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Office Depot (NYSE:ODP)

Q1 2011 Earnings Call

April 26, 2011 9:00 am ET

Executives

Brian Turcotte - Vice President, Investor Relations

Charles Brown - President of International

Kevin Peters - President of North American Retail Division

Neil Austrian - Interim Chairman, Interim Chief Executive Officer, Member of Corporate Governance & Nominating Committee and Member of Finance Committee

Michael Newman - Chief Financial Officer and Executive Vice President

Steven Schmidt - President of North American Business Solutions Division

Analysts

Joseph Feldman - Telsey Advisory Group

Daniel Binder - Jefferies & Company, Inc.

Kate McShane - Citigroup Inc

Matthew Fassler - Goldman Sachs Group Inc.

Stephen Chick - FBR Capital Markets & Co.

Christopher Horvers - JP Morgan Chase & Co

Alisa Guyer

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Mike Perez

Operator

Good morning, and welcome to the First Quarter 2011 Earnings Conference Call. [Operator Instructions] At the request of Office Depot, today's conference is being recorded. 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, and good morning. With me today are Neil Austrian, Interim Chairman and Chief Executive Officer; 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.

Before we begin, I'd like to remind you that our discussion this morning includes 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 we refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to 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.

Neil Austrian will now summarize Office Depot's first quarter 2011 earnings. Neil?

Neil Austrian

Thanks, Brian, and good morning. Before I review our first quarter 2011 results, I'd like to update you on our CEO search. Our search committee continues to meet with a short list of candidates, and we hope to conclude the process soon.

However, as I've said in the past, we'll take as much time as we need to find the right leader for Office Depot. In addition, I would like to make it very clear that the 2010 restatement announced on March 31 has had no negative impact whatsoever on our CEO search process.

In regard to the restatement, it's unfortunate that the Internal Revenue Service denied our claim to carry back certain tax losses to prior tax years under economic stimulus-based tax legislation enacted in 2009, and that we needed to correct the 2010 financial statements. While we're disappointed to have had to restate our 2010 financial results, it's important to note that this restatement had no impact on our previously reported 2010 EBIT or EBITDA and no net impact on 2010 cash flows.

Turning to Office Depot's first quarter 2011 results, sales totaled $3 billion, a decrease of 3% compared to our first quarter results in 2010. Excluding sales related to asset dispositions and deconsolidation in the fourth quarter of 2010 and an acquisition in the first quarter of 2011, total company sales decreased 2% versus prior year.

The company reported a net loss after preferred stock dividends of $15 million or $0.05 per share in the first quarter of 2011 versus earnings of $20 million or $0.07 a share in the same period 1 year ago. The first quarter 2011 reported results include a 164% tax rate that Mike will review in detail later in the call.

First quarter 2011 results also included charges primarily related to restructuring and integration activity costs and actions to improve future operating performance. Excluding these charges, which totaled $8 million before tax, net earnings after preferred stock dividends were marginally profitable.

Total company gross profit margin decreased about 20 basis points in the first quarter compared to the prior year. This was driven primarily by gross margin pressures in the International division.

In North America, gross margins were flat for Retail and only slightly down for Business Solutions in a weak sales environment.

Total company operating expenses adjusted for charges were down $7 million compared to the first quarter of 2010. EBIT, adjusted for charges, was $34 million in the first quarter of 2011 compared to EBIT of $62 million in the prior year period.

The year-over-year decline was related to a number of factors, but the negative flow-through impact from lower sales without a gross profit offset in the first quarter was the primary driver. Mike will go into more first quarter financial details later in the call.

I'll now ask Kevin to review North American Retail's first quarter 2011 performance.

Kevin Peters

Thanks, Neil, and good morning. In the North American Retail division, first quarter 2011 sales were $1.3 billion, down 2% versus 1 year ago. Same-store sales were down 1% versus the prior year period.

Average order value rose modestly during the first quarter versus the prior year, while customer transaction counts declined after 2 quarters of growth, due in part to the negative impact of weather in January and February.

If we look at the product categories, furniture comp sales were positive again in the first quarter, as seating remains strong. Other key product groups showing year-over-year improvement in the first quarter include paper, writing instruments, laptops and printers.

Total peripheral sales comped negatively in the first quarter, but we have identified actions that we can take to drive sales within that group going forward.

As I've mentioned on past calls, growing sales of our high margin service offerings continues to be a great opportunity for our Retail business. In the first quarter, Tech Depot Services again reported double-digit sales gain versus the prior year, and Copy & Print Depot comped positively for the fifth consecutive quarter. We're encouraged that these value-added services are gaining awareness with our customers, and we will continue to allocate resources to drive their growth.

Our direct import of products continues to go well. Penetration in North American Retail is at a double-digit level and increased as a percent of sales versus last year.

If we look at our first quarter same-store sales on a regional basis, 4 regions showed flat to improving trends, including California. Of the regions that showed year-over-year declines, most were impacted by winter storms during the quarter.

Our North American store count at the end of the first quarter was 1,141 stores. During the quarter, we opened 1 new store, closed 7 and relocated 2 stores. We also remodeled 4 stores during the quarter. Of the 4 remodels and 2 relocations, we successfully reduced the space in those locations by about 20% on average.

We announced last week that we will close our remaining 9 stores in Canada in early June of this year. However, it's important to understand that Office Depot is not leaving Canada. We will continue to serve our Canadian customers through BSD [Business Services division]. The decision to close the stores was part of our ongoing real estate portfolio review and that we believe the changes that we will make with strengthen the North American Retail business going forward.

North American Retail operating profit in the first quarter was $58 million versus $73 million 1 year ago. This decline was driven primarily by a number of factors including the negative flow-through effect of lower sales volume, rolling over the shrink benefit reported 1 year ago, incremental advertising expense to drive brand awareness and additional investments in our key initiatives. We offset some of these margin pressures with lower property costs.

Last quarter, I provided 4 initiatives for North American Retail to drive sales and reduce costs. I'll now update you on our progress with those key initiatives.

First, we've completed phase 1 of our plan to improve the in-store shopping experience, which included a comprehensive in-store field study and competitive diagnostics to understand customer journeys and breakpoints at a number of stores. This early work allowed us to define key operational and service opportunities for immediate remediation, reduce nonessential low-risk tasks, make improvements to current sales and service activities and identify a list of potential quick win ideas to be launched in later phases.

Second, we continue to invest in our Copy & Print Depot and Tech Depot Services. These 2 solution-based businesses continue their strong year-over-year gains in revenue, margin and market share, while providing Office Depot the opportunity to differentiate in the market.

As an example, our exclusive national, multi-carrier shipping platform continues to distinguish Office Depot from the competition. Additionally, we remain on track to further accelerate and scale Copy & Print Depot and Tech Depot Services, while working to improve awareness, trial and retention.

Third, we are focused on improving the productivity of our stores. This includes remodeling about 50 traditional stores into our M2 format in 2011, and reducing our average store size wherever possible. We continue to test our new smaller concept store in a number of markets, and the results are encouraging today.

And then fourth, we continue to pursue opportunities to improve margin, including increasing direct import penetration, conducting product line reviews, pursuing the harmonization and rationalization of SKUs and reviewing our practices and policies in regard to product pricing.

In summary, our North American Retail business remains focused on delivering on its key initiatives, and our profitability should improve over the long-term as the investments mature.

Looking forward, the second quarter is traditionally our weakest sales quarter. We mentioned on April 1 that we're excited the first quarter -- we exited the first quarter with positive same-store sales in March. That trend continued in April, and we anticipate that our second quarter same-store sales will be slightly positive and operating profit, excluding charges, will be flat versus last year.

Before I turn the call over to Steve Schmidt to review the first quarter 2011 results for the North American Business Solutions division, I would like to thank Steve Moharan [ph] for his contributions to our North American Merchandising efforts over the last 3 years. Steve left Office Depot last week to return to his roots in the home improvement industry. Our Merchandising group will continue to report to me and given my merchandising background at Granger and Home Depot and the strong merchant team currently in place, we will assess our needs in terms of replacing that position in the near future.

Steve?

Steven Schmidt

Thanks, Kevin, and good morning. In the North American Business Solutions division, first quarter sales were $806 million and down 3% versus the same period last year.

Although the rate of sales decline was consistent with the fourth quarter of 2010, we're encouraged that we were able to offset the adverse impacts from the winter weather experienced in January and February through our growth and solutions and sales to large customers.

Essentially, the entire year-over-year sales decline in the first quarter relates to customers not retained during the transition from our previous U.S. Communities agreement to our new purchasing consortiums.

Looking at our first quarter sales by product category, we did see positive year-over-year sales growth in seating and cleaning and breakroom supplies. We continue to gain traction in breakroom supplies, with the sales rate improving at a double-digit rate in the first quarter.

Despite the recent reports on the secular trends of paper consumption, we continue to see improving sales trends with only a 2% decline in the paper group versus last year. Declines in paper consumption are nothing new, but we have successfully managed our mix and actually increased the gross margin contribution of the paper group. We also see opportunities to mitigate any lower paper sales to an increase in sales of services and solutions to our customers.

Geographically, the first quarter sales rates in Texas and California versus the prior year were better than the overall BSD business. This is the first time in a number of years that our California region sales have performed better than the overall BSD business.

BSD's first quarter average order value was flat to last year, as the big-ticket discretionary purchases remain elusive. Although the main driver of our sales decline again this quarter was lower customer transaction counts, the rate of decline was actually improved sequentially each quarter since the second quarter of 2009.

If we look at the Direct channel, sales in the first quarter were flat versus 1 year ago. We continue to improve the website and provide greater functionality for our customers, which positions us well for future growth.

Turning to the Contract channel, sales declined about 3% versus last year. As I mentioned, this decline was essentially driven by customers not retained during the transition from our previous U.S. Communities agreement to our new purchasing consortiums.

Regardless of the noise in the marketplace, I'm pleased to report that we continue to retain this business at about an 85% rate. This could be attributed to the strong relationship our sales teams have built with our customers over the years and the great products and services we provide them. Although pleased with this level of retention, we are not satisfied, and our goal is to win back these customers that we did not initially retain.

In regard to other parts of our Contract business, we continue to see weakness in state government area, as well as some signs of volatility within the federal government business. Adversely, sales to our large national account customers continue to improve, and we achieve positive sales growth for the first time since the fourth quarter of 2007.

We're pleased that our sales to small- to medium-size businesses or SMB customers in the first quarter were flat versus the prior year. This is the first quarter where sales have not declined year-over-year in a number of years. SMB customer growth remains a priority and 1 of our key initiatives to grow sales.

First quarter operating profit for BSD was $16 million, down from $20 million in the same period 1 year ago. The decrease in operating profit was driven primarily by the negative flow-through impact of lower sales, increased marketing and sales costs related to back to business and rolling over the shrink benefit reported 1 year ago. Partially offsetting these items were reductions in selling and other operating costs achieved as part of the initiatives to improve the division's cost structure.

In North American BSD, we're focusing on 3 key initiatives to drive sales and improve margins in an environment that remains difficult. I'll now update on our progress with these initiatives for you.

First, we are determined to increase our customer mix to small- to medium-size business customers. This initiative continues to be a priority, and we feel that we are gaining traction as evidenced by our recent performance in this group.

Second, we are continuing to grow our Copy & Print business. We have been successfully expanding this service with our Contract customers in most markets using Office Depot's regional print facilities.

And third, we continue to look at every area to offset margin pressures and improve the bottom line. This would include reducing overhead and supply chain expenses and reviewing our practices and policies in regard to product pricing.

In summary, we continue to win new business and retain existing business in the Contract channel, and our Direct channel continues to perform well and maintain its competitive position in this market. As we move forward this year, we look forward to even better performance from both channels.

In regard to the second quarter outlook, we expect our sales to be flat to slightly up versus last year and both our operating margin and profit to be up significantly.

Before I turn the call over to Charlie to discuss his first quarter 2011 results for the International business, I'm pleased to report that we have tapped Office Depot's 8-year veteran Steve Cockens [ph] to manage the Contract channel's national sales organization. He's a talented executive with significant contract channel experience and will be a great asset to me in driving our profit-enhancing initiatives. Charlie?

Charles Brown

Thanks, Steve, and good morning. The International division recorded first quarter sales of $846 million. That's a decrease of 5% compared to the prior year period in U.S. dollars and a 6% in constant currency.

Excluding the revenue impact from our recent portfolio optimization activities, the constant currency sales were flat versus the same period a year ago. These activities include the negative sales impact from divesting our businesses in Japan and in Israel and de-consolidating our joint venture in India late in 2010. And finally, the positive sales impact from acquiring Svanströms in Sweden during the first quarter of 2011.

As I speak to year-over-year comparisons, please note that I will do so in constant currency. Geographically, our sales results were mixed across Europe. The U.K., our largest market, reported positive sales growth, while sales in France and Germany were relatively flat compared to the prior year. Our business in Asia reported double-digit sales growth in the first quarter, excluding prior year sales for both Japan and India.

In the Contract channel, our European business continues to report positive sales growth in the first quarter. The U.K. and German Contract businesses performed well, while France was relatively flat. In addition, our Contract business at Asia reported double-digit sales growth, excluding the divested businesses I mentioned earlier.

First quarter sales in the Direct channel were lower than a year ago. As I've mentioned in the past, we're not satisfied with the performance of our Direct business in Europe, and I believe we have a great opportunity to drive profitable sales growth in this channel through a number of initiatives that I'll review in a moment.

For the Retail channel, sales in the first quarter grew at a high single-digit rate compared to prior year, excluding the 2010 sales from our divested business in Israel. France, our largest Retail business in Europe, continues to report positive sales growth in the first quarter, driven by higher customer transactions.

The International division reported operating profit of $27 million for the first quarter compared to $42 million reported in the same period last year. Excluding $6 million of charges primarily related to our business restructuring actions and acquisition integration costs, adjusted operating profit was $33 million in the first quarter of 2011.

The balance of the year-over-year operating profit decline was primarily driven by a reduction in gross profit margin due to both cost increases in paper and more competitive pricing in ink and toner. These items are -- were partially offset by lower operating expenses as a result of the divested businesses and the benefits created from our continuous process improvement initiative in the first quarter.

I'd like to take a moment to dive a little deeper into the gross margin issue, given all the questions we've received. There are 2 factors at play here. First, we received price increases on paper from our vendors in Europe towards the end of last year. And second, we faced some competitive pressures in ink and toner.

Most regions have done a good job in passing the paper cost increases through, thus, mitigating the margin pressure. Unfortunately, 1 region's efforts to pass the higher price paper costs through at a timely manner were less successful.

This region accounts for more than the total year-over-year operating profit decline. We have taken actions in that region to increase the level of resources and modify our strategies over to improve its performance going forward. As a result, we're already seeing improved performance in this region in the second quarter.

Turning to our initiatives. We continue to concentrate our efforts on implementing our strategic plan to enhance sales and overall profitability of the International business. Let me update you on 3 of these initiatives.

First, as part of our portfolio optimization strategy we discussed last quarter, we closed on the acquisition of Svanströms in Sweden. This is an attractive market, and we see further opportunities to grow throughout the Nordic region. Based on the initial results, we expect this acquisition to be accretive going forward.

Secondly, we're making progress on the business restructuring and continuous improvement -- process improvement initiatives in Europe launched during the fourth quarter of 2010. These initiatives reduced G&A in the first quarter and we continue to find opportunities to enhance our current processes and leverage our resources, enabling us to further reduce our overall cost structure.

Third, we remain focused on winning new SMB customers. We will launch the rebranding of Viking next month in the U.K. and Germany to drive our Direct channel growth.

The rebranding includes a needs-based customer segmentation model, a new look and feel, better layouts for our catalog and websites, sharper pricing on many products and an overall enhanced customer shopping experience. This rebranding, which is the first such effort in many years, is designed to improve our competitive position within the Direct channel.

So in summary, the International, Contract and Retail channels continue to perform well in the first quarter, and we're pursuing opportunities to profitably grow our Direct channel. Looking forward, we will continue to carry out our strategic initiatives to profitably increase sales and reduce our costs.

In regard to our second quarter outlook, we expect our sales in constant currency to be up low single digits on a like-for-like basis versus the prior year, and operating profit excluding charges to be down slightly from the prior year.

With that I'll now turn it over to Mike, who will review the company's first quarter 2011 net results in more detail.

Michael Newman

Thanks, Charlie. I'd first like to give you an update on our restructuring actions and benefits. Let's start with restructuring.

In the first quarter, we reported $8 million of charges, $6 million of which related to European process improvements and acquisition integration costs that Charlie discussed earlier. We also had charges of $2 million for Business Process Improvement at the corporate level.

If we look at the remainder of 2011, we anticipate an additional $60 million to $70 million in charges, primarily related to the global process improvements and cost reductions.

By quarter, we're projecting approximately $30 million of charges in the second quarter, $20 million in the third quarter and about $10 million in the fourth quarter. The full year negative cash impact from these charges could be in the $65 million to $70 million range in 2011 and relate mostly to severance and facility closure costs.

Let's now discuss the benefits from both the restructuring actions in our previously announced Business Process Improvement program. In the first quarter of 2011, we realized about $15 million in gross benefits, mostly from International division restructuring activities. After some reinvestment in our business, net P&L benefits in the first quarter were approximately $5 million.

As a reminder, we anticipate reinvesting about $40 million to $50 million of the $80 million to $90 million in projected gross benefits back into the businesses in 2011.

Although the net benefits did not significantly impact our first quarter EBIT, we still anticipate the full year 2011 net benefits to be more second-half-weighted and in the neighborhood of $40 million to $50 million.

By quarter, we're projecting about $10 million of net benefits in the second quarter, $15 million of net benefits in the third quarter and $20 million in the fourth quarter. As a reminder, the P&L benefits expected from the business reinvestments are not built into the projected benefit stream.

Turning to our first quarter results. The effective tax rate for the first quarter of 2011 on a reported basis was 164%. It is based on an annual estimated effective tax rate. Because the company had valuation allowances in several jurisdictions including the U.S., operating losses in those jurisdictions do not result in the recognition of deferred tax benefits.

Accordingly, tax expense recognized on positive earnings in our International division and no tax benefit on losses in the U.S. caused the effective tax rate to exceed net pretax earnings.

It's unlikely that the effective tax rate on a reported basis could exhibit -- excuse me. It's likely that the effective tax rate on a reported basis could exhibit significant variability throughout the course of the year due to changes in income projections and the mix of income across jurisdictions.

For the full year, we estimate that we will pay a total of $20 million to $25 million in taxes on a book and cash basis, excluding any discrete items. For the second quarter, we project 0 cash taxes.

The effective tax rate on our earnings, adjusted for charges, dropped to 43% for the first quarter. This rate is significantly lower than the reported rate, because it removes the charges that do not get tax benefits in our GAAP calculation. This rate can also show significant volatility over the course of the full year, if results vary across countries with valuation allowances.

I'd now like to expand a little further on something I reviewed on our recent conference call. Throughout 2010, we were able to successfully offset most of the deleveraging impact of lower sales volume through year-over-year gross margin expansion, which averaged about 90 basis points per quarter and cost control.

In the first quarter of 2011, we had a similar sales decline to the previous 4 quarters, but actually had a gross margin rate decline of 20 basis points. Most of that decline was driven by paper cost increases and competitive pricing pressures on ink and toner and International that Charlie described. And we think we'll be able to offset a significant amount of those impacts later in the year.

We also have a number of margin-enhancing initiatives in place that the business unit president described, and these initiatives should continue to mitigate deleveraging if we should continue to see lower sales volume.

I'd also like to revisit some earlier comments we made in regard to winter weather impact on first quarter EBIT. Upon completing the analyses of our North American businesses, we determined that although the weather disruptions did cost us sales on days when stores and distribution centers were closed, the bottom line impact was less than previously expected. As a result, we did not call out any weather-related year-over-year operating profit impacts need to North American retail or BSD.

Taking a look at cash flow, we ended the first quarter of 2011 with $123 million use of free cash flow, which was principally driven by higher inventory reinvestment, the timing of accounts payable, the normal payment of year-end accruals, compensation-related items and restructuring activities.

Despite the heavy use of cash in the first quarter and a projected use in the second quarter as well, we believe we will end 2011 with free cash flow of $20 million to $30 million.

As I mentioned on our recent call, we expect to receive a cash dividend from our Mexican joint venture partner in the second quarter of 2011. Our portion of the cash dividend totals MXN 300 million, which translates to approximately $25 million at current exchange rates. We also have other opportunities to drive incremental cash flow as well in 2011.

Shifting to CapEx, we invested $29 million in capital expenditures during the first quarter, primarily to cover maintenance and all business units, as well as North American Retail store downsizes and relocations.

Full year 2011 guidance for capital spending is now estimated to be in the range of $165 million to $170 million. That range is down from the original estimate of $180 million, but the decline won't negatively impact the execution of our strategic initiatives.

During the first quarter, we recorded a dividend on our convertible preferred stock of approximately $9 million, which was paid in cash in April. And moving to our balance sheet, we ended the first quarter with $494 million of cash on hand, lower than the same period in 2010.

Including availability from our asset-based loan facility of $684 million, our liquidity totaled about $1.2 billion at the end of the quarter. We did have borrowings of about $70 million in Europe on our ABL at the end of the first quarter, and this was related to our acquisition of Svanströms in Sweden.

Inventories totaled $1.2 billion globally, slightly up from the first quarter of 2010. The majority of this increase was driven by timing and should moderate as we go forward. However, we did increase our stocking levels of certain high-margin, high-velocity SKUs in our retail stores in the first quarter to drive sales and that higher inventory level should remain in place. Receivables of $990 million were down $20 million compared to the first quarter of 2010.

Looking at our outlook for the second quarter of 2011, we expect total company sales to be flat to slightly up versus the prior year, and that includes the unfavorable impact on sales from the divestiture of our businesses in Japan and Israel.

Second quarter EBIT, excluding charges, is anticipated to be up compared to last year as a result of the restructuring benefits and progress made on our initiatives at the business level and corporate.

With that, I'll now turn the call back over to Neil.

Neil Austrian

Thanks, Mike. I remain excited about the opportunities we have to move Office Depot forward. As I've told the numerous investors that I've spoken to or met with since taking the helm in October, we are not waiting for the new CEO to arrive to drive positive change at Office Depot or for a rising economic tide to lift all boats.

For example, we have made organizational changes that strengthened the team and created opportunities for improved financial performance. We have a deep and talented bench at this company, and it's time to reenergize the organization and bring fresh new ideas to the table.

In addition, I have engaged a number of our associates across Office Depot to take the first steps for an honest assessment of our culture, discuss where we are as a company and more importantly, highlight what behaviors we need to exhibit to affect necessary change across the enterprise.

It may not sound like an important objective to some of you, but I have seen some really amazing progress made at companies where everyone is aligned and pulling in the same direction. I am convinced that we have the same opportunity here at Office Depot.

Brian Turcotte

Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kate McShane.

Kate McShane - Citigroup Inc

Thanks. Citi Investment Research. I was wondering if you could go into a little bit more detail about some of the improvement that you saw on your international markets, specifically in the U.K. and Germany. And what's driving some of those better results?

Charles Brown

This is Charlie. Well, I think, the results that we're seeing in some of our markets like the U.K., for example, all focus around record [ph] -- as you probably recall, we had some difficulties in the U.K. about 3 years ago. We put a new management team in place and then had to report that our execution is probably the best in Europe, from my perspective. And that's allowing us to grow that business even though the economy in the U.K. is not strong. When you move to markets like Germany, the economy there is still soft as well. Although the exports are picking up, but there's not an increase in white-collar workers. But again, we're holding our own, particularly in the contract business.

Kate McShane - Citigroup Inc

Okay. Thank you very much. And also, in terms of the North American Retail business and your guidance that second quarter same store sales will become more positive. Can you talk a little bit more about what you're seeing in terms of traffic and conversion? And how much you think is being driven by just an overall improvement in the economic recovery. And any possible market share gains you might be benefiting from.

Kevin Peters

Sure. I'll take that, Kate. This is Kevin. I think as we commented, as we exited Q1, we saw some improvement in March, slightly positive comps in March. And that continued into the month of April. I think, it's a little bit of mix of traffic. But I think as important, perhaps more important, better execution, which is translating into conversion. So I think our conversion inside the store is getting much better. Partly, I think from the investments that we started making in improving the in-store experience. So we're hopeful that, that trend continues. And that as we see changes in white-collar workers that, that flows through to improved traffic in Retail as well.

Kate McShane - Citigroup Inc

Okay. Thank you.

Operator

Our next question comes from Chris Horvers.

Christopher Horvers - JP Morgan Chase & Co

Thanks. Chris Horvers, JPMorgan. Can you talk about how much that shrink impacted overall gross margin in the first quarter? And as you talk about your initiatives to offset some of the paper pricing and ink and toner pricing issues from International, will gross margin -- was 1Q an anomaly where perhaps at the total company level, we could see gross margin begin to expand again in 2Q, and then build from there?

Michael Newman

Chris, Mike Newman. Yes, I think going forward with -- Charlie talked about the issues in International that related to first quarter gross profit that the team is working on that relate to paper pricing and competitive prices on ink and toner. When you look forward and you look at growth of services, Steve Schmidt talked about the fact that our Direct business in BSD is outperforming our Contract business, that helps us mix up. And we've got a quite a few initiatives in the business that we're starting to get some traction on. We've had a number of quarters in a row where we've had margin expansion. I don't think it would be to the same extent we saw in 2010, where we were up 100 basis points a quarter. But I do expect going forward that we'll see margin improvement. And also, as the economy comes back and sales start to grow, we should get some leverage impact from that. If that happens later this year or not, we'll see. But based on our guidance of being -- sales being flat to slightly up, if we're up, this is the first quarter that we'll be up since the late 2007. So that should certainly help on the leverage side.

Charles Brown

Chris, this is Charlie. On the International side, I would reiterate that our issues on gross margin were really confined to 1 region. We had cost increases across the board, but our execution in 1 of the regions was not what it should be. And as I commented on, we're already seeing improvement going to second quarter, in terms of our execution around those price increases. So it should be better. It should moderate in the second quarter.

Christopher Horvers - JP Morgan Chase & Co

And then on the -- Steve, on the top line, being flat to slightly up in 2Q is a pretty big change from what you saw in the first quarter and the past couple of quarters. Is that -- obviously, that has to be something that you're seeing in the business there. Any commentary?

Steven Schmidt

Yes, Chris. I mean, we are pleased with kind of the trend that we're seeing at this point. If you recall, we talked about gaining share in the large segment during the second half of 2010. That's obviously carrying over into 2011, so we're starting to see growth in our large customer segment. In addition, I talked about SMB being flat. And we're hoping that, that trend continues in the right direction. And all of that is used to offset the decline that we experienced from the U.S. Communities transition which again we feel really good about. So those factors, really, are contributing to those positive trends.

Christopher Horvers - JP Morgan Chase & Co

And then Mike, on the tax rate side, could you just clarify how we should think about perhaps the tax rate in the second quarter? I mean, you usually lose money. So will you have a tax benefit flow-through, or should we use that flat 0 cash rate in the models?

Michael Newman

Yes. The way to think about it is if you look at our International business, we will pay -- on a GAAP basis, taxes should be $23 million to $25 million in 2011. It's principally driven by International taxes. And so the losses on the domestic side do not get any tax benefit, as I said in the script. So that should flow fairly evenly with the exception of Q2. Q2 is going to be about 0. So from a dollar basis -- and the effective rate, as we talked about, will bump -- will jump all over the place. So $23 million to $25 million for the year. 2Q relatively flat with the balance of the $23 million to $25 million to come in Qs 3 and 4. Chris, we didn't answer your question on shrink. We had a shrink adjustment in 2010 of about $7 million last year that we, obviously, did not -- that's not recurring. We did a lot of good work operationally to drive shrink down. We have shrink at very low levels today. I don't think we'll see any improvement off those levels unless we have some new process change that I'm not aware of. So we were up against a pretty tough adjustment from last year.

Christopher Horvers - JP Morgan Chase & Co

Thanks a lot.

Operator

Our next question comes from Matt Fassler.

Matthew Fassler - Goldman Sachs Group Inc.

Thanks so much. It's Goldman Sachs. A couple of questions. First of all, I want to get some insight into your thinking on the return profile of some of the investments you've made, namely the Business Process Improvement, given the charges that you outlined today. And then also just an insight on the ad spending that you put in place in Q1, and what kind of return you're getting on that investment.

Charles Brown

You want to take the ad spending first?

Steven Schmidt

Yes. Matt, this is Steve. On the ad spend, we spent in Q1 similar to Q1 of 2010. We measure our return on that through a third-party company. And we feel, generally fairly good about advertising during back to business. It's 1 of our most productive times, and we do track an ROI on that. Obviously no advertising, totally pays for itself, but we do feel good about that. And we are assessing our advertising plans for the rest of the year. We did announce a change in agencies as part of a proactive approach here, and we're continuing to reevaluate our advertising as we go forward.

Michael Newman

You're talking about investment return on the reinvestments we're making back into the business from a result of the restructuring benefits?

Matthew Fassler - Goldman Sachs Group Inc.

I guess it's the $60 million or so in charges for Business Process improvement, which is a pretty big number at the outset. How should we think about the payback that you get on that investment?

Michael Newman

Yes. The payback on that is -- we've talked about this year, the charges, the benefits that we're looking at. Our guidance is -- we're talking about $80 million to $90 million for the year. We've picked up some of that in Q1 with a lot of that coming yet into Qs 2, 3 and 4. A significant piece of that relates to International initiatives we've talked about previously. But we've also got a number of other initiatives in the business that we talked about for the last year. We've got indirect cost reductions. We've got finance process improvements where we're looking to outsource some of our processes in finance. So a lot of that benefit we've talked about in the past. I think those initiatives are going very well. The 1 thing we have not called out yet is the return on the reinvestments from some of these benefits that we've talked about making. We talked about reinvesting $40 million to $50 million of that back into the business in areas like in-store experience, Copy & Print, Tech Depot. We started to look at some pricing initiatives. We're starting to get our hands around what some of those returns could be, but we're not in a position to talk about them yet. We'll probably come out with some guidance later this year.

Matthew Fassler - Goldman Sachs Group Inc.

And of those dollars that were allocated to the charges, can you roughly break out for us how much is severance and how much relates to the facilities?

Michael Newman

I don't have that off the top of my head.

Matthew Fassler - Goldman Sachs Group Inc.

Got it. And just a couple of housekeeping notes. If you could help sort of translate Charlie's guidance on International, local currency, adjusted for divestitures, acquisitions and such into kind of more of a stated U.S. dollar or local currency number, whichever you prefer, just so we can understand it...

Michael Newman

In Q2?

Matthew Fassler - Goldman Sachs Group Inc.

Yes.

Michael Newman

We're going to pick up a significant benefit in Q2 from currency. And so the guidance in Q2, on a dollar basis, may be up as much as 5% to 7%. And so when he talks about his guidance on International was that he would be up low single digits, constant currency like-for-like. On a dollar basis, and this includes acquisitions, dispositions, this is all in, we could be up as much as 5% to 7% in Q2.

Matthew Fassler - Goldman Sachs Group Inc.

And I guess just to understand the impact of acquisitions and disposition as you net that all out in terms of percentage impact on the business.

Michael Newman

Yes. In Q1, we called out that the total sales number adjusted for acquisitions, dispositions was minus 2. The dollars are about -- approximately, Q1 were approximately $50 million of lower sales, year-over-year. About Israel and Japan, I think, it was about $60 million. And then we picked up approximately 10 from Svanströms going the other way.

Matthew Fassler - Goldman Sachs Group Inc.

And Svanströms, I guess, is bigger in later quarters just because of the timing of the deal?

Charles Brown

We only had 1 month on a trailing quarter, Matt.

Michael Newman

That's correct.

Charles Brown

So it will be fully in for the balance of the year.

Matthew Fassler - Goldman Sachs Group Inc.

So it's much closer to a wash, I guess, in subsequent quarters?

Michael Newman

No, I think it will still be a reduction of [indiscernible].

Matthew Fassler - Goldman Sachs Group Inc.

And very last question, just a clarification. You talked about better EBIT year-on-year. Last year, you lost money on an EBIT basis. Are you implying a smaller loss or are you implying the possibility of breakeven?

Michael Newman

We're implying a smaller loss, and we'll see how some of the sales trends develop as we go through the quarter. Kevin?

Kevin Peters

I'm pleased with the fact that we're starting to see some improvement on the top line, though.

Matthew Fassler - Goldman Sachs Group Inc.

Thank you so much, guys.

Operator

Our next question comes from Emily Shanks.

Mike Perez

This Mike Perez on behalf of Emily from Barclays Capital. Regarding the Svanströms acquisition made during the quarter, could you discuss what the purchase price was of that acquisition? And how you funded it?

Charles Brown

Yes. This is Charlie. The purchase price was actually in Swedish kronor, but we translated them out. It was USD $69 million. And how we funded it was -- under our ABL, we have a restriction. We were able to bifurcate the purchase, executing part of it in the fourth quarter and the remainder in the first quarter. That was financed under the ABL.

Mike Perez

Great. That's helpful. And what was that on a multiple basis?

Charles Brown

On a multiple basis, it was -- give me a second, I can get it for you.

Neil Austrian

Move on to the next question already.

Charles Brown

It was about between $8 million and $9 million, multiple EBITDA LTM.

Mike Perez

Great. And 1 more, if I may. Regarding your plans for your footprint, are you planning on shuttering any stores in fiscal year 2011?

Kevin Peters

International or domestic?

Mike Perez

Well, could you discuss footprint plans for both? As far as shuttering stores is concerned?

Kevin Peters

Mike, this is Kevin. On the North American Retail side, we have about 100 leases that come up each year for renewal. And we take a look at each of those to determine whether or not we have opportunities to relocate, downsize or close. Aside from the Canadian stores that we talked about earlier, there are no current plans for any major structural closure of stores for the balance of the year.

Charles Brown

And for International, again, it's part of the larger plan that we announced in the fourth quarter of last year. There's a small single-digit number of stores that we will likely close in Europe.

Mike Perez

Great, that's very helpful. Thanks, guys.

Operator

Our next question comes from Colin McGranahan.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

The company in Sanford Bernstein. Just following-up first on the BPI initiative. Of the $45 million to $50 million net this year, how much of the reinvestments are what we should consider to be recurring? So in other words, if you expect to get $80 million to $90 million gross benefit this year, are any of these reinvestments kind of 1 time, or is kind of the ongoing net benefit $40 million to $50 million?

Michael Newman

Yes. This is Mike. We have some of the reinvestments back into the business to benefits and merit increases from our employees. And so some of that will be -- it will be recurring. That's about $10 million to $15 million of the total. The balance are mostly project-driven reinvestments, in-store experience, Copy & Print, Tech Depot. Although that may expand and be a broader initiative, but the balance of the non-people piece is project-driven. And after a period of time, can probably be reset to 0 and we'll look at other things.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Okay. And then just thinking on unallocated, I guess, the total G&A overhead kind of flat in the first quarter. Should we expect it to be down this year, even though sales are now starting to hopefully inch up? Can you take more dollars out of the G&A nut?

Michael Newman

Yes. I don't have the guidance for the year on G&A. I think a lot of it will depend on what we do from a performance basis. We took back some -- we were much lower last year in bonuses than we probably would like if we hit our numbers so aside from that, I would think that the G&A will be down as a result of some of the initiatives that we've got in going through the business.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Okay. And then on working capital, it sounds like that some of the inventory was getting some high-velocity SKUs back in stock and to a level you want in retail, but how much of the working capital performance should reverse through the year? Because it looks like -- and even with the business improving, excluding the $25 million dividend from Mexico, you're going to be excluding that, you'd be free cash flow negative this year largely on a working capital issue.

Michael Newman

Yes. 1 of the things -- our inventory in Q1 on the domestic side of the business typically will go down following the back-to-business period by about -- it averages about $90 million, if you look at the last 3 years. And I'll adjust 2009 for the stores that we exited in the inventory reduction that went with that. We were down in first quarter domestic inventories, but we were only down in the $20 million range. So we were about $70 million heavier than we would be in prior years. And of that, I think about $20 million of that relates to increased inventories in high-velocity SKUs. We had some increased inventory due to some of the direct import penetration. But of that $70 million that we would normally be down, the remaining $50 million is -- a lot of it relates to timing.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Okay, that's helpful. And then just a quick final question for Neil. I know you're still in the process and the board's looking at CEO candidates. But I guess it's been about 6 months now. And I think initially, we thought it would be something like a 6-month process. Can you provide any more insight into what the final candidates look like? Do you have final candidates? Any more insight into the timing and where you are in the process today?

Neil Austrian

Actually, Colin, I think, we've made a lot of progress. We said initially it would take about 6 months. We're kind of at the 6-month number right now. I think as you look, part of the timing issue was when we started in terms of putting a search committee together, getting a search firm, you had Thanksgiving first, and then you had the Christmas holidays, which made it a little bit difficult and we probably should have said it might take 7 months. But I'm optimistic that within the next 30 days or so, we'll be able to announce something.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

That's great. Thank you very much.

Operator

Our next question comes from Steve Chick.

Stephen Chick - FBR Capital Markets & Co.

FBR. Thanks. Just to close a loop or follow up on that Neil. Is it safe to say -- I mean, are we thinking it's definitively an external candidate at this point for the CEO spot?

Neil Austrian

No, I'm not going to comment on where the candidate might come from.

Stephen Chick - FBR Capital Markets & Co.

Okay. All right. I guess, and then separate then, with -- for Steve and your guidance and your commentary about BSD margins in the second quarter being up significantly, I was wondering if you could kind of give us a thought on what significantly would mean? And then secondly, as you think about when sales come back, what kind of incremental margin are you thinking that EBIT will kind of garner with eventually when we go sales positive?

Steven Schmidt

Yes. Regarding Q2 guidance, as we look at Q2 -- obviously during Q1, we spent fairly heavily in back to business, and some of those expenses don't reoccur as we go into Q2. But we balance that with also investments that we want to put behind our solutions business, as well as if we start to see continued pickup from a revenue standpoint, you have to decide when you start to hire and bring back some incremental headcount costs. And so we're trying to balance that equation. If you compare it versus year ago, we had a very weak Q2 due to significant investments that will not reoccur this year. So as we go in to Q2, we feel positive about our ability to drive incremental profitability across the BSD business. And I prefer not to, at this point, to define significant other than we feel like that trend definitely will be in the right direction pretty significantly in Q2.

Stephen Chick - FBR Capital Markets & Co.

Okay. So I guess, I mean, could it be -- could the EBIT dollars for the segment be up north of where Q1 was?

Steven Schmidt

The bottom line profit will be higher than Q1, yes.

Stephen Chick - FBR Capital Markets & Co.

Okay. That's helpful. And so just as you look at your cost structure, if and when sales do turn positive, how should we think about kind of the incremental EBIT dollars that will rise with rising sales? I don't know if you've looked at it that way.

Steven Schmidt

Yes. The way I would guide there is simply, we have advised that we need to get this business and should be able to get this business back into the mid-single-digit margin level. And that's been the guidance we provided. The question will be is how fast can we get there based on what happens in the economy. And obviously what we need to judge is how fast do we reinvest in the business as we start to steal some tailwind from the economy. And so that investment would include headcount, obviously, investment behind solutions, investment behind marketing dollars. And so the balance will simply be to do that. But with the deleveraged cost structure, we should be able to see some positive margin growth going forward, assuming we see the economy continue to show some tailwind behind us.

Stephen Chick - FBR Capital Markets & Co.

Okay. Thanks, Steve.

Operator

Our next question comes from Dan Binder. [Jefferies & Company]

Daniel Binder - Jefferies & Company, Inc.

A few questions. I was curious, could you review with us today how many stores are actually unprofitable on a 4-wall basis? And why, if there are any, why wouldn't be just sort of taking 1 whack at this and closing them as you are in Canada?

Kevin Peters

Dan, this is Kevin. We're not going to talk about unprofitable stores, other than to say if you recall, I think in Q1 of 2009, we closed roughly 120 or so stores that we deemed to be unprofitable. So that was a fairly significant structural change in our store base. We have now done the same thing in Canada with unprofitable stores. And as I said earlier, we don't have plans to shutter any more stores at this point.

Daniel Binder - Jefferies & Company, Inc.

Okay. And then separately, and I think in response to 1 of the last questions, you said that there was significant reinvestment in BSD a year ago that wouldn't repeat this year. I'm just curious what that reinvestment is, and why it wouldn't repeat this year?

Steven Schmidt

If you recall last year, we had invested significantly behind headcount, specifically in anticipation of the economy turning around, which didn't happen. And so we placed a bet. That bet didn't pay off, and so we then reduced our overall G&A expenses in the third and fourth quarter, which then turned around and lead to the incremental margins that you saw in the BSD business. And so we simply have righted our cost structure as we entered 2011. And we've maintained that lower cost structure basically at the level to support the business as it exists today.

Daniel Binder - Jefferies & Company, Inc.

Okay. And then, on the paper pricing issue, I was wondering if you could give us a little bit more color, broadly, really -- I don't know if it's specific by region or International versus domestic, but when you experience a price change in paper, what is your -- how tied up are you in commitments and for how long before you can pass that through? And then, specifically to the International region that you spoke about, how long will it take to get that pricing increase all the way through?

Charles Brown

Dan, this is Charlie. In terms of the issue with paper, I think first of all, we're talking about a European issue. And largely, the paper suppliers that we use in Europe are different than the ones we use in North America, for the most part. And also, the competitive set itself, there is overlap between ourselves and Staples. But obviously, you have Lyreco and other players in Europe that you don't have in North America. So first of all, you're dealing, contextually, with a different environment. The paper price increase that was given to us in Europe in the latter part of 2010, there was not a paper price increase in North America. So the process that you go through, because our business in Europe is mostly delivery in either Direct or Contract. For the most part, you have to deal with catalogs that you have out in the market, and you have to deal with conversations with customers in the Contract business. So in some of those -- and most of our markets in Europe, we handle that fairly aggressively. The margin erosion was pretty small. In 1 region, as I commented in my earlier statements, we didn't do such a great job. What we have done is we took action in the first quarter to right that process. And the reason we're giving guidance down a little bit both prior year to second quarter is because it will take us through the end of the second quarter to get most of that pass through, but we should be back on track. We're actually doing better in the second quarter than we did in the first quarter, much better, actually, in that regard, when we passed a number of prices along. This will take us most of the second quarter to get our way all the way through it, but we should then be back on track in the second and third.

Daniel Binder - Jefferies & Company, Inc.

I mean, this business has been volatile through the years. Are there generally agreements between you and your customers, whether it's in the Contract or even in the catalog business, with the sort of exceptions that are made? In other words, because I'm a Contract customer, should I expect that you're going to take paper pricing up? Or is there actually commitments that force you to keep in place for some period of time? I guess that's kind of what I was driving at. How long is that period, if there are those commitments?

Charles Brown

Generally speaking, our contracts in Europe are very similar to contracts in North America in terms of duration and how they're structured. There's not -- this is a negotiated thing, so there's not an automatic pause that you can put into the contract, it depends upon the competition, that will let you automatically pass price increases along. And given the economic environment that we're coming out of, we've found in some cases that some of our customers just simply said no. They said look, my costs are up everywhere. And so therefore, I'm not going to accept it. We're in a position where we have to be -- that's what our reaction to that's going to be. So typically, when it comes to price increases, we get 2 or 3 months of notice and no more than that. And because we're dealing with oligopoly when it comes to the paper industry, you really don't have much choice but to accept it. And so then it's all hands to the pump to figure out how best to deal with it.

Daniel Binder - Jefferies & Company, Inc.

Great. Thank you.

Operator

Our next question comes from Joe Feldman.

Joseph Feldman - Telsey Advisory Group

Telsey Advisory Group. So I wanted to kind of -- from a bigger picture perspective, it sounds like the large business environment is starting to pick up a little bit. Your small- and medium-sized business sounds like it's flattish, maybe even starting to look slightly up. I guess, am I reading too much into this that maybe the macro is finally getting a little bit better? That you guys are starting to feel good about the back half that there's a tailwind here coming from the macro? Or are we not there yet?

Michael Newman

I wouldn't go so far as to say we're feeling good. But it gives us hope, and when we look and do analysis on the macro indicators that we tend to track, which would be employment and whatnot, we see -- we should see trends improving going forward. That's what the macro indicators would tell us. A couple of people on the sell side that we've talked to have done the same analysis, and that's what they say as well. Certainly, when you see flat to slightly up sales the first time since 2007, we're encouraged. We'd like to watch it a little bit longer to see what it means and understand it and see how the margins flow. The earlier question about how do you lever up and what kind of -- it all depends on mix. It depends on our furniture does, it depends on how services work. We've had huge mix shifts that have hurt us on the way down. Are we going to see those mix shifts help us on the way back? There's a lot of questions we have. I would say we're encouraged. We're cautiously optimistic would probably be the best way to put it.

Neil Austrian

This is Neil. As you look at some of the consumer surveys that have been done, there isn't a whole lot of optimism right now in the economy. There's not any sense of where this budget is going to go. More people are concerned about the deficit. And we have not seen small businesses start to hire at a rate that would give us optimism, in your words.

Joseph Feldman - Telsey Advisory Group

All right. That's helpful, guys. And then another question. You had mentioned services, and that was an area we wanted to ask about, too. Where -- can you share like the percent of sales is these days and maybe what kind of margin you get? Is it still -- do you get like almost 2x the normal margin on it?

Kevin Peters

This is Kevin. Copy & Print Depot and Tech Depot Services, which are 2 of the principal services that sit inside the North American Retail store organization. Those margins are roughly 2x the house average.

Joseph Feldman - Telsey Advisory Group

Got it. That's helpful. And 1 final thing. In North American Retail -- thank you for giving us sort of the cadence, March into April. I was wondering if you could do the same with the BSD group?

Charles Brown

Joe, we haven't been specific other than to say the trends that we see, hopefully will continue and the trends clearly will be better in Q2 than in Q1. We're down, as we said, 3% in Q1. And with some headwind -- or excuse me, with some tailwind, other things of that trend should continue to improve. And hopefully, we'll start to see the business get closer to flat and heading in the right direction.

Neil Austrian

And 1 other thing I'll point out. We probably said it earlier in the script, but we're down 3% in BSD, with most all of that being driven by the U.S. Communities business, the 15% that we didn't retain. So when you compare that to previous trends that we've had in the last 4, 5 quarters in BSD, it's showing improvement.

Joseph Feldman - Telsey Advisory Group

That's helpful. Thanks very much, guys. Good luck.

Operator

We have time for 1 more question. Our final question comes from Aram Rubinson.

Alisa Guyer

This is actually Alisa Guyer in for Aram Rubinson at Nomura. 2 questions, thanks for squeezing us in. First off, on the double rebates between January and June on the TCPN contract, can you help us think about how that might affect the flow of BSD revenues through the year? I mean, is there any chance of kind of front-end-loading those revenues as people kind of work within that first 6 months parameter?

Steven Schmidt

Yes, Alisa. This is Steve. No. When you think about what happened, just think about the old U.S. Communities contract ended basically at the end of December. We then had to transition customers to 1 of 2 cooperative agreements that we have. 1 is with TCPN and the other is with National IPA in the state of Florida. Those customers had to decide who they wanted to go with. And so the retention rate that we've spoken about is where we're at, and that will be consistent. And I also had spoke to the fact that we are out trying to bring some of those customers that looked back into the fold. But you will not see any significant swings from where we sit today.

Alisa Guyer

Okay. Great. And then just on sort of looking at Canon's commentary around the supply chain recovery taking until June or July, do you expect any sort of impact in terms of ink and toner? And if so, can you give us a sense of like magnitude or timing or anything like that?

Kevin Peters

Yes. This is Kevin. I think, certainly, the disaster in Japan has impacted principally the consumer electronics markets. Certainly, smart phones are heavily impacted. I think the other area that's impacted is probably more toner in our business than it is ink. And so we're certainly working with our manufacturers today to 1, buy early to protect our customers and then 2, put plans in place to transition customers to alternate products if the National brands aren't available. And we're also working with the manufacturer to look at production and potentially shift production from SKUs that are for older printing units that are close to the end of their service life, pulling those SKU manufacturing dates back and reallocating that production to more popular toner SKUs. So right now, I think toner is on allocation. We've got to watch out. But at this point, it certainly hasn't impacted the business yet.

Alisa Guyer

Great. Thanks so much for taking our questions.

Brian Turcotte

So that concludes our webcast and conference call this morning. Thank you very much for attending, and I'll be available later today to take calls if you have any more questions. Thank you very much. Have a great day.

Operator

That does conclude today's conference. Thank you for participating. You may disconnect at this time.

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