to the third quarter 2010 outlook.

With international operating profit expected to be about flat, North American BSD projected to slightly improve and North American Retail possibly down a little due to marketing expenses required to support our plan to gain our share to back-to-school business, we expect third quarter EBIT for the total company to be about flat versus last year.

And with that, I'll now turn the call back over to Steve Odland.

Steve Odland

Thanks, Mike. I'm very pleased with the progress and the results that we've seen in North American Retail, in North American Direct and in our International businesses. All of these areas are very close to returning to sales growth. These businesses are executing well, and we've seen good margin gains over time.

Our greatest opportunity continues to remain in the North American Contract business. We need to recover in the state and local government spending, and also unemployment levels continue to plague our small- and medium-size business customers. But we need to push harder as well to gain market share in contract, while at the same time not allowing margin deterioration.

The good news is that the second quarter, our lowest seasonal quarter, is behind us and back-to-school is upon us. And this offers a great opportunity to drive growth in our seasonally important period and that leads right into the holiday season in the back part of the year. So we're focused on returning to growth and delivering improved profit in the second half of 2010.

And with that, we'll open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Chris Horvers, your line is open your for question. [JPMorgan]

Christopher Horvers - JP Morgan Chase & Co

Can you speak to -- on the free cash flow guidance reduction to $50 million to $70 million from $71 million to $100 million, how much of that was the tax, the shifting of the tax realization? And then also, Charlie, can you speak to why there is such a deceleration in terms of the operating profits after $34 million last year? It sounds like you're basically saying that it isn't going to be flat to that $34 million. Or are you saying that it's actually going to have no profit at all?

Michael Newman

Chris, Mike Newman, I'll take the first piece. The push on the tax planning is about $10 million, and really the balance of the change from our previous guidance on cash flow for the year is mostly exchange driven. So those are the two pieces that I'd call out as the major differences.

Charles Brown

Chris, this is Charlie. We're saying that our third quarter this year will be about flat to the third quarter of last year. Really a couple of things are driving that. Our Public Sector business and some of our large markets in Europe, we've seen a significant tightening, and this is again a matter of public record. The other issue that we've had, it's moderated somewhat, has been foreign exchange rates. Late in June, the euro got down to about 1.18, which compares to a mid-1.30 number for the prior year. So both of those are headwinds to earnings growth for us. We still expect our margins though to continue to be strong.

Christopher Horvers - JP Morgan Chase & Co

And then as it relates to the potential exposure from U.S. Communities, two questions there. The first being, it sounds like you would basically be -- is it you go other consortiums and then you can go to the customer and essentially sell that, joining that consortium to the customer? Mike, if you could talk about what the potential delevering by not having an incremental or decremental dollar of sales, what the potential delevering impact to earnings outside of the profitability of the contractor itself?

Steven Schmidt

Yes, Chris, this is Steve. First of all, yes, the way the process works is that you have a buying cooperative, which is basically U.S. Communities and LA County was the lead agency. We currently have other operatives that we work with today that are part of agreement between Office Depot and these other cooperatives. And so as we go forward, we will be working with either U.S. Communities or other cooperatives to ensure that we have an offering to our customers. I also want to remind everyone that all of these customers are our customers today. We're shipping these customers. We invoice them. Our sales organization is calling on them. And so we have the relationship with all of these customers, and our intent is to try to retain as many of these customers as we can.

Michael Newman

The reason that people use these buying coops, Steve, is because it just allows them to piggyback on another bid without having to do a competitive bid. You may want to explain that because these public agencies have legal requirements.

Steven Schmidt

Yes, within the public sector, the way it works is that as long as you have a competitive bid within a public agency and the terms within that bid have what's called piggyback of a language on it, that affords any other public agency in the United States to piggyback on that contract and not have to go out to competitive bid. Because within the public sector, it does require a public bid be offered. And so through this piggyback-able arrangement, many, many agencies which don't have the resources to go through an RFP process are simply able to piggyback onto, in this case today, the LA County-U.S. Communities Agreement and/our other cooperative agreements.

Michael Newman

And so the co-op just is an efficient way to have another party through the competitive bids. They're our customers. We call on them. And our view is that we're going to keep our customers, and they're happy with us. And we will deal with other competitively bid cooperative arrangements for them. Mike, you pick up the second part of that.

Michael Newman

On the second part of your question, as we've stated, the overall, the profitability on U.S. Communities, we've said it in the low-single digit, from an operating margin rate. We do have a, what I'll say a modest piece of fixed costs. I don't want to call that number out for our competitors. But we believe that through the amount of business we retain and our ability to manage those costs in the short term, we can defray a lot of the impact from that. And I'll just leave it at that, without getting into more detail.

Steve Odland

But I think it's important for people to understand, this doesn't expire until the beginning of next year. We will have other arrangements in place before then. Our goal is to keep every one of our customers. And this gives a better platform from which to grow, because it will be a more powerful and more profitable platform going forward in the future. So we're going to be very excited about selling it harder. So we think that this will create a platform for stronger growth in the future than the previous platform.

Operator

Our next question comes from Gary Balter. [Crédit Suisse]

Gary Balter - Crédit Suisse AG

Just following up on the margin side of the U.S. Communities contract, you mentioned that it's low singles, but essentially, the company earns about $2.5 million to $2.7 million in that division. So isn't it about average, or is there something in there that says it's actually lower than the average?

Steven Schmidt

Gary, this is Steve. Yes, when we look at on the U.S. Communities business today is that it is as we've talked about low single digit margins, you're correct. When we look at the overall business, I mean, historically, the BSD [Business Solutions Delivery] business has operated in kind of the mid-teen range, kind of that 5% range from an operating margin standpoint and that's our intent to try to get back to those levels over time. But obviously, at this point, we have some significant headwinds in front of us. And at this point really, we can't talk about or don't want to talk about any kind of future performance.

Steve Odland

I think you said mid-teens -- you meant, I think...

Steven Schmidt

I'm sorry, I mean, mid-single digits. I said mid-teens. Sorry, mid-single digits.

Steve Odland

It got us all excited here. I think today your point is it's about average which is correct.

Gary Balter - Crédit Suisse AG

But going forward, what you're saying is your other contracts have more potential for profitability, and this would have kind of squeezed you had you had this favored nation clause in there. Is that the way we...

Steven Schmidt

Absolutely. I think that's a good way to think about it.

Steve Odland

The new language, Gary, was significantly different which led us to believe that we weren't going to be able to make any money on it period. So that was going to go the wrong way. While at the same time as the Contract business recovers, our intent is to restore the margins on that business. So they were going to diverge rather than being at convergence here.

Gary Balter - Crédit Suisse AG

Could you talk about payables? That came down for a second quarter in a row significantly. Is there something going on there? Or is it just the way you're purchasing?

Steve Odland

No, I mean, I would probably say it's more than time, there's not really any change in terms of how we do business with our vendors or any change -- there might be some timing issues there. One thing I will point out, especially when you look at our cash flow this year versus last year, last year we were pushing very hard DSO reduction. We took our vendor program receivables down a lot last year. We're up against that on the same basis. And all of our working capital numbers, whether it's receivables, inventory and payables, have got a fairly significant foreign exchange impact due to the currency adjustments or currency trends that Charlie talked about earlier. So there's not been a change in our posture on payables and what we're doing with vendors, no.

Gary Balter - Crédit Suisse AG

I mean, are you seeing -- like you talked about flattish for the third quarter. Maybe asking a different way, the fourth quarter you did a really good job of kind of managing expenses and showing margin. And then this quarter, I think you did pretty much the same and you deserve credit for that. What happened in the first quarter?

Steve Odland

What happened in the first quarter?

Gary Balter - Crédit Suisse AG

Yes, like it seemed like you fell off the track a little bit and now you're back on. Let me ask [indiscernible] (48:15) obviously, which you can't control.

Steve Odland

If I characterize the things that we've done from really Q4 to now, I think we're certainly ahead of where we thought we'd be. The margin expansion that we've had is greater than I thought. I'm pleased with Q1 and Q2 from a performance perspective. We're being slightly conservative on Q3. It's a big season for us. We don't want to get too far off in front of us is back-to-school. That period starts really right now. July, didn't tell you much, so that period starts right now. So I think we've taken a pragmatic approach to how we look at Q3 and how we talk about the business. But so far, with what we're doing this year and the environment we're in, we're pleased with our execution.

Operator

Colin McGranahan [Sanford Bernstein].

Colin McGranahan - Bernstein Research

Mike, just wanted to get a little bit more detail on the BPI [Business Process Improvement] initiative. A couple things. One is, can you talk about potential headcount reductions over time and how those might phase through? And then secondly on that, just if you can provide any more kind of what some of those big buckets are? You talked about indirect spend, finance process improvement, IT integration. We've been hearing about those opportunities for quite some time, so I wanted to kind of get a sense of what was maybe incremental or different as you've gone through this process so far, what you've learned.

Michael Newman

Yes, we've been working on it for quite some time. If you look at what we've identified today, more than half of that benefit comes from indirect, which is a fairly straightforward process. It takes time. So we're looking at a significant impact from the indirect side of the things that I called out. The other pieces are going to -- and I don't want to get into headcount obviously. But we're looking at process improvements, common European platform is shared services which we -- initiatives we're currently working on. It will play a significant role. But of the 80 we've identified, well more than half comes from indirect spend, and we're looking at other opportunities. We'll talk more as we go forward. The obvious question is how much capital do you need to do this. We think that we'll be able to handle a lot of the capital requirements inside of a CapEx number that's fairly close to our D&A number. But we've got some work to do there. I'd prefer to be more definitive as we get down the road. We've had teams working on this really since February. We have an outside consultants been here since February. We're making a lot of progress. This is up and running and we're actually starting to get some benefits already on the indirect side in 2010. So I'm really excited about this, and I'm more excited about the long-term prospects of what this could bring for our business down the road as this becomes embedded in our culture and becomes a way of life.

Colin McGranahan - Bernstein Research

And the indirect spend, is there something there that wouldn't make that realizable, let's say, even within the next few quarters?

Michael Newman

We're starting to roll through that on a category-by-category basis. We're just getting up, we're having outside consultant help us with that. But of the things that are identified on the call, that certainly is the one where we would see based on how we layer in these approaches and looking at the spend. That's the one where we'd see results the fastest. Some of the others, whether the common platform in Europe, some shared services, looking at process improvements and parts of our organization, that's going to take a little more time process mapping, looking at how we organize those efforts, that's the heavier lifting.

Colin McGranahan - Bernstein Research

And then second question for Steve Schmidt. 2Q profitability, I think you had expected it to be improved sequentially and year-over-year. Obviously, it came in a little bit disappointing relative to those expectations. And you said, I think, lower sales was the primary, was there anything else there that didn't meet your expectations from a bottom line perspective? And where was really the sales weakness relative to what you had expected?

Steven Schmidt

Yes. I mean, the softness, Colin, was in the top line, and we did see softer sales than we expected. Probably, the one area that continues to be softer than anticipated is the entire public sector. With California especially continues to be very soft and as we've spoken before, between California and Florida, two of our single largest markets, we continue to see some significant degradation there and in addition to that, in the public sector, most of our state contracts which ended the end of June, we saw real softness in their purchasing relative to a year ago. So that public sector continues to decline. Secondary, would be SMB. SMB, we continue to work hard on it we've seen really good progress relative to acquiring new customers and building our file. But at the same time, the lack of liquidity in that area continues to be a drag and be softer than we had forecasted.

Steve Odland

Last year, Colin, I think what Steve was saying is the state budget fiscal year in June. And so last year, we were seeing them spend a lot of money in the second quarter as they were ending their fiscal year and still have cash. It was cut this year, so we saw a big year-over-year decline in the amount of money available to the states and local budgets that had fiscal years ending in June.

Operator

Matt Fassler. [Goldman Sachs]

Matthew Fassler - Goldman Sachs Group Inc.

The first relates to Retail, you gave your Retail guidance based on some more aggressive retail marketing. If you could just talk a bit more about how that's going to be manifested in terms of advertising versus price promotion.

Kevin Peters

Matt, this is Kevin. So I think we're expecting the back-to-school season in 2010 to be very competitive. I think if you look not only at the big-box retailers, but also the OSS markets and even the adjacent markets like drugstore chains, it seems as though everybody is getting into the back-to-school business. So we want to make sure that we get our fair share of the back-to-school spend. We think that the right thing to do is to augment our marketing activities with some additional direct mail pieces, as well as media. We didn't do that last year. So this hopefully gets us off on the right foot to support back-to-school helps us gain share in the market, put a little bit of expense pressure on it. But ideally, we think it'll actually get customers back in our store that haven't chopped us for a while, yet give them a taste of the new product offering that we have and help us gain some loyal customers going forward.

Matthew Fassler - Goldman Sachs Group Inc.

So is the incremental piece the direct marketing or the broadcast media?

Kevin Peters

Broadcast media.

Matthew Fassler - Goldman Sachs Group Inc.

So you'll be on TV and radio for back-to-school, whereas you were not last time?

Kevin Peters

That's right. And we did that last year.

Matthew Fassler - Goldman Sachs Group Inc.

Had you been in years prior to 2009?

Kevin Peters

It's been, I believe, three or four years since we've been on broadcast media.

Matthew Fassler - Goldman Sachs Group Inc.

The second question I have relates to BSD guidance. I believe that you've guided 2010 sales and profits to improve slightly versus a year ago. Just to dig into that a bit more, you did have a bit of a sales decline this year, this quarter, rather, albeit a smaller one than you had previously. The compare is, if anything, just a little bit tougher and that's on the sales side. And as I look at the earnings side, over the past several years, your BSD profits have fallen sequentially slightly from Q2 to Q3. And to achieve flat with a year ago, you'd have to have a sequential increase from Q2 to Q3. So if you could just share some insight as to what you think will get better, I guess, on the underlying profitability of the business to help you get to that number, please.

Steven Schmidt

Matt, you are correct. That's exactly how we're guiding. That we expect our third quarter, both sales and operating profit to improve slightly versus year ago. And at the end of the day, we're doing a number of things. First of all, our Direct business continues to do well, as I spoke about. And we're seeing very good progress there relative to our efforts around our direct mail, e-mail, Web and our -- all of our initiatives catalog that we have in place there. Second of all, we have a number of new business initiatives which we have launched during the course of the last six months and they're slowly starting to show some trends positively as we move forward. And then finally, as we look at the public sector, we hopefully will start to see some growth as new budgets come into play here as we move forward. So at this point, those are really the three or four key initiatives that drive that projection.

Matthew Fassler - Goldman Sachs Group Inc.

If you just dig into the U.S. Communities business, you had sized that in your, I guess your last 10-Q somewhere around 15% of BSD sales, which was around $600 million. I understand your rationale for doing what you did. Is there a portion of that business that is definitively not accessible to you based on the way those customers buy? And then by inference, how big a piece is sort of legitimately jump ball that you might still be able to capture?

Steven Schmidt

Well, first of all, let me level -- set the numbers and while we had -- within the U.S. Communities business, $600 million. In reality, the numbers today about $500 million, about $100 million was moved out of the L.A. County U.S. Communities agreement, about half of that was through a school supply bid that was done through Fairfax County, which we were able to secure. And then the State of Florida and the State of Arkansas chose to not bid or be part of the U.S. Communities relationship and that was pulled out. So the number or the starting point is around $500 million. All of those customers are customers of ours today that make up that $500 million. And as we spoke about, we will work aggressively going forward to retain as many of those customers as we can as we go forward.

Operator

Kate McShane. [Citi Investment Research]

Kate McShane - Citigroup Inc

Can you talk a little bit about your inventory balance for the rest of the year, specifically in Retail?

Kevin Peters

Kate, this is Kevin Peters. So I think the way to think about our inventory balance. We have now for some time been working on fine tuning our inventory. We saw a little bit of a build in Q2 in preparation for back-to-school. But essentially, we expect our inventory balance to essentially be roughly at the same run rate of improvement that we saw last year. The way that we've been able to do that is to focus on reducing cycle time with our vendors, which allows us to take safety stock out of our inventory investment. We've changed the way that we profiled slower moving SKUs, which allows us to be more prudent and prescriptive in terms of how we invest in the inventory. And we've also done some work in our supply chain that allows us to transition from a push environment into our stores to a pull environment, which means we can essentially use the point of sale trigger to move inventory into the stores which will lower the inventory balance.

Steve Odland

We had some consolidations, too, Kevin.

Kevin Peters

Yes, we've also had some consolidation in our supply chain. If you look back a year ago, we had roughly 33 facilities in our network. Today, we have, call it, 17 on our way down a little bit lower than that. As a result, we've been able to pull inventory out of the system.

Steve Odland

And the execution here has been just remarkable. I'll praise Kevin and the team because during this period of time, our service metrics have actually increased. And typically, when you go through these kinds of transitions, there's risk to service and in fact, the execution has been so good that we've got better in-stock conditions in the stores and better delivery and service conditions for our BSD customers. So congratulations to that team.

Kate McShane - Citigroup Inc

And at the end of today's comments, Steve, you had mentioned that you plan to push harder in delivery without hurting margin. Is there anything that has been talked about internally that maybe haven't been mentioned yet, in terms of how you do plan to improve capturing more of that business going forward?

Steve Odland

Well, what I was saying essentially is that we need to pick up some market share. The Contract business still is a tough business. It's still is related to jobs and a little bit the economy. But I don't really want to take away, we're just sitting back and waiting for the economy to come back with quite the contrary. We're out there and being more aggressive than ever. But we're not going to do so and lose money and take margin degradation, and that's the stance we've taken with U.S. Communities and that's the stance we're taking with our big bids. So we're going to be logical in our price competition but aggressive. And that's essentially, Kate, what I was trying to say. We need to pick up market share here.

Operator

Our next question comes from Stephen Chick. [FBR]

Stephen Chick - FBR Capital Markets & Co.

I guess first off, for Steve Schmidt, I have a question on the U.S. Communities contract. It seems like the economic resolution of it, I guess in the case of both L.A. and yourselves, given the switching costs seem to be high for both parties. It kind of seems like the best resolution would be that you come to some sort of maybe agreement and retain the contract going forward. I mean, your two largest competitors have relationships with, as I understand, competing contracts with NGPA and the Western States Alliance. So I guess my question is, since you've back, kind of gotten out of it or didn't submit a bid for the RFP. Can you talk about if you've had any discussions since then and how the relationship is with L.A. currently? And I know they have a renewal option potentially. Is that something that you guys have discussed potentially renewing and maybe kind of come to some type of agreement to retain it in its entirety?

Steven Schmidt

Yes, Steve. First of all, our relationship with L.A. County and U.S. Communities is very good. And they're both organizations that we have worked with for the past, over a dozen years, and we will continue to have a positive working relationship with both of them. Relative to the current solicitation, there's a couple of things going on. First of all, they're under the process right now. This is their process, and the bid process continues. They're going through their evaluation process as we speak. And I think it would be inappropriate for me to make any comment relative to any decisions that they choose to make. At this point, they're going to the evaluation process and will determine what they think is in the best interest of L.A. County and U.S. Communities as part of that decision-making process. Once they make whatever decision that is, that will obviously, then potentially dictate certain pass that either we would choose to take or they would choose to take. At this point, anything is possible. But I think prudently, the path that we're going down is one of we chose not to bid for the reasons we articulated, and we are proactively continuing to serve our customers and we will continue to honor all of the terms and conditions of the U.S. Communities contract, which runs through January 1, 2011. While at the same time, ensuring that we have an alternative strategy ready to present to all of our customers as we go forward.

Stephen Chick - FBR Capital Markets & Co.

So have they given, I guess, a date at all? Or do you have an expectation of when a decision is supposed to be made? Or we're just kind of going status quo with the contract as it stands right now?

Steven Schmidt

Yes, we're moving forward status quo. And at this point, we really don't have any indication relative to a decision timeline by them.

Steve Odland

And I think we should be clear, these guys have been great partners with us for a very long period of time, and we'd be very open and willing to continue the relationship. We just couldn't do it on the new terms that they were presenting, and we're trying to make that clear to them. So the ball is really in their court to determine whether they want to revise the terms and come back or how they want to proceed. Meanwhile, just to be clear, we have other agreements too. You mentioned people having other agreements, we have those as well. And that's why we're confident that through this and maybe some other work that we're doing that we could -- that we have a high probability of retaining our customers. So it's a complex situation. We were more than willing to continue, but we just couldn't do it on the terms that were outlined in the new bid.

Stephen Chick - FBR Capital Markets & Co.

Now second, if I could on that, in the 8-K, you talked about the separate RFPs with the State of Florida and Arkansas. And there's actually been some rumblings on if the State of California is open or not with an RFP out yet, or I don't know what the status of that is. But can you talk to -- I mean, we've heard that you've actually got in a pretty good spot to retain a good portion of Florida. But can you speak to where those RFPs currently stand?

Steven Schmidt

Sure, Steve. First of all, the Florida RFP is under process right now and so they're going to their evaluation process. And we've obviously, we'll see where it comes out. But I mean at this point, it's really up to the State of Florida. But we would hopefully be optimistic there and the same would be true in Arkansas. The other piece that I would say to you is the School Supply business, the other half of that $100 million has already been awarded to us through Fairfax County, and that's a five-year agreement that's in place that we have moved forward with. Relative to California, California just announced that they had basically canceled the RFPs. So they had gone through an RFP, I believe this is the second time that it was modified, and then they came out and canceled. We continue to service California customers through a small business consortium that we have in the State of California and will continue to service California customers through that.

Stephen Chick - FBR Capital Markets & Co.

So switching gears, and just one other question, again for Steve Schmidt. Just to clarify, your sales guidance for BSD in the third quarter is up year-over-year in percentage terms. Do I have that right?

Steven Schmidt

Improvement versus Q2 is what we've guided.

Stephen Chick - FBR Capital Markets & Co.

So down at a lower rate. Now Q2, as I -- looking back at what you said last quarter, I think BSD started the quarter off down 5%, and you reported today -- I'm assuming these are on adjusted figures, they were down 6% today for the quarter. So it sounds like maybe they kind of slipped a little bit as the quarter went on, if my math is right. So your expectation for Q3 is a better decline than the reported down 6% or the adjusted down 4%?

Steven Schmidt

Steve, I think if you go back and when we did our Q1 investor call, our results during that quarter were down, I'm going to say, 8%, 9%. And so we were then down 6% here and we're expecting that decline to be less in Q3. It did get better.

Stephen Chick - FBR Capital Markets & Co.

And what are you thinking about in terms of cleaning supplies and H1N1 from a year ago? As I recall, in Q3, Q4, you called that out as maybe being a strong category for you. Is it kind of small enough where you can kind of cycle it pretty easily? Or is there some type of basis point kind of item that we should be thinking about?

Steven Schmidt

Yes. I would say, Steve, that the impact from that was not significant. It's an area that we have put incremental resources, incremental marketing programs. And we're encouraged by the growth that we're achieving across the board relative to new customers as well as new categories that we've launched across the Cleaning and Breakroom categories. So we think it's something that we can overcome and is not significant relative to year-on-year comparisons.

Operator

Our next question comes from Dan Binder. [Jefferies]

Daniel Binder - Jefferies & Company, Inc.

First, on the increased pressure in margin for Retail in Q3 around the back-to-school business, I just wanted to make sure I understood correctly that this is a function of increased marketing. I'm curious, though, is this also a function of increased or I should say a decrease in anticipated merchandise margins around more aggressive pricing? In other words, is it just more aggressive marketing? Or is it more aggressive pricing also?

Kevin Peters

Dan, this is Kevin. I think first and foremost, it's more aggressive marketing and specifically it's broadcast media to help build brand awareness. I think they'll naturally, it'll nationally be a competitive back-to-school season, which will put some pressure on margins. But I think the biggest part of that is our broadcast media. We probably have a little bit on tech as well. We've got a new tech assortment that we're rolling out. That will have some impact on margin as well. But the biggest chunk, I think, is from broadcast media.

Daniel Binder - Jefferies & Company, Inc.

And then on -- I hate to belabor the point, but U.S. Communities has a response to Office Depot. And I realize it may be a contest of words, so I'm not going to get into that too much. But I guess what I'm trying to understand and I think what might be helpful for investors is it U.S. Communities -- if you're not bidding on U.S. Communities, and U.S. Communities decides to do something else whether it's wait a bit longer or maybe take a bid from a group of dealers, or whatever the case may be. If there is a solution that they find that does not include Office Depot, what is your sense, based on -- I'm assuming you've done a fair amount of work talking to the folks that are included in that contract and talking about retention efforts. Do you try and move those customers to a different co-op? Do you have a sense of how many of them would be willing to stick with you? And then if there is a group of dealers that are willing to accept the more onerous terms, it would seem to me that your existing customers then are motivated to do something. So I just want to get a sense around the retention efforts and anything else you can add with regard to with their response.

Steve Odland

Yes, Dan, let me made a couple of points here. First of all, again, we have alternative cooperatives who are already customers of ours and agreements that are already in place that we could leverage and put into the marketplace tomorrow, but it's already out there. So we already have alternative cooperatives in place that we use and leverage in the marketplace. We are absolutely committed to living up to the terms and conditions of the U.S. Communities contract, which goes through, again, January 1, 2011. So we are still working on U.S. Communities. We're obligated and will absolutely honor the terms and conditions through January 1, 2011. Obviously, during that period, when U.S. Communities makes a decision and L.A. County relative to the current RFP, we'll then have communication going out to customers in respect to our plan of action going forward. Again, to reiterate, these customers are our customers. We shipped them today, we invoice them, our sales reps call on them. And obviously, we will have in place a full-blown marketing program and strategy relative to trying to ensure that we retain as many of those customers as we possibly can. And that's really how we're trying to focus.

Daniel Binder - Jefferies & Company, Inc.

And then just a final point of clarification. In earlier comments, there was an expectation of delivery being better, slightly better than last year. And then I think in response to the last question, there was a comment that -- I think someone said whether it'd be less bad than what we saw in this most recent quarter. I just wanted to get -- are you expecting sales to be up in delivery year-over-year or just down less than what we saw in Q2?

Steven Schmidt

Down less than we saw in Q2.

Operator

Mike Baker. [Deutsche Bank]

Michael Baker - Deutsche Bank AG

Just can you talk about comp trend sequentially through the second quarter? And then, including what you're seeing in early July, because I do believe you've given that kind of color in the past, including last quarter you told us about April. And then the second question, just to make sure we have the right number. So I think the guidance is EBIT flat versus last year, just to be clear on that. And I think the EBIT number, correct me if I'm wrong, it was about $16 million? Is that right? I think $7 million operating profit, plus $9 million or so in miscellanies income?

Steve Odland

First of all, I think that July is not a meaningful number because it's -- that there's timing in back-to-school and that sort of thing. We're just hitting the back-to-school season this week. And so things look good, I would put it that way. Mike, you might want to comment on the specifics on the EBIT number?

Michael Newman

Yes, you're real close. I have $18 million last year adjusted for charges. I should be within $1 million or so in that.

Steve Odland

Yes, we're trying to play the right balance. We're trying to be conservative in how we approach this and what we say, but certainly not pessimistic. Because we're going into very strong periods for us in back-to-school. And as people come back to work after the holiday season in summer, you go back to jobs, they use more office supplies and then we're going to have the fourth quarter. So this back half of the year is very exciting period for us, but it all kind of starts like yesterday. So we're anxious, but we're really excited about what we've got in place.

Michael Baker - Deutsche Bank AG

Can I just ask one follow up and I know you don't want to give an EPS number, but just to make sure we have the pieces right. If we start with EBIT at around $18 million, then you take out interest expense and then you take out the preferred dividend to get to the EPS number, and a tax, I guess, benefit. Those are the right pieces?

Steve Odland

Yes.

Michael Baker - Deutsche Bank AG

So if I do all that, if I could follow up. I think I'm going to get a negative number. Can you guide that much?

Steve Odland

No.

Michael Baker - Deutsche Bank AG

No, you can't guide it or no, I'm not right?

Steve Odland

I prefer not to. I mean, I think the guidance we've given, and you guys have enough to do what you need to do.

Operator

Our final question comes from Mitch Kaiser. [Piper Jaffray]

Mitchell Kaiser - Piper Jaffray Companies

Mike, in terms of the Business Process Improvement initiative that you have going on. In the past, I was thinking that maybe you want to see how sales trends were for back-to-school before you invested into that initiative. Have you seen enough just in terms of stabilizing sales trends that gives you confidence in pushing forward on this? And then maybe could you just talk about what the investments might be? I know you quantified what the longer-term cost savings might be, but if you could just give us some sense for the investment and then the confidence to start the program.

Michael Newman

Yes, I don't think it's fair to say that we're watching comps or sales trends to make no-go or go decision on BPI. This is something we've had to go on for the last few months. The investments -- we've made the investments that we need to make today on the indirect procurement side. We've got some outside consultants helping us who have industry expertise there. There may be some CapEx investment as we look at a common platform in Europe and back-to-school. When I look at having something around $200 million of CapEx in the 2010 numbers, there's pieces in our current year CapEx number that are project-driven initiative that are nonrecurring. I expect to be able to manage the capital required to do this inside of a CapEx number that's approximately equal to or less than D&A in the next few years in the absence of something that I can't see today. But we have a lot of those resources in place today. We've beefed up the indirect team a bit. We're driving those results today, and we're moving forward. It really does not have much to do with how we see Q3, Q4 for the balance of the year.

Mitchell Kaiser - Piper Jaffray Companies

So the costs associated with the program, as the project unfolds, are they less than you had originally anticipated? Or are they about the same?

Michael Newman

Well, we said on the call earlier today that any cost we're incurring in 2010, which we are, are being offset by benefits in 2010. So the 2010 impact will be neutral and then as we go forward, obviously, when you look at an $80 million identified benefits stream over the next three years, we obviously expect that to be a significant contributor. So we were very keen in this year on having the benefits offset any short-term impact from the professional fees and additional resources. We've been doing that going forward as this ramps up. We expect it to be a significant contributor. I don't know if that answers your question, Mitch, or not.

Operator

And I'll now turn the call back over to Brian Turcotte.

Brian Turcotte

Yes. Well, this concludes our conference call this morning. Please note that we updated our supplemental investor presentation that provides additional information on the company, and it's on our Investor Relations section of our website. Thanks very much for participating in today's call.

Operator

That does conclude today's conference. Thank you all for joining. Please disconnect your lines at this time.

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Source: Office Depot Q2 2010 Earnings Call Transcript
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