Office Depot Management Discusses Q3 2010 Results - Earnings Call Transcript

Oct.27.10 | About: Office Depot (ODP)

Office Depot (NASDAQ:ODP)

Q3 2010 Earnings Call

October 27, 2010 9:00 am ET

Executives

Brian Turcotte - Vice President, Investor Relations

Charles Brown - President of International

Neil Austrian - Lead Director, Chairman of Corporate Governance & Nominating Committee and Member of Finance Committee

Kevin Peters - President of North American Retail Division

Michael Newman - Chief Financial Officer and Executive Vice President

Steven Schmidt - President of North American Business Solutions Division

Analysts

Michael Lasser - Barclays Capital

Colin McGranahan - Bernstein Research

Kate McShane - Citigroup Inc

Daniel Binder - Jefferies & Company, Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

Matthew Fassler - Goldman Sachs Group Inc.

Stephen Chick - FBR Capital Markets & Co.

Christopher Horvers - JP Morgan Chase & Co

Anthony Chukumba - BB&T Capital Markets

Mitchell Kaiser - Piper Jaffray Companies

Question-and-Answer Session

Neil Austrian

I'll answer the first part. I don't see any significant change in the strategic plan at this point at all. I think it's an executional issue, and I think it gets back just to the blocking and tackling and doing what we do best. On the U.S. Communities, let me ask Steve to talk about that.

Steven Schmidt

From a U.S. Communities standpoint, just to remind everyone, we are committed to our existing U.S. Communities contract through January 1 of 2011. Obviously, we are prepared and have prepared to retain as many of those customers as we possibly can. We haven't given any guidance relative to the percent of customers that we will retain, but we do expect to retain the majority of them. I mean, these are our customers. We've been servicing these customers, we've been selling to these customers, and we have the relationship with these customers. And we have all of the options that our customers will need to stay with the Office Depot Corporation. But again, that process will take place, as we move into the latter part of this year and early 2011, and we can give indications at that time.

Daniel Binder - Jefferies & Company, Inc.

In the most recent quarter, did your account wins offset your account losses? Was it a net positive or negative number?

Steven Schmidt

As we stated, particularly in our medium to large public sector private and public sector business, we are having very good success from the standpoint of acquiring new customers, and we're actually running at the highest retention rate that we have since I've been here. And so clearly, in our large segment, we are growing share.

Daniel Binder - Jefferies & Company, Inc.

Mike, just one question for you on the G& A, the $100 million, I think, you said you wanted to achieve by the end of 2013, is that a net number, or is that before investments that are needed to achieve those cost savings?

Michael Newman

That's the net number.

Operator

Mitch Kaiser, you may ask your question.

Mitchell Kaiser - Piper Jaffray Companies

Piper Jaffray. You talk a little bit about the Windows 7 launch. You talked a little bit about the windows 7 launch. Could you just talk about where your thoughts are on the tablet and the e-reader impact on the computing category, and maybe what your strategy is on a go-forward basis?

Kevin Peters

This is Kevin. I'll take the question on the tablet. I think the tablet certainly are here to stay with the launch of the iPad earlier this year. There are several million iPad tablets in the market. I think data that's published from a number of sources would suggest that it certainly impacted not only the netbook market, but it's also impacted the laptop, and in some respects, even the smartphone market. So I think it's a choice that both consumers and small businesses will make in terms of their computing needs. So therefore, for us, having a presence in the tablet category, we think it is important. We've picked a couple of tablets that we plan to have as part of our offer in the fourth quarter, specifically for our small and medium business customers. We've also enhanced our offering of accessories both for Apple products, as well as other makers of not only tablets and smartphones. Short answer is tablets are here to stay. I think they'll be an evolution. It seems as though every week somebody is getting in the tablet market, so we'll try to stay at least on pace or ahead of that curve.

Mitchell Kaiser - Piper Jaffray Companies

So is the expectation that you'll have those in the fourth quarter here in a meaningful way?

Kevin Peters

Yes.

Mitchell Kaiser - Piper Jaffray Companies

And then just on Florida and California. I think California was the big turn. Could you just talk a little bit what you're seeing in California from the delivery side and also the retail side that suggests that sequential improvement relative to Q2?

Kevin Peters

I'll take the retail piece and let Steve address BSD. I still think and if you look at California and Florida for the Retail business, it's roughly 25% of our fleet of stores. If you look at unemployment in California and Florida, it's still running about 24% or more, higher than the national average. I think the stores in California are well known. There's still a furlough that I think is in place in public government there. So I don't think California is out of the wood. That being said, for Retail in the third quarter, students and parents don't need to do back-to-school shopping. They still need the supplies to allow their students to go back-to-school equipped. And we did I think a good job, not only advertising the products that we had available for sale. We have attractive price points. And we were fortunate that when shoppers came in our stores, we were able to convert them to buyers. So we're pleased with the results in California. I think, we said they were slightly positive for the quarter. I don't know that, that's necessarily a telltale sign of what to expect in the future. I think, they've got a lot of headwind that they're going to have to navigate through.

Steven Schmidt

This is Steve. On the BSD side of the fence, I think Kevin articulated most of the key points that are consistent between retail and the BSD organization. As we look at our state business within the state of California, we have seen some leveling off versus prior negative trends. Obviously, we still remain concerned specifically regarding the furlough process where most of the workers are off on Friday. But as we kind of look at our business overall, relative to Florida, Texas and other key states, we have seen stabilization, primarily driven by the key trends that Kevin articulated.

Operator

Kate McShane, you may ask your question.

Kate McShane - Citigroup Inc

Citi Investment Research. Can you talk a little bit about what you're seeing in your Furniture business? I think you highlighted it, comps positively during the quarter. There's some thought out there that it's temporary, that landlords are incentivizing businesses to move to smaller spaces. Do you have read on the sustainability of this trend?

Kevin Peters

Kate, this is Kevin. We're very pleased with our Furniture business. We, Office Depot, for a period of time was in the Furniture business. We lost our way. Our customers have told us over time that Furniture's an important category for them. I don't think we were as relevant as we could have been. So we've made a big investment in getting back into the Furniture business. And it started really a couple of years ago, we've got an exciting private brand assortment, as well as national brands, a real we're focus on seating and modular furniture and very, very attractive price points, not only within the OSS space but perhaps more importantly, even within the broader retail. So I think, we're increasingly becoming a destination for furniture, data from NPD, which is a private source that provide market share, would probably confirm that. And at this point, we don't see any softness on the near-term horizon for the Furniture category.

Steven Schmidt

Kate, this is Steve. From a BSD standpoint, what we've seen is really kind of a pent-up demand. As you know, the Furniture category over the last two or three years, was in severe decline. So one, there's just a need out there for furniture. Two, what we've done is really focus on the basics: core accessories, chairs, cabinets, the things that our customers need. And we've also -- working with our merchants have really created a line of product that meets the overall needs of our customer base. So we really seen an increase in demand relative to the Furniture category. With that said, we do understand this is more of a discretionary purchase, and so it's something that we need to continue to watch versus what I'll call core supplies, which is more of a day-to-day basic need.

Kate McShane - Citigroup Inc

My second question is on private label. It sounded like it contributed positively to gross margins both in retail and delivery. Did you have a notable increase in penetration of private label? Did that increase as a percentage of sales, or Is it mix and what customers are trading to?

Kevin Peters

Probably more of the latter than the former.

Operator

Anthony Chukumba, you may ask your question.

Anthony Chukumba - BB&T Capital Markets

It's Anthony Chukumba with BB&T Capital Markets. Not to sort of beat a dead horse here, but more interested in Steve's departure just in respect of what role did BC partners play, I guess,in the mutual decision? And then just a follow-up, what role would BC Partners play in the selection of the new CEO?

Neil Austrian

BC Partners is on the board. They had the same votes, if I might want to call it vote, because we never voted as such, as all the other board members. So they did not play any role other than as a board member. And they're good board members. This was not a BC Partners issue at all. In terms of the search process, there are five board members on the search committee and Jamie Rubin of BC Partners will be one of the five.

Operator

Joscelyn MacKay, you may ask your question.

Unidentified Analyst

It's Joscelyn MacKay from Morningstar. I just had a really quick question for International. With regards to that annual sale, I believe, you said was moved to the fourth quarter of this year versus last year, it was in the third quarter? Would you be able to quantify the impact of that?

Charles Brown

No, I can't quantify the impact. Every year, we have our anniversary sale. And it's a three-day event. It tends to drive -- it tends to be very promotional so the margins are not at the level that they normally are in our retail stores. But it does tend to drive a lot of top line sales. it drives a lot of foot traffic due to stores. So I think the main call out was that we were actually positive despite not having the positive sales percent perspective without that sale, and we'll not have those sales in of the fourth quarter.

Operator

I would now like to turn the call back over to Steve Turcotte (sic) [Brian Turcotte].

Brian Turcotte

This concludes our call this morning. Please note that we updated our supplemental investor presentation that provides information on the company and placed on the Investor Relations website this morning. Thank you very much for participating in the call. Speak to you soon.

Operator

That concludes today's conference. Thank you, all, for joining. You may disconnect your lines at this time.

Operator

Good morning, and welcome to the Third 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 begin.

Brian Turcotte

Thank you, Julie, and good morning. Before we begin, I would 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, 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, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as our press release and accompanying webcast slides for today's call, are available on our website at www.officedepot.com. Click on Investor Relations under Company Information.

Office Depot's interim Chairman and Chief Executive Officer, Neil Austrian, will now make a few comments. Neil?

Neil Austrian

Good morning, and thank you for joining us for Office Depot's Third 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 our International President, Charlie Brown.

As most, if not all, of you in the call and webcast this morning are aware, Steve Odland announced his resignation from Office Depot effective November 1, 2010, by mutual agreement with the Board of Directors earlier this week. We want to thank Steve for his contributions to our company beginning in 2005 and through one of the toughest economic climates in memory.

During his tenure, the company grew and achieved record revenue and profits, and we've seen some improvement in margins coming out of the depths of the recession. Now that the worst of the recession is behind us and margins are improving, we believe that this is an appropriate time to seek new leadership to make the most of the platform we have in place, return to sales growth, improved financial performance and reinvigorate our franchise. We all wish Steve well.

As you may have read, we agreed to pay $1 million to settle an SEC investigation regarding communications with analysts and other matters previously disclosed. This settlement puts a definitive end and to investigation that started in 2007, and throughout which, Office Depot cooperated fully with the SEC. The company chose to settle, in order to return its full focus to the business and to serving its customers. I want to make absolutely clear that Steve Odland's resignation was not prompted, in any way, by the settlement with the SEC as some have speculated.

Looking forward, we're committed to taking the time needed to find the right leader for Office Depot for the future. In the meantime, I'll be very actively engaged in carrying out our strategic plan in helping the company to deliver value for our shareholders.

With that, I'll ask Mike to summarize our third quarter 2010 results. Mike?

Michael Newman

Thanks, Neil. Office Depot's third quarter sales totaled $2.9 billion, a decrease of 4% compared to our third quarter results last year. Although negative, the third quarter sales trend was the best since the second Q [ph]. Additionally, I should note that it impact the foreign exchange translation and business restructuring activities, subsequent to the third quarter of 2009. The year-over-year sales decline was only 2%.

Third quarter earnings were $54 million or $0.18 per share versus a loss of $413 million or $1.51 per share in the same period one year ago. Third quarter 2010 earnings include significant tax and interest expense benefits related to tax settlements for open years reached during the quarter that positively impacted earnings by $0.15 per share.

Our third quarter 2009 results included charges for deferred tax asset valuation allowances, the reversal of tax benefits and charges related to restructuring activities, which negatively impacted earnings by $1.43 per share.

Total company operating expenses in the quarter decreased by 8% or $72 million, compared to the third quarter of 2009. This decrease primarily reflects the charges taken in the third quarter of 2009, cost actions taken in the third quarter of 2010 and lower professional fees compared to the prior-year period.

EBIT of $20 million in the third quarter was $2 million higher than EBIT adjusted for charges, reported in the prior-year period. The year-over-year improvement was driven by stronger results in North American Business Solutions at a lower corporate expense.

Total company gross profit margin increased 20 basis points in the third quarter compared to the prior year. This was the fifth consecutive quarter of year-over-year gross profit margin improvement. Our North American Retail and North American Business Solutions divisions were both successful in increasing their gross profit margins compared to the prior year in a weak sales environment. While the International division had flat gross profit margin compared to the prior-year period.

We're very pleased with the continued progress being made in these three businesses, as they continue to execute well in regard to growing margin and are very close to returning to sales growth.

I'll go into more financial detail later in the call, but I'll now ask Kevin to talk about North American Retail's third quarter performance.

Kevin Peters

Thanks, Mike, and good morning. In the North American Retail division, sales for the third quarter were $1.3 billion, down 1% versus one year ago. Our comparable store sales in the U.S. and Canada were flat versus the same period last year. This is the best comp sales performance we've had since the fourth quarter of 2006.

Comp sales across most of the U.S. showed flat to improving trends. We saw a significant improvement in our sales performance in California, with that market, achieving slightly positive comp sales for the first time in at least three years.

Our best-performing sales markets were Florida, the Midwest and the Northeast, with all obtaining positive sales comps. Third quarter customer transactions increased versus the prior year for the first time since at least 2006, due in part to our successful advertising campaign. Our average order value declined in the low single digits during the quarter versus the prior year, due to increased competitive pressure during the back-to-school season.

Sales of our three major product categories of supplies, technology and furniture continue to improve versus prior quarters. Our technology category showed the largest sequential improvement with increased sales of PCs, laptops, software and accessories as these items were on the hot list for students.

Tech Depot Services continue to gain traction with customers and achieved double-digit sales growth and a significant increase in attachment rates compared to last year. Furniture sales were strong, as were our Copy & Print Depot services and school supply categories, all of which, achieved positive comp sales.

We are pleased with our back-to-school performance this year. We offered our customers exceptional value with our broad assortment of fashion, color and trend products. Our direct import product assortment was expanded and performed very well, with sales in the quarter doubling that of last year.

The Go Back Smarter campaign effectively drove our smart brand positioning and may have been the most successful campaign in Office Depot's history. Also, our Teacher Appreciation events were a big hit with the 180,000 teachers that we're celebrated, and as a result, our Star Teacher Program membership enrollments were up significantly compared to the prior year.

Looking at our North American store count in the third quarter, we opened three new stores and closed five stores, bringing our total to 1,150 stores at quarter end. We also relocated two stores during the third quarter.

North American Retail operating profit in the third quarter was $30 million versus $35 million a year earlier. The decrease in operating profit was primarily driven by increased advertising expense to drive improved brand awareness and the impact on product margins due in part to a promotional and competitive back-to-school season.

Despite the slight sales decline and product margin pressure, our third quarter gross margin rate was up compared to the last year due to lower occupancy cost, reduced product clearance activity. We not only manage our back-to-school inventory and clearance items better this year, we also increased our direct import product penetration.

We continue to implement initiatives to drive sales and reduce costs and make prudent investments in both our infrastructure and customer-phasing activity. I'll review a few of these initiatives and investments for you.

First, in September, we rolled out the United States Postal Service offering nationally in our retail stores. The addition of this service offering now provides our customers with two choices for their shipping and mailing needs: UPS and the United States Postal Service. Our customer response so far has been very positive, as the majority of our customers find this multi-carrier shipping solution very desirable. Providing this service makes Office Depot the first national retailer to implement the USPS approved shipper program, which we believe presents an excellent opportunity to drive additional traffic into our stores.

Second, the new state-of-the-art combination distribution facility we opened in Pennsylvania is running well and providing world-class service to both our retail stores and BSD customers in the Northeast. This investment allowed us to consolidate four facilities into one, lowering our inventory needs, improving working capital and making our supply chain more efficient.

Third, we continue to invest in our Copy & Print Depot and Tech Depot Services, and these services consistently produce favorable results with positive sales growth compared to last year. Our Copy & Print Depot services have made strong gains in key verticals, and we have also improved our Copy & Print web page to offer additional products and enhance the customer experience.

And then fourth, we continue to focus on reducing our overall store size where appropriate. Our current average North American Retail store size is about 24,000 square feet, and we are pursuing a footprint in the 15,000 to 17,000 square-foot range based on the size of the trade area and the availability of real estate. The smaller model is our go-forward footprint, as it lowers occupancy costs and improve sales and margins.

As we reconfigure the base with about 100 of our store leases expiring, each of the next three years, renewing these leases will be somewhat driven by our ability to downsize and reconfiguration of the remaining space. We will also continue to remodel our 400 traditional format stores remaining in the fleet. We will keep you updated on these initiatives as we move forward.

To some up, our Retail business continues to execute well as we focus on reducing our cost of sales, improving store productivity in category management, while investing our business.

Looking at the fourth quarter, we expect the holiday season to, again, be very promotional and competitive this year with consumer spending still tight and customers demanding great value. Along with our United States Postal Service and UPS shipping services, we will offer our customers an expanded product assortment that will drive incremental traffic into our stores. Part of this expanded assortment will include offering new tablet computers to provide consumers with exciting options to communicate, browse the Internet, consume media, and we think this should be very popular for the holiday season.

While we are optimistic about our fourth quarter plans, we will remain realistic about the current state of economy. In addition, we have improved product margins in eight of the last nine quarters and this benefit will diminish as we continue to anniversary these improvements. As a result, we anticipate our compensation sales to be about flat and operating profit to be flat versus the fourth quarter of 2009 due to increased marketing expense to drive brand awareness.

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

Steven Schmidt

Thanks, Kevin, and good morning. In the North American Business Solutions division, third quarter sales were $842 million, down 4% versus the same period last year. The sales decline has continued to improve sequentially, with this third quarter having the lowest rate of decline since the fourth quarter of 2007. Excluding the impact from the restructuring of certain non-core businesses in late 2009, sales were down about 2%.

We are encouraged by our sales trend in California during the third period, while still negative, was in line with the overall BSD business trend. In comparison, the California year-over-year sales decline was twice the average for the BSD business in the second quarter.

Our average order value for the third quarter was slightly higher 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 in each of the last six quarters.

We had strong third quarter sales in furniture, cleaning and break room supplies and of course, school supplies, where we are one of the largest suppliers to K through 12th [Pre-K through 12th Grade] schools in the U.S. Although we haven't yet seen a clear positive rebound in discretionary purchases by our customers, we do believe that this product group has stabilized.

We're pleased with our Direct channel sales in the third quarter, where they were relatively flat versus one year ago. In fact, the direct year-over-year sales trends in the second and third quarters of 2010 were the best we've realized since 2005. Our success is really due to having increased effectiveness and efficiency from our direct mail, email and catalog, as well as improved websites.

Contract channel sales declined in the third quarter versus last year, but the rate of decline continued to improve from prior quarters. We saw a positive sales growth in national accounts. And although sales to small- to medium-sized business customers declined in the quarter, the rate of decline continued to improve from prior quarters. Sales to the federal government sector increased in the quarter, but our overall Public Sector business continued to decline to budgetary cuts, albeit, at a lower rate in previous quarter.

I should mention that we continue to win new business and retain existing customers in the third quarter. A few examples include award for office and educational supplies from the latest solicitation from the State of Florida Department of Management Services and our new contract for Office Supplies with the Central Kentucky Educational Cooperative. We feel good about our pipeline for acquiring accounts.

While discussing our Contract business, I should mention the efforts we are making to ensure that we continue to service customers that purchase under the U.S. Communities contract that expires at the end of this year. We intend to both retain our customers related to this particular business and grow the business as well through multiple offerings such as other purchasing consortiums, and other contracts that allow piggybacking capabilities.

These offerings will continue excellent terms to our customers and to Office Depot, while providing much less risk to our shareholders. For example, we recently announced that Office Depot has been awarded a contract for Office Supplies from The Cooperative Purchasing Network or TCPN. TCPN is a national government purchasing cooperative that contracts in behalf of K through 12th schools, local government, colleges and universities.

Taking a look at our Internet sales in the third quarter, 85% of total BSD sales were online, up from 82% for the same period a year ago. And our global company Internet sales for the past 12 months totaled $4.1 billion.

Third quarter operating profit for BSD increased to $25 million despite the decline in sales. An increase of $4 million compared to the same period a year ago and an $11 million increase from the second quarter of 2010. Gross profit margins improved 90 basis points in the quarter versus last year. The year-over-year decrease in operating profit was due primarily to a relatively higher sales mix from our Direct channel and improved productivity in selling expense.

Even though business conditions remain challenging, the BSD sales team continues to focus on executing on this key initiatives to grow sales, reduce cost and improve 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, continued focus on growth in the small- to medium-sized business customers space; fourth, continued growth in the government sector; fifth, adding sales resources in the area of cleaning and break room supplies; sixth, continuing growth and increasing momentum in our Copy & Print business; and seventh, launching new marketing program and loyalty programs.

In the area of margin expansion and contract, we continued to grow our margins through 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 brand and direct import programs, continued product line reviews, renegotiating low-margin contracts and reducing our supply chain cost.

In summary, we continue to be successful in winning new business and retaining existing business with large global customers in the third quarter. I'm encouraged by how well the Direct channel is executing, and I see many opportunities to drive profitable growth in the Contract channel in the fourth quarter and into next year.

Looking forward, we expect our fourth quarter sales to decline versus last year but the rate of decline should improve compared to the third quarter. Additionally, we expect the fourth quarter operating profit to be up at least $10 million compared to last year, due in part to non-recurring legal expenses in operational improvements.

Charlie will now discuss his third quarter 2010 results for the international business. Charlie?

Charles Brown

Thanks, Steve, and good morning. The International division reported third quarter sales of $778 million, down 10% in U.S. dollars from the same period in 2009. Our local currency sales decreased only 3% versus prior year and excluding the 2009 revenue. When we shut our Japanese Retail business, the sales decline was 2%. This marks the fifth consecutive quarterly improvement in our sales performance.

While most of our markets in Europe were negative for the quarter, the sales rate of decline varied from country to country. For example, key markets such as the U.K. and France continue to improve and perform at or better than the European average.

Asia performed very well with 2% higher sales year-over-year, excluding the closure of Japan Retail. This strong performance was driven by all countries in that region excluding Japan. We continue to see consistent growth in this region and remain focused on improving its profitability.

In contract, sales in the third quarter were flat compared to the prior year in local currency. Asia again performed very well with strong sales growth, and we saw mixed results in Europe. We have a large presence in the public sector several markets, which remains under pressure and the various government Australian [ph] programs launched earlier this year, and it negatively impacts our results. For example, sales for our Contract business in the U.K. are up mid single digits if we exclude Public Sector. In contrast, we will continue to add sales representatives to grow our Regional Contract business.

Third quarter sales in the Direct channel were lower than a year ago. To address this negative trend, we were implementing several actions to improve the competitive position of this channel, attract more customers and increase sales. This includes sharper pricing on fast-moving SKUs and vendor-funded promotional activities.

Retail channel sales for the quarter were slightly higher compared to last year, excluding the Japanese store closures. Our Retail business in France reported another solid performance, with positive comp sales driven by successful back-to-school season. This improvement was achieved despite moving our anniversary sale into the fourth quarter this year compared to the third quarter last year.

International divisions operating profit was $30 million for the third quarter compared to $34 million reported in the same period last year. Excluding the adverse impact of foreign exchange translation, operating profit was down $1 million versus the prior year. The operating profit decline was primarily driven by the unfavorable flow-through impact from lower sales volumes, partially offset by improved product pricing, lower occupancy costs and benefits derived from the reduced distribution and GA costs compared with last year.

We remain focused on executing our strategic initiatives designed to drive sales and improve the profitability of the International business. I would like to take a moment to update you on a few of these initiatives.

First, we are focused on winning new customer. For several months, we have been refining our business model to become more customer-centric, with better segmentation, refined and coordinated contacts, refreshed branding, improved pricing and more robust e-commerce tools. These activities are resulting in improving customer acquisition and [indiscernible] trends in our regional and SMB customers. And as I mentioned last quarter, we intend to continue adding sales representatives with better training and support to gain new business and market share.

Second, we are nearing completion of our project to replace analog equipment with voice-over-IP digital telephony in all our European market. This will allow automated call distribution solutions to route incoming service requests to the first available agent with the appropriate skills set. It also features call queuing, workflow optimization and better selling tools for our agents. In addition to reducing cost, this investment will drive a more robust customer experience to drive loyalty and retention.

And third, we remain committed to increasing our global reach and capitalizing our market opportunities. In September, our joint venture in Mexico, Office Depot de Mexico, closed a transaction with Carvajal International to acquire its business-to-business office products division in Mexico, Costa Rica, El Salvador and Columbia. With this transaction, Office Depot de Mexico increases its revenues by $110 million as it secures its leading office price position in Columbia, while further strengthening it's leading position in Mexico and Central America.

I would like to also mention our current business in Israel. We announced two weeks ago that we are currently in negotiations to sell Office Depot (Israel) Ltd. to a large Israeli retailer for proceeds of $47 million, less outstanding debt of about $25 million at the time of closing and expected into a related agreement to license certain tradenames and intellectual property rights for this business. We had executed in an exclusive, nonbinding letter of intent and are currently in the middle of due diligence and cannot add anything more at the moment.

We've been doing business in Israel since 1993 and are extremely proud of the business we've built with our associates. There are a number of compelling reasons for executing this transaction, which will be accretive to our current division margins. And I'll be happy to discuss them, should the transaction close, as anticipated in November.

In summary, the international division performed well again this quarter and has shown improved and sustainable results over the last several quarters. Our sales trends continue to improve, while we have also expanded our gross margins and lowered our operating expenses. We've remain focused on improving our execution at reducing costs and building stronger relationships with our customers.

Looking forward, we expect our fourth quarter sales to be slightly higher sequentially but lower than prior year as foreign exchange rate movements will likely continue to impact results. Fourth quarter operating profit is also expected to be higher sequentially but down versus the prior year, because of the gross margin pressure, resulting from pricing actions I mentioned earlier and lower vendor rebates.

With that, I'll now turn it over to Mike, who will review his third quarter financial results in more detail.

Michael Newman

Thanks, Charlie. As mentioned at the outset of the call, we recognized significant tax and interest benefits during the quarter, and I'll try to provide some additional color now.

The third quarter was impacted by the settlement of uncertain tax positions relating to open years, as well as the catch up benefit from the change in estimated annual effective tax rate for 2010. These items favorably impacted third quarter taxes by $40 million. The settlement also resulted in lower interest costs related to these positions, totaling $13 million. Combined, the tax benefit of $40 million in interest expense benefit of $13 million, positively impacted earnings per share by $0.15 in the third quarter.

In addition, during the quarter, we adopted a tax accounting method change for repair and maintenance expenses, which allow the faster recovery of these costs and increases near-term cash flow. This impact, combined with a tax benefit on pretax earnings totaled $7 million, which are viewed to be operational in nature. So in total, we recognized tax benefits of $47 million in the third quarter, reflecting an effective tax benefit rate of 295%.

Our fourth quarter effective tax rate will be impacted by bonus depreciation rules enacted by U.S. tax authorities after the end of our fiscal third quarter in the accounting method change for repair and maintenance expense. These changes are expected to drive our annual effective tax rate to be a benefit of approximately 92% and our cash tax to be a benefit of about $56 million for 2010, with about $40 million having been realized, September year-to-date.

Shifting to take a look at cash flow. We ended the quarter with free cash flow of $109 million compared to $141 million in the third quarter of 2009. And although down from prior year, we are very pleased with our strong cash flow performance this quarter, which was driven by both earnings and good working capital management. We now expect full-year 2010 free cash flow to be at the higher end of the $50 million to $70 million range we gave you last quarter due to our strong third quarter performance.

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

Moving to our balance sheet. We ended the third quarter with $679 million of cash on hand, slightly lower than the same period in 2009 and including availability for our asset-based and loan facility our liquidity totaled about $1.4 billion at the end of the quarter, up from $1.3 billion in the second quarter of 2010.

Inventories totaled $1.2 billion globally, roughly flat with the third quarter of 2009. And receivables of $999 million were down 14%, or $166 million compared to the third quarter of 2009, reflecting both operational improvements and currency impacts internationally.

Moving to the Business Process Improvement update. On the previous two earnings calls, we discussed our efforts to reduce cost in areas such as indirect spend and other noncustomer facing functional cost areas in our new Business Process Improvement organization. As I mentioned, we're very excited about this Business Process Improvement initiative, but shifting the culture in building such capabilities takes time, which is why we are also driving the G&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, financial process improvements and IT integration. We are optimistic that the balance will be identified and delivered as we ramp up our continuous improvement strategy.

Although I'm still not in the position to provide the benefit breakdown by year, I can tell you that the benefits in 2010 are on track to more than offset any investment required this year, and I look forward to sharing the progress with you as we go-forward.

Turning to look at the fourth quarter outlook, we expect total company sales to decline in the low single digits versus the prior year, and we expect total company EBIT to be up year-over-year due to improved selling expenses, gross margin improvements and non-recurring legal fees and insurance reserves. With that, I'll now turn the call back over to Neil.

Neil Austrian

Thanks, Mike. I'll end our prepared remarks this morning by saying that I'm extremely proud of the accomplishments our associates have made this year. We've been executing very well across the entire enterprise as we focus on returning to sales growth and delivering improved profit as we go forward.

To some up our third quarter sales results, in North America, Retail reported flat sales comp, the best sales performance we've had since the fourth quarter of 2006, and direct sales were again flat compared to the prior year, the best year-over-year sales trends we've realized since 2005.

In local currencies, International contract sales were flat compared to the prior year and Retail sales were slightly higher, excluding Japan. As you heard from Steve and Charlie, we've identified opportunities and initiatives to grow profitable sales in our two remaining businesses, North American contract and international direct.

We believe that we're pulling all the right levers and controlling what we can control well. These efforts will enable us to better position Office Depot for the economic recovery when our customers resume their normal buying habits for office supplies and services. However, we will need some tailwind from a recovering global economy and some relief from high unemployment to return to more normalized levels of profitability, with EBIT margins in the mid single-digit range.

Before I ask the operator to open the call to Q&A, I would like to note that Newsweek magazine released its 2010 Green Rankings Report for the top 500 U.S. publicly traded companies last week. And we were pleased to learn that Office Depot was listed as the number one green company in the retail category and 18th out of 500 overall. This is a true testimony to Office Depot's commitment to the environment, and leadership in the green space. This is extremely important to both our public and private sector BSD customers.

Operator, we're now ready to take questions.

Operator

[Operator Instructions] Our first question comes from Matt Fassler.

Matthew Fassler - Goldman Sachs Group Inc.

Its Goldman Sachs. I've got one strategic question for Neil and then a financial question for Mike. Neil, my question to you would be, if you could you talk about the timing of the board's decision, why now? I know you said that the SEC settlement did not factor into your thinking, but to the extent that this is a mutual call by you and by Steve. What did the board see that drove the timing on its end?

Neil Austrian

Hi, Matt. Good morning. I think there's basically, never a good time to make a change. And I think in this situation, we were starting to see a return to some of the economic positives that we'd experienced in the past. We were beginning to see margin improvement. We were beginning to see the situation from a total economy standpoint bottom out. Yet at the same time, no one was 100% pleased with the results. And basically, we both concluded that now was a good a time as any. And I want to reiterate, it didn't have anything to do with the SEC issue. If you use a sports analogy, at sometime, you make a quarterback change, and there's never good time to do that, and you're never 100% certain if it's going to work, but on the field, there is an emotion, there's a spark, there's an energy level that the whole team gets from that kind of change. And I think, both of us at this point, felt that, that was probably necessary.

Matthew Fassler - Goldman Sachs Group Inc.

And then secondly, for Mike, when you look at the inventory dynamic, your inventory growth was a bit unfavorable to your sales trends. And that was, I believe, reversal of trends that we had seen, leading up to the certainty versus where we were last quarter. If you could give us a sense as to what contributed to that and kind of where inventory stand and where the inventory lives right now?

Michael Newman

Actually, when we talk about flow in the quarter and the contribution to cash flow, we're actually really pleased with the inventory levels. If you look at what's driving flow for the quarter, it's mostly driven by increases in accounts payable from last year. But what didn't happen, with that increasing accounts payable was an increase in inventory. We certainly had great sell through on back-to-school inventory. We had great sell through on overstock, in clearance items and inventory. And we also had some operational changes in the way that we're managing the supply chain on ink and toner that we think are going to be permanent. So I'm actually very pleased from a flow perspective, with the payable in inventory numbers for the quarter, principally for those reasons.

Operator

Colin McGranahan, you may ask your question.

Colin McGranahan - Bernstein Research

It's Sanford Bernstein. first question for NeI'll, just following up on Matt's question. As you think about getting, I guess, spark back on the field, what kind of quarterback are you looking for? What are the characteristics and quality, the new leadership that you're pursuing at this point?

Neil Austrian

I think the specs are pretty obvious, Colin. I think that you want someone who's an absolute proven leader, somebody who's run a major business, somebody who in the past has not only demonstrated their ability to control thoughts and innovate, but someone that can build revenue. We're not going to cost cut our way out of the problem here, going forward for the next decade. We've got to build revenues. You'd like to find somebody that has both retail, and what I'll call, BSD experience. It's a very tough position to fill. I think we've hired the right search firm in Heidrick & Struggles. They've already gotten started. And our expectations are that given the liquidity we have in the company, given the management team that we have in place and given the starting change in the economy, we're going to find a superior CEO to come in and take the company to the next level.

Colin McGranahan - Bernstein Research

And how important is it that, that best person has any familiarity with office products?

Neil Austrian

I can't answer that today. All I can say is as an analogy, I was on the research team at DirecTV when Chase Carey went back to News Corp., and our initial specs to get a CEO were to find somebody that knew the media entertainment or television business. And then out of the box, candidate Mike White, who had been Vice Chairman of Pepsi and the former CFO of Pepsi came in, and he's doing an extraordinary job. So I don't want to rule out anybody at this point.

Colin McGranahan - Bernstein Research

And then a question for Mike. Of the $80 million you've identified in OpEx and cost reductions, where are you today? And how much of the G&A reduction that we saw in the third quarter, I think, it was down more than $20 million year-over-year -- how much of that was from efforts that are already underway on the process improvement?

Michael Newman

The decrease to last year was more due to things that are already been in place plus some non-recurring things from last year. Of the $80 million, we're not -- as I mentioned in the script, I really don't want to get into a year-over-year update, but we're making a lot of strong progress. I feel as good as I could feel sitting here looking at 2011 and looking at us making considerable traction towards delivering that $80 million in three years. Our teams are working hard, we've got a lot of buy-in from the organization, and we've got a lot of great process workshops going that my folks are running. And I really feel that as if this thing is getting a lot of traction. I do want to give specifics, but I feel like we're well on our way to delivering that $80 million given where we are today.

Colin McGranahan - Bernstein Research

Just on gross margin, it's still an improvement fifth quarter in a row but the least improvement we've seen in a while. But gross margins are still more than 200 basis points below historical levels in the 30 to 31.5 range. I know there's probably a 100 bps there on rent deleverage, but what needs to happen to get the rest of that 100 to 150 basis points back?

Michael Newman

Yes, I think it's general leverage across the company. I think, rent is the key piece. We're talking about a number of programs to take the level of rent down, but it's leveraged across the company. It's also our contract business and we're working hard at looking at improving profitability there. Steve talked about the customer savings programs and some initiatives there, but those are the pieces I would highlight as why we're short based on your question.

Operator

Chris Horvers, you may ask your question.

Christopher Horvers - JP Morgan Chase & Co

Thanks, JPMorgan. I want to follow up on the timing question, Neil. And reflecting back a few months ago, I guess, February, March time frame, you re-upped Steve's contract and added a three-year retention package, which frankly, was just kind of exchanging value for his option to leave around this time of the year, given the changes of control costs. So I just want to follow up and really understand the timing, and what's really changed versus six or seven months ago?

Neil Austrian

I think, as I said, it's really a coincidence. The contract discussions got started a while back, given the BC Partners investment and the change in control issued. They only got signed in the first quarter, so you're really looking at a time period there, where we've had almost nine to 10 months from the time the discussion started about changing the contract or renewing the contract with the effective event that we have this week. So it was just one of these things, where as I said earlier, there's never a good time to make a change. Both sides decided that it was appropriate at this point. And again, we want to say, it had nothing to do with the SEC issue. It was unfortunate that it's come out that way, but that's not the facts.

Christopher Horvers - JP Morgan Chase & Co

As a follow-up, as you compare it to when you brought Steven in 2005, and he did a great job early on and the recession's been really tough. But how maybe is the lens that you're looking through for the search different today versus what it was in late 2004?

Neil Austrian

I think it's going to be in some ways, more difficult to find a good new CEO. In other ways, it's going to be easier. It's going to be easier because from my perspective, and that's my lens, there is a far more solid and more in-depth management team here at the company today than when I was here in 2004. And I think that's a huge positive. I also think that the reason it may well take a little bit longer is because of the economy, and because of the fact that we've had two changes in the last 10 years and somebody on the outside may wonder if this is an appropriate time to make a change.

Christopher Horvers - JP Morgan Chase & Co

Mike, as a follow-up on the expense side. On advertising, you drove sales. You drove gross margin dollars here in the third quarter with back-to-school. It sounds like in the fourth quarter, you're looking at advertising again and really causing your operating profit rate to be flat. Could you maybe quantify what the step up in advertising was in the third or fourth quarter? And how are you thinking about advertising, I guess, more holistically, is this now part of building the brand so there's some upfront costs, and you assume it to pay off later? Or do you expect a more immediate term pay off?

Michael Newman

I'll let Kevin Peters answer that.

Kevin Peters

I think, maybe the place to begin is our customers have choices, not only in the OSS space but across the broader retail chain. We have underspent in marketing and advertising as a company, really since the depths of the economic recession hit Office Depot. During that time though, I think what would be important to point out is we've made significant investments in our business. We have improved our private brand penetration. We significantly improved the products that we domestically or globally source and bring in to provide great value for our customers in the store. We've invested in Copy & Print Depot. We've invested in Tech Depot Services. We've priced our assortments so that we're competitive, not only within the OSS channel, but across retail, in general, for highly visible items. And we've reduced our supply chain from 33 facilities down to 16. But given the fact, our customers have choices, and we've got a great story to tell our customers about the changes that have taken place at Office Depot, not only to drive brand awareness, but also to drive traffic and customer loyalty. We felt it's time to tell that message, and one of the marketing levers that we have to tell is through broadcast media, and typically, that's the broadest lever that we have. Overtime, we may change the mix of how we choose the market, but I think the one thing that we won't change is the recognition that we need to do a better job of creating brand awareness. We needed to do a better job of marketing our company. So to the point earlier, I would say our issue at least with the North American Retail is lots of about marketing. It's from an operating margin standpoint, it's our store base. We have an aging store base, and we have a store base that's larger than it needs to be on average. We have a plan to address both. By addressing that over the next three years, we think we can rightsize our store base. We'll continue to advertise our company. And we should talk less about advertising expense at that point and talking more about how we're growing the business, that's certainly our plan.

Operator

Steve Chick, you may ask your question.

Stephen Chick - FBR Capital Markets & Co.

FBR. I guess, first question is for Kevin. The comps for the quarter being flat, obviously, relative to your history that's a good trend. And I think, to date in August, you'd said, held by back-to-school, that your comp trends were slightly positive at that point. So did they split a little bit? I guess, once you kind of moved away from that back-to-school period? And if you could give us a sense kind of how the trending maybe now, and do you get back to flat for the fourth quarter? Do they need to accelerate from the trend we're looking at here today?

Kevin Peters

We talked in August about the comp trends in North American Retail, and we said they were slightly positive at that time. As we continued to progress through the quarter, there really wasn't a material change in the comp trend. They were, if it's possible to say, less positive, and so we didn't have enough of the positive inertia to allow us to round to a positive comp. But there was not a significant drop off in the comp trends, it's just, there wasn't enough tailwind behind us to allow us to round up to a positive one. So I think that's probably the best way to characterize it.

Stephen Chick - FBR Capital Markets & Co.

And so as we come into the fourth quarter here, I guess, if you look at year-over-year comparisons, they sequentially get a little tougher. It sounds like you're on the trend right now to achieve what your guidance is, which would be flat for the period? I mean nothing's really changed much post quarter end?

Kevin Peters

Yes, I think that's certainly what we've communicated. I think many of us in the retail space will have to comp over the Windows 7 launch. So we've got plans in place to address that. But that's obviously, going to be some headwind that were going to work through in the fourth quarter.

Stephen Chick - FBR Capital Markets & Co.

Second, if I could, I know it's small and this maybe for Charlie or maybe even Neil as well. But the sale of Israel, as I recall, if I got it right, you had just maybe closed out or exercised a put option against you to buy the minority stake of that in 2008? So was that an asset that you're proactively, I guess, approaching people for a sale or were you approached? And is it a sign of other things you might be looking at or entertaining as you look at other assets and their strategic relevance to you?

Neil Austrian

Charlie, you want to answer that?

Charles Brown

Sure, Neil. I think that the International business is, as I frequently say, is different than our domestic divisions because it's a portfolio of businesses. And we look at this on a regular basis, this portfolio, our long-term goal is to move up to a high single-digit operating margin, and we still got a lot of ways to go. So we look at those businesses that will be accretive to that move, and those that won't, so that was part of the -- this is an overall strategy that we had in place for sometime. Regarding Israel itself, we were not actively marketing that. We were actually approached several months ago. And as we worked through our discussions with this particular company, it became clear that we could create a win-win situation for both us, and this large Israeli retailer. So I think that pretty much covers it.

Neil Austrian

The only thing I might add is that at this point in time, we're not looking at selling any of the assets that we own.

Stephen Chick - FBR Capital Markets & Co.

For Steve Schmidt, just on the Direct segment, the BSD, obviously, flat, it's been an improvement from where it had been. It was kind of the same as last quarter. And I was thinking that Direct would've gotten sequentially a little better. I don't know if you're kind of looking that way as well. But just given the investments that you've been making there, can you talk about what's happening competitively within Direct? And just remind me is that about a third of the BSD business?

Steven Schmidt

Steve, yes, about a third would be a good estimate. When we look at the Direct business, the combination of, obviously, our activity on the web, catalog, direct mail, e-mail, and when I look at that space, it is a highly competitive space. When you look at page search, you look at what's happening, who the different search engines. We see competition increasing significantly, the number of companies who are actually competing with us from a page-search standpoint to acquire keywords has increased significantly. We see increased activity around catalog and obviously our focus around the web. I would say generally, we're pleased with the overall performance of our Direct business. Obviously, we're involved in the whole back-to-school process, also, highly competitive. So just to see that business kind of trending flat, it is our intention to obviously return to positive growth hopefully in the near future. So no, I was not displeased in any way with our performance. And I think we're doing a good job overall, managing the mix, both products and promotion, relative to our Direct business.

Operator

Michael Lasser, you ask your question.

Michael Lasser - Barclays Capital

Barclays Capital. Neil, how long can we expect the process to find a permanent CEO will to take place? And what will be your priorities in day-to-day involvement in the business as you're in the interim CEO role?

Neil Austrian

My wife said if we had somebody by Thanksgiving, she'd be thrilled. We both know that's not going to happen. I don;t think we want to set a timetable, because I think we want to find the best person we can. If you look at the last search, it too somewhere, six plus months, plus or minus, I think that's probably as good an estimate as you can make at this point in time to do the search right. In terms of priorities, I think what my plan really is to sit with the team and find the ways we can implement the strategic plan, which I think is the right plan, at the same time, spend more time trying to find revenue-building opportunities as opposed to just cost-cutting, which has to continue. And I really plan, for the next several months, just to listen, to spend as much time as I can in the organization to get a sense from the people as to what we're doing right, and where we can make improvements. I think we've got a very good team in place at this point, which gives me a lot of encouragement that I think we're moving in the right direction.

Michael Lasser - Barclays Capital

And then a quick follow-up for Steve Schmidt. I think your guidance implies that the operating margin in the fourth quarter will be up to be 100, 150 basis points. A, is that appropriate? Is that correct? And B, what's driving that, and can we expect that to continue in the next year?

Steven Schmidt

Yes, what we stated was in Q4 versus Q3, that our operating profit would be up $10 million versus prior year. So that is continued growth. We mentioned that we see from our sequential basis, Q4 versus Q3, and while we still see the revenue down, it should continue to improve. And we are pleased with the progress that we're making from a bottom line standpoint. The focus really has been around creating effectiveness and efficiency across every area of the organization. We have streamlined our overall cost structure from a selling standpoint. We are continuing to focus around supply chain. Our mix of products and services particularly on the Direct business, continue to trend favorably. So obviously, our commitment, as I publicly stated, overtime, is to get these margins back into the mid-single digits. And we're making progress on that track.

Michael Lasser - Barclays Capital

Is there anything unique about the fourth quarter that there'll be a disproportionate amount of benefit?

Steven Schmidt

Nothing that I would want to call out.

Operator

Brad Thomas, you may ask your question.

Bradley Thomas - KeyBanc Capital Markets Inc.

KeyBanc. Just one last follow-up on the CEO search. Will you be considering internal candidates, or is this external only?

Neil Austrian

We're considering everybody. And obviously, internal candidates will always be included.

Bradley Thomas - KeyBanc Capital Markets Inc.

Charlies, I want to just follow up on some of the international trends. You obviously alluded to some of the changes in the political and economic backdrop over there, but can you just share more insight in terms of what you're seeing?

Charles Brown

Well, I think what we're seeing is a strong improvement in our contract business. I think we actually mentioned the fact that our U.K. business was up mid-single digits in the third quarter if we took out the public sector, and we're seeing those trends continue. So getting good growth in the regional accounts, getting good growth also in some of our strategic accounts. It's just that the a big portion of our business in our major markets, U.K., France, Germany, Netherlands, depends upon the government. And as you know also, the government is a bigger part of the economy in Europe than it is in North America, so it's kind of a double hit. Retail is looking very, very strong right now, of course. The French business has actually never been stronger from a Retail perspective, and we got good growth going in Sweden as well. So as I think Neil pointed out in his closing remarks, the issue that we have is really in the Direct business, where we have a lot more competitive pressure than we've had in the past. We have plans to address that. And you'll see those start to kick in, in the fourth quarter.

Neil Austrian

Charlie, what I forgot when the question was asked, are we selling other assets, in my mind, I had already assumed that the situation in Japan had closed and it has been announced, and it has. And you might want to say something about that.

Charles Brown

Well, I think I would leave my remarks kind of where they are. We're constantly looking at that.

Bradley Thomas - KeyBanc Capital Markets Inc.

Just a quick follow up on the business solutions. In the first quarter that operating margin has increased year-over-year and in several years, obviously, the revenue backdrop is getting better. Do you think we're at that tipping point, where we should continue to see margins improve in the division, or do we really need to get sales back into positive territory?

Michael Newman

I prefer not to really give any guidance relative to future just because of the uncertainty around the economy. What I would say though is when you look at the first half of the year, we did invest. We had anticipated an economic turnaround. We invested in sales costs. We added additional resources. We invested behind marketing. We invested behind a number of areas. And at the end of the day, given the lack of an economic turnaround, obviously, that impacted our margins in the first half of the year. What we have done in the second half is really focused around cost reduction, mix, pricing and really driving the fundamentals of the business. And that's why you're seeing the improvement in the overall margins structure. Obviously, what happens from a competitive standpoint, what's happened from the economy are things that we can't predict. So obviously, again, my commitment, and we believe it's attainable, is to return this business to the mid-single-digit margin range overtime, and we'll obviously be committed to delivering that, but how fast and at what rate, yet to be determined.

Bradley Thomas - KeyBanc Capital Markets Inc.

Mike, can you give us an update on what you think for CapEx this year? And perhaps, an early sense for 2011?

Michael Newman

Yes, probably, the lower end of the previous range that we've given on CapEx, $170 million to $180 million. As we go forward, we're looking probably -- we've just finished our strategic plan. We're looking at CapEx probably consistent with DNA, in the $210 million to $220 million range. We talked earlier in the discussion about touching our old format stores. We want to take 400 old format stores and put them in the new M format. That will be a significant CapEx driver, going forward. And we're also looking at a common systems platform for Europe, going forward. So those will be two things that we're looking at that'll drive the business. And given where we are, with liquidity, cash flow -- I'm particularly pleased with the third quarter cash flow. That's probably the long and short of CapEx guidance from where we sit today.

Operator

Dan Binder, you may ask your question.

Daniel Binder - Jefferies & Company, Inc.

It's Dan Binder, Jefferies. Neil, you mentioned earlier that you thought the strategy was right, I. I am curious though, is there anything that you would say whatever philosophical differences that needed to be addressed more immediately? For example, store closures beyond your sort of typical maintenance of closing and opening in a new location. And then secondly, is there any visibility on some of this period after the U.S. Communities contract was awarded to independent stations? Is there any visibility on the level of retention you think you can achieve with the various accounts that fell under that? In other words, are you getting signals from those accounts as to whether or not they plan on staying with you?

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!