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OfficeMax, Inc. (NYSE:OMX)

Q2 2007 Earnings Call

August 1, 2007, 9:00 AM ET

Executives

John S. Jennings - Sr. VP, Treasurer and IR

Sam K. Duncan - Chairman and CEO

Don Civgin - EVP and CFO

Analysts

Seth Basham - Credit Suisse First Boston

Matt Fassler - Goldman, Sachs & Co.

Colin McGranahan - Sanford C. Bernstein

Bradley Thomas - Lehman Brothers

Anthony Chukumba - FTN Midwest Securities

Francis Gallagher - Catalyst Fund

Mitchell A. Kaiser - Piper Jaffray & Co.

Christopher Horvers - Bear Stearns

Presentation

Operator

Good morning. My name is Christian and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the OfficeMax Second Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. It is now my pleasure to introduce you to John Jennings, Senior Vice President, Treasurer, and Investor Relations of OfficeMax Incorporated. Mr. Jennings, you may begin your conference.

John S. Jennings - Senior Vice President, Treasurer and Investor Relations

Good morning everyone and thanks for joining us today. I am here with Sam Duncan, our Chairman and CEO; and Don Civgin, our Chief Financial Officer. Sam and Don will provide details of our financial and operating performance for the second quarter of 2007.

Before I turn the call over to Sam, I have a few administrative items. Today's conference call will be archived on our website for one year following the call. Note that this call may not be rebroadcast without prior return consent from OfficeMax. In addition, please note that during this call, we will discuss non-GAAP financial measures. We believe that presenting these non-GAAP financial measures will enhance our investors' overall understanding of our operational performance.

In accordance with SEC regulations, we've provided a reconciliation of these non-GAAP financial measures to GAAP measures in our press release today. This press release is also available on our website and we encourage you to read it.

Now I will read our forward-looking statements. Some statements made on this call and other written or oral statements made by or on behalf of the company constitute forward-looking statements within the meaning of the Federal Securities Laws, including statements regarding the company's plans to address sales margin, and the company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future. Management believes that these forward-looking statements are reasonable. However, the company cannot guarantee that it will successfully execute its turnaround plans or that its actual results will be consistent with the forward-looking statements and you should not place undue reliance on them. These statements are based on current expectations and speak only as of the date they are made. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

Important factors regarding the company which may cause results to differ from expectations are included in the company's Annual Report on Form 10-K for the year ended December 31, 2006, including under the caption "Cautionary and Forward-Looking Statements," in Item 1A of that form, and in the company's other filings with the SEC.

As always, after the call today please feel free to call me with any follow-up questions. It's now my pleasure to turn the call over to Sam Duncan, Chairman and CEO of OfficeMax.

Sam K. Duncan - Chairman and Chief Executive Officer

Good morning everyone. I would like to thank you for joining John, Don Civgin, Chief Financial Officer, and me on the call today. Today, Don and I will summarize our second quarter 2007 financial results. As we review our performance, we will provide our assessment of the key factors, both positive and negative, that contributed to our Q2 performance. I'll also detail some specific activities we have implemented to address those areas with performance concerns.

Taken as a whole, the second quarter continued some positive trends consistent with our turnaround plan. But Q2 also included some challenges that we continue to address. For the second quarter of '07 compared to the prior period excluding special items, total sales grew 4.5% to $2.1 billion, operating income margin improved 20 basis points to 2.6%, and net income and earnings per share increased approximately 20% to $27.4 million and to $0.35 per diluted share respectively.

Before going into details of our segments, I want to address the overall sales environment as we see it. There has been a lot of talk about the slowing economy and the top line pressure it is creating. We are certainly not immune to economic conditions and undoubtedly there is some negative impact to our business in 2007. But I am happy with our revenue growth in the second quarter, particularly in Retail where our 2.7% same-store sales growth, excluding the impact of mail-in rebates reflects the substantial improvements we have made to our business. And I feel especially good about that growth about that growth in the phase of what has been described as a more challenging macro environment.

Now, let's take a look at our operating performance by segment. In the second quarter, our Contract business generated operating income margin of 3.4%, down 50 basis points year-over-year. In Contract, we generated sales growth, but at lower gross margin rates, which are only partially offset by reductions in operating expense as a percent of sales. Total Contract sales increased 4.4% in the second quarter with US contract up 2.2% and international contract up 11.1% from the second quarter last year, reflecting both favorable foreign exchange rates and strong same location sales growth.

Within our US Contract business, sales growth was primarily from our large customer market, which makes up the majority of our total US Contract sales. Sales from the middle customers increased only slightly in Q2 and middle market is attractive because it typically generates higher gross margins than the large customer market, and currently represents a smaller share of our US Contract sales. The middle market field sales and tele sales teams were not as productive as we would have liked in Q2, as we continued to refine our US Contract field sales organizational model. We are disappointed with our middle market sales in the first half of 2007, but we still see significant opportunity going forward.

In our small market direct business, sales decreased in the second quarter compared to last year with OfficeMax.com sales growth offset by lower catalog sales as we control circulation to reduce cost and improve bottom line performance. We are looking forward to rolling out a new OfficeMax.com website later this summer. The new site is expected to provide better navigation and functionality for customers and better efficiency for OfficeMax.

Contract segment gross margin in the second quarter of 2007 decreased 70 basis points from last year to 21.4% with US Contract responsible for most of the decline. Large market customer sales at lower gross margin rates primarily accounted for the US Contract gross margin decline. This included sales from a handful of significant large market new and renewing accounts that rounds up in the first half of 2007 at lower gross margin rates. For certain large accounts, we accept lower initial gross margin rates, anticipating that we can drive higher margins over the full contract term.

Contributing to our US Contract gross margin decline in the second quarter of 2007 was the impact of higher paper prices. When our cost for paper is increased, it pressures our gross margin rates in Contract because of the lag time that it takes to pass along paper price increases to our customer. Positively impacting US Contract gross margins in Q2, as in the recent quarters, was improved vendor funding levels.

Contract segment operating expense as a percent of sales improved 40 basis points from last year to 17.9%. Contract expense as a percent of sales benefited in the second quarter from international contract expense leverage and from targeted cost controls in the US. Our US Contract operating performance, and specifically our gross margin rates have performed to our expectations in 2007 and we want to detail a few of the action plans we have recently implemented with the intention of improving Contract profitability.

First, we have adopted more pricing analytics to better model profit account profitability of large new and renewing account over their term. Second, we have instituted new management controls to review and improve account profitability for all contracts. Our expectation is that these controls will result in better predictability and accountability for new and renewing large contract gross margins. We continue to pursue profitable growth and where necessary we have to be willing to walk away from unprofitable business.

Third, we have implemented a task force to identify margin opportunities within existing large accounts. This is an extension of normal tactics we pursue as new accounts ramp up and we attempt to drive higher margins in these new accounts. These tactics include increasing private label and expanding existing customer relationships into more sales categories to benefit OfficeMax, and to provide cost savings for our customers. But this task force will also identify other specific cost-to-serve improvements in existing accounts and work to quickly implement them.

Fourth, as we continue to refine the US Contract organization, we believe that the material transition challenges associated with the refinement have been identified. While the reorganization is appropriate and it is generating cost savings, the transition has resulted in margin pressure, partly due to slower growth in the middle-market. For transition challenges, we are implementing remedies and completing the reorganization. In addition, we have initiated a number of changes in Contract leadership that we believe will reignite a focus on Contract profitability.

We expect these action plans coupled with our ongoing Contract turnaround initiatives to have some near-term and some longer-term benefits to our Contract operating income. As we implement these actions, we will likely create some pressure on top line growth in our large customer segment, and we are prepared to do so for the purpose of improving our bottom line probability.

Now, turning to our Retail segment, second quarter operating income margin improved to 2.6%, up 60 basis points year-over-year, excluding the special items in the second quarter of 2006. Same-store sales in the second quarter were up 1.6%, which reflects our intentional elimination of mail-in rebates. Excluding the impact of mail-in rebates, Retail same-store sales would have increased about 2% in Q2. As a reminder, while moving away from mail-in rebates did not impact our earnings in a meaningful way, it did reduce our second quarter same-store sales, mostly in technology categories. We anniversary our move away from mail-in rebates during the third quarter of 2007.

In the second quarter, we experienced positive same-store sales growth across many of our technology product categories, including filter supplies, desktop and notebook computers, shredders, and software. Our furniture category has slightly negative same-store sales in Q2, but we are pleased with improvement with certain furniture categories, which had previously been weak. We experienced positive comps in chairs and ready-to-assemble furniture, benefiting from our new fashionable assortment. Our exclusive Sharper Image licensing agreement, which launched Chain Light at the end of Q1 performed very well and contributed to our ready-to-assemble furniture comp growth. Offsetting this growth was weakness in other furniture categories, specifically in desktop accessories.

Our strategies for furniture categories began to show results in Q2, but we still have opportunities for improvement. In office supply categories, we experienced negative comps as a whole in Q2. We had positive comps in several key supply categories, including writing instruments, filings, and storage products, but they were offset by decreases in other supply categories, including commodity paper and presentation. These decreases in supply categories during Q2 this year were driven in part by changes in our promotional strategy last year for certain supply categories.

OfficeMax Impress, our document service business, again produced strong same-store sales in the second quarter with high single-digit comps. We continue to pursue a leading position in the direct print marker providing small business, individual consumers, and our Contract customers with a full range of print and document services. Our strategy to grow Impress includes building print and document services relationships with our Contract customers using our field sales teams, print specialists.

And while penetration of our Contract customer base continues to gain traction and represents a small portion of our total Impress sales, we believe that hold significant opportunity.

Retail gross margin in the second quarter of 2007 increased 20 basis points from last year to 29.9%. Retail gross margin improved from our targeted promotional strategies and improved vendor funding, which were partially offset by fiscal inventory gains in the second quarter of last year. Retail operating expense as a percent of sales was 27.3% for the second quarter, an improvement of 30 basis points versus last year, excluding special items.

Retail expense as a percent of sales benefited from lower occupancy and advertising costs, which were partially offset by higher allocated G&A expense. During the second quarter, we opened nine new Retail stores, including four stores in the US and five stores in Mexico, and closed one store. We remain on track to open about 60 new domestic stores in our Advantage format during 2007, primarily in existing market as part of a multi-year store growth strategy.

While our real estate strategy still includes plans to remodel our stores, we have adjusted our remodel plans for 2007. As a reminder, our remodel prototype involves aggressive remerchandising and reconfiguration of stores to incorporate elements of our Advantage format. Given the significant investment required and to ensure as low disruption as possible, we now plan to evaluate an additional 10 sales remodel stores that were recently completed. We adjusted our remodel plan to further cost engineer for prudent investment, validate our return assumptions, and mitigate operational risk before we begin our chain-wide rollout.

Now turning to prior label, in the second quarter we continued to expand private label as a percent of total sales to 26%, up 400 basis points compared to the second quarter last year. The private label improvement reflects the increase of about 500 private label SKUs added in the past year across our Retail and Contract business. We continue to view private label expansion as an opportunity since we remain underpenetrated in many categories.

With higher gross margin rate than average for private label transactions compared to the branded equivalent and efficient direct sourcing opportunities, we believe private label growth is critical to our bottom line improvement.

Now at this point, I would like to turn the call over to Don Civgin, so he can review additional financial details for the quarter.

Don Civgin - Executive Vice President and Chief Financial Officer

Thank you Sam and good morning everyone. For the second quarter of 2007, on a GAAP basis, OfficeMax reported net income of $27.4 million or $0.35 per diluted share, consistent with the same period last year. While there were no special items in the second quarter of 2007, results for the second quarter of 2006 included items that are not expected to be ongoing. We have provided a detailed description of these special items along with the reconciliation to GAAP results in our press release today.

Excluding special items, net income for the second quarter of 2007 was $27.4 million or $0.35 per diluted share compared to net income of $23 million or $0.29 per diluted share in the second quarter of 2006.

Total sales for the second quarter of 2007 were $2.13 billion, an increase of 4.5% compared to the same period a year ago. Contract segment sales grew 4.4% and Retail sales increased 4.6%.

Clarifying something Sam said earlier, excluding the impact of mail-in rebates, same-store sales in Retail was 2.7% for the quarter. US Contract sales increased 2.2% and international Contract sales increased 11.1% in US dollars or 2.9% in local currency. Retail sales growth in the second quarter of 2007 was positively impacted by 49 additional stores opened versus the second quarter of 2006.

Total operating income was $55.9 million for the second quarter of 2007 or 2.6% of sales, up from 2.4% of sales for the same period in 2006, excluding special items. Our operating income margin improvement reflects lower margin in Contract, continued margin improvement in Retail, and lower Corporate and Other segment expense.

Our Corporate and Other operating segment includes support staff services and other expenses that are not fully allocated to our Retail and Contract segments. Excluding special items, Corporate and Other operating expense was $9.8 million in the second quarter of 2007, down $4.3 million from the second quarter of 2006 as a result of lower legacy company expenses.

Moving to the balance sheet for the second quarter of 2007, inventories ended $84 million higher and inventory turns were slightly lower compared to the second quarter of last year. The higher ending inventory versus second quarter last year reflects the 49 additional stores opened along with our strategies of maintaining slightly higher inventory to improve in-stock metrics and stocking select products previously stocked by wholesalers to pursue better margins.

Accounts payable ended the second quarter $18.4 million lower than the second quarter of 2006, primarily reflecting the timing of vendor payments, including back-to-school inventory purchases. At the end of the second quarter of 2007, OfficeMax reported total debt excluding the timber securitization notes of $391.5 million.

At the end of our second quarter, OfficeMax amended and restated our revolving credit... I am sorry, after the end of our second quarter, we amended and restated our revolving credit facility, which is intended to fund our working capital and general corporate purposes. This five-year financing agreement amends our previous revolver and replaces our accounts receivable securitization facility. We expect that the amended revolver will improve our financing terms and lower total costs.

Turning to cash flow during the second quarter of 2007, OfficeMax generated $120.9 million in cash from operations, an increase of $41.9 million from the second quarter of 2006. Cash from operations in the second quarter of 2007 reflect changes in working capital and the benefit of $82 million of proceeds from monetizing certain company-owned life insurance assets.

Capital expenditures totaled $31.3 million during the second quarter, reflecting store capital investments and other projects during the quarter. Based on a review of 2007 capital projects, including our revised store remodel plan, we expect our capital expenditures for full year 2007 to total somewhat lower than our previous plan, between $180 million and $200 million.

Now, I'll turn the call back over to Sam.

Sam K. Duncan - Chairman and Chief Executive Officer

Thanks Don. I feel OfficeMax made progress toward our turnaround of the second quarter, but we have opportunities throughout our business. We remain committed to the near-term action plans we have implemented, as well as the longer-term strategic initiatives discussed with you previously. We believe these plans and initiatives will result in continued bottom line improvement and long-term shareholder value generation.

This concludes our prepared remarks. And now I would like to open up the call for questions.

Question And Answer

Operator

[Operator Instructions]. And your first question is from Gary Balter with Credit Suisse.

Seth Basham - Credit Suisse First Boston

Hi, good morning. It's actually Seth Basham for Gary. Congrats on a good quarter in a tough environment. A couple of quick questions for you on the Contract segment, if I may. If you could give us some color on the action plans for addressing the large Contract customer segment, how you are going to look at profitability going forward and what kind of pressure you expect that to lead to on the top line?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, Seth, I made comments about that in my script, and you can replay that, but I am not going to go through it again. We have task force that we have assigned and digging through everything and I can't predict what's going to happen. We have got to wait until what the task force comes up with... with a game plan on our large contract.

Seth Basham - Credit Suisse First Boston

Okay. So, just thinking about the go forward plan, we are likely to see continued top line strength, but margin pressure for the near term?

Sam K. Duncan - Chairman and Chief Executive Officer

I don't want to... I don't have a crystal ball. And we need to let the task force continue to go through, take... see what progress is made, we have... in the first half we've had some pressure on the margin side and we are trying to correct that.

Seth Basham - Credit Suisse First Boston

Okay. And just looking at the middle market segment there, last quarter at this time you gave us some data on the size of that segment relative to Contract segment overall. So wondering if you could provide that as well the profitability of that segment last year, you said it was profitable segment for the second quarter.

Sam K. Duncan - Chairman and Chief Executive Officer

Well, it is a good segment for us. I am not going to go into any detail for that. John may be able to give you some more information, but not details after the call. We don't want to get too specific on that.

Seth Basham - Credit Suisse First Boston

Okay. Are you optimistic that we will see a turnaround in that segment, trends in the near term?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, it is our focus, middle market is a great opportunity for us, it is much more profitable than the large market, and that is what our focus is. And we need to redirect a lot of our attention from the large market or the large customers to the middle market or the smaller size customers.

Seth Basham - Credit Suisse First Boston

Okay. Thank you.

Operator

Your next question is from the line of Matthew Fassler with Goldman Sachs.

Matt Fassler - Goldman, Sachs & Co.

Thanks a lot and good morning. A couple of questions, if I could. First of all, on the mid-sized customer business, if you could remind us whether this was as big a problem in the first quarter or whether it deepened a bit, and also, as you think about remedies, is it a productivity issue or kind of a sales force management issue in your view, if you could try to help us understand what needs to be changed there?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, the issue is the same. This company in a past has put so much emphasis on the large customer and kind of thought that was the way to go, and those large customers, Matt, are the ones that are always driving to get lower cost. And so, consequently, you are going to be under some pressure to maintain your margins. And we have not in the past redirected our efforts to the middle market the way we should have. And that's what we are doing right now, is redirecting our focus to get into the more profitable middle market.

Matt Fassler - Goldman, Sachs & Co.

Okay. Thanks, Sam. And then just by way of follow-up, Don, two financial questions. The corporate G&A came down a lot. Do you view this as more representative of a sustainable level and if not, kind of where the moving piece is going to be? And then I will just ask the second one as well, the payables ratio did come down, you spoke about timing and changes in back-to-school. Would you expect that as you move through those kind of calendar shifts that the ratio could start to flatten out again at some point going forward?

Don Civgin - Executive Vice President and Chief Financial Officer

Okay. Matt, with respect to the G&A, I think what has happened is largely in line with our expectations and relates primarily to the legacy expenses we have been working hard to reduce the last couple of year. So, I think it's very consistent with what we would have expected. On the payables, the leverage has dropped and it's been a couple of quarters now that it's dropped. And there is a few reasons for it, part of it is timing and what you talked about. We are becoming more aggressive with imports and that obviously impacts the number as well. It's not as strong as it has been. We are working to figure out ways to make it optimal. We don't want to raise that ratio and hurt the business. So we have to be smart about how we do it. But we know it's there, we know it hasn't been a terrific performance this year. So we are going to do everything we can to try and make it as strong as it can be going forward.

Matt Fassler - Goldman, Sachs & Co.

And, Don, to the extent that you are... if you guys cited vendor dollars, it's been helpful to gross margin in both businesses. Is there a bit of terms and rate trade-off that may be you are deploying here?

Don Civgin - Executive Vice President and Chief Financial Officer

There is a lot of things that you've... that go into the equation with vendors and I suppose that's two of them. But I don't think we have explicitly traded one for the other.

Matt Fassler - Goldman, Sachs & Co.

Got you. Okay, thank you so much.

Operator

Your next question is from Colin McGranahan with Bernstein.

Colin McGranahan - Sanford C. Bernstein

Thank you. Good morning.

Sam K. Duncan - Chairman and Chief Executive Officer

Good morning.

Colin McGranahan - Sanford C. Bernstein

Couple of questions. First, on the Retail comp, I may have missed it. Did you give the technology comp, I know supplies you said were slightly negative in the whole, and furniture was negative [ph] but better?

Don Civgin - Executive Vice President and Chief Financial Officer

[technical difficulty] We did not give a comp. We don't break out comps by product category.

Colin McGranahan - Sanford C. Bernstein

But you said supply is negative and furniture is negative. So clearly technology had to be very positive. I was just wondering --

Don Civgin - Executive Vice President and Chief Financial Officer

Technology was up. Impress was up and we didn't say how negative any of the categories were. So again, I want to be consistent about not breaking up product category level comps.

Colin McGranahan - Sanford C. Bernstein

I understand. I just wondered how much of that was driven by company-specific initiative you have implemented with more PCs in the mix and how much of it was just... there were obviously unit demand for the PC category has been quite good this year following the Vista launch. How much you thought was overall environment versus great things you've been doing in that category?

Sam K. Duncan - Chairman and Chief Executive Officer

For something in the furniture department, the negative comp was not as big as what it was because of the positive impact we've had with the new lines of furniture that we've brought, specifically Sharpe Image. So, although it might be negative, the improvement has been... pretty big improvement in that furniture area. So, we feel good about the signs that we are seeing there.

Colin McGranahan - Sanford C. Bernstein

Okay. And then you mentioned that for most of your [ph] benefit on gross margin in Retail from the more disciplined promotional strategy. Two questions on that. I know you started changing that really last year, I think early last year. Are these more incremental changes or when do you start to anniversary that more disciplined strategy? And then secondly some players have commented on expectations for more promotional back-to-school environment and obviously Wal-Mart has been out with their price rollbacks. What are your expectations generally for the promotional environment going forward?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, we are consistently evaluating our promotional activities, and so to say something, it's going to be cycled. One thing that we have... really have cycled is the rebates, which is just part of your promotional strategies, which is in the third quarter. But we are always looking at... you have to always look at circulation of your mailers to make sure you are being effective and doing some trial and error stuff. So, that's ongoing and so I don't think you ever would see an anniversary because you are always making those changes. As far as back-to-school, it didn't surprise, it shouldn't surprise anybody when some companies come out like the big guy did, they have a history of that. And we have our game plan for back-to-school and we are going to stick to it.

Colin McGranahan - Sanford C. Bernstein

Okay, great. Thank you and best of luck.

Operator

Your next question is from Brad Thomas with Lehman Brothers.

Bradley Thomas - Lehman Brothers

Thanks, good morning.

Sam K. Duncan - Chairman and Chief Executive Officer

Good morning.

Bradley Thomas - Lehman Brothers

Just wanted to talk about a little bit about the remodeling plans, it sounds like you want to do a little bit more evaluation work. Could you just talk a little bit about what the results are that you have seen from the remodels you have done so far and is any of this decision a result of what's going on in the macro environment right now?

Sam K. Duncan - Chairman and Chief Executive Officer

It has nothing to do with the macro environment, Brad, it's just that you have to remember that this company basically did not do any what I call real remodels for many years. It didn't have the staffs to really handle hundreds and hundreds of remodels. And so, what we needed to do was to take some beta stores and test them and make sure that we have value engineered everything, and we have got our cost in line, and the companies that we have lined up with to help us with merchandising. I want to make sure that we've got everything in order before we go our and tackle a bunch of stores. So it's really the issue is I don't want to go out there and disrupt our stores by having remodels hypothetically take months instead of just weeks, and also having this excessive spending when it's not necessary when you value engineer any work, maintaining your cost on these remodels. So it's really just an issue of just pulling back a little bit and making sure that we have everything in order.

Bradley Thomas - Lehman Brothers

Okay, thanks. And if I could just follow up quickly on the Contract, in terms of some of the issues that pressured your margins in the first quarter, the new account activations and the renewals. Obviously, Sam, you talked about some initiatives that you're going to use to address that. Have you been able to implement any of that in the second quarter or should we look for that more as an opportunity in the back half of the year?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, we've made some minor changes, we actually exited one account. That was at the end of this past month. And so, we have done something like that, but we are really just... we started digging into it about three or four weeks ago with our task force and everyone. And we are going to be doing everything from taking each individual contract and go through it page by page to see where the opportunities are, whether it's in the margin side or the cost-to-serve side, and to see what opportunities we have and then to work on those.

Bradley Thomas - Lehman Brothers

Okay, great.

Operator

Your next question is from Anthony Chukumba with FTN Midwest Securities.

Anthony Chukumba - FTN Midwest Securities

Hi. Just had a quick question in terms of the reduction in the CapEx guidance. Is that driven by cutting back a bit on the remodels or is there something else because you... you did reaffirm your new store guidance. So, I was just looking for a little color in terms of what's driving that.

Don Civgin - Executive Vice President and Chief Financial Officer

Yes, a fair question. It really is driven almost entirely by the remodel program. I mean, there is going to be ups and downs in all the different categories, but the big driver is going to be the remodel.

Anthony Chukumba - FTN Midwest Securities

Okay, thanks.

Don Civgin - Executive Vice President and Chief Financial Officer

Sure.

Operator

Your next question is from Steve Chick with J.P. Morgan.

Unidentified Analyst

Hi, this is actually a Jeff Limmer [ph] on behalf of Steve Chick. I have got a quick question on your Contract segment, maybe something to clarify here. You've said that you have seen gross margin pressures from new and renewing contracts in the first half of '07. So, have you signed more of these large press parcel [ph] accounts in Q2?

Sam K. Duncan - Chairman and Chief Executive Officer

Have we what?

Unidentified Analyst

Have you signed some of these larger accounts in Q2 or is this still fall off [ph] from the contract signed in Q1?

Sam K. Duncan - Chairman and Chief Executive Officer

So, we may have or may have not signed in Q2, I don't recall, but if we did, they would not be at the low rates that we signed a few of them that we did in Q1.

Unidentified Analyst

Okay. And how long do these contracts take to ramp to a better gross margin rate?

Sam K. Duncan - Chairman and Chief Executive Officer

I would hate to give a time line. Jeff, it varies. I really couldn't answer that. I would think inside the first year, but that is a guess.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question is from Frank Gallagher with Catalyst Fund.

Francis Gallagher - Catalyst Fund

Yes, good morning. Could you tell me what your... what you know or what your understanding is right now as to the status of Boise Cascade, LLC, a bad investment there? I think they had made attempts to do a public offering in the past and sort of what you know about what is going on there?

Sam K. Duncan - Chairman and Chief Executive Officer

We have no comments on that. You need the contact them, not us.

Francis Gallagher - Catalyst Fund

Okay, thank you.

Operator

[Operator Instructions]. And your next question is from Mitch Kaiser with Piper Jaffray.

Mitchell A. Kaiser - Piper Jaffray & Co.

Hi, good morning guys. I was curious if you had any updated thoughts on the cash. It looks like you have a couple of bucks per share right now and typically that ramps up by the end of the year. Any updated thoughts on potentially doing a buyback, particularly where the stocks trading right now?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, I guess, the way I would answer that is that we evaluate with our Board our capital structure in the context of short and long-term requirements for working capital, investment, and the impact of leverage and ensuring we maintain the financial flexibility. Share repurchases, I guess, are one of those investments we would consider with our Board, will evaluate share repurchase in the context of the best way delivering returns on the investment and the value to our shareholders and it's just a Board decision.

Mitchell A. Kaiser - Piper Jaffray & Co.

Okay. And I am trying to reconcile the corporate overhead. Should the... roughly $10 million be a pretty good run rate going forward? And then also, it looks like that the Retail segment was... it looks like maybe you allocate some G&A there from corporate overhead, if I read the press release right. Could you just help me reconcile that?

Don Civgin - Executive Vice President and Chief Financial Officer

Yes, I mean, I think, as I said before, I think when Matt asked question too, I mean, the G&A number is consistent with what we have been trying to do and what we expect [indiscernible]. With respect to allocating it, we have allocated parts of our G&A... on a consistent basis all along. So, I mean, we have been doing that on a consistent basis quarter after quarter. So, it just so happened that more of that allocation went to Retail in the second quarter for a variety of reasons, but that's not something that's new, that's just the way we operate our divisions.

Mitchell A. Kaiser - Piper Jaffray & Co.

Understood. So, that should be a pretty good run rate going forward, there is not much seasonality to that number, I would assume?

Don Civgin - Executive Vice President and Chief Financial Officer

Which number?

Mitchell A. Kaiser - Piper Jaffray & Co.

With respect to the corporate G&A.

Don Civgin - Executive Vice President and Chief Financial Officer

Well, I guess I'll say the third time, it's been... it was consistent with what we expected in the second quarter and consistent with what we have been trying to do all along.

Mitchell A. Kaiser - Piper Jaffray & Co.

Okay, fair enough. And then on the global sourcing side, could you give us an update where you are in percent of COGS and where you think that that might be able to go?

Sam K. Duncan - Chairman and Chief Executive Officer

I don't have with us; we might be able to give that to you later on.

Mitchell A. Kaiser - Piper Jaffray & Co.

Okay. All right, thanks guys. Good luck.

Sam K. Duncan - Chairman and Chief Executive Officer

Thanks.

Operator

Your next question is from Chris Horvers with Bear Stearns.

Christopher Horvers - Bear Stearns

Thank you, good morning. I wanted to follow-up on your comments about the environment in the Retail comps. Did you see any inflation in terms of deterioration improvement, either from a tone or sales perspective at Retail during the quarter? And if it's deteriorating, do you think you are just simply taking share in a tougher environment?

Sam K. Duncan - Chairman and Chief Executive Officer

Well, we hope that our... the improvements that we have made is from the changes that we have made over the years. We've also got to be realistic and look at issues like fuel cost, what that's doing to our economy, and it's taking money out of people's pockets, which is less purchasing power. We've made some good changes on the Retail side in our stores the past couple of years, and we are starting to see some of that pay off. One of the biggest changes that we've had is, if you remember back a year ago when we consolidated our headquarters, we had to hire 500 to 600 people for our retail operation. And I feel our people on our Retail side, we have some great talent that we were able to get last year, and they have been settled in and now giving dividends to the company as far as making some very good decisions. And I would hope that has had some impact on our sales also.

Christopher Horvers - Bear Stearns

In terms of the environment, would you characterize as worsening throughout the quarter on the Retail, the macro toned sales, however you want to look at it?

Sam K. Duncan - Chairman and Chief Executive Officer

It's really difficult to make a direct correlation between stuff like economic data points in our performance, but I will say like your peers, we are impacted by economic conditions, how much I don't know. We monitor these and other factors to determine the impact on us. There are some broad indications that the economic growth has slowed, when you look at employment data, retailer sales, industrial production and others. But in our turnaround situation, we feel our Q2 performance was more impacted by company-specific initiatives that we have done over the past year or so.

Christopher Horvers - Bear Stearns

Thank you very much. And one follow-up on the popular corporate and other question, going back to the increased allocated G&A to the Retail, can that... just so we understand the moving part, can corporate and other, the expense side of that fall into operating and selling as well in G&A, or it's just G&A corporate and other?

Don Civgin - Executive Vice President and Chief Financial Officer

We take the corporate G&A budget. We allocate that, which relates to Contract and it goes into their expenses, and that which relates to Retail and goes into their expenses.

Christopher Horvers - Bear Stearns

So the --

Don Civgin - Executive Vice President and Chief Financial Officer

The rest shows up in corporate and other.

Christopher Horvers - Bear Stearns

Okay. So there is... so it's really G&A and corporate and other came out... come out of same pool. There is no operating and selling?

Don Civgin - Executive Vice President and Chief Financial Officer

Right.

Christopher Horvers - Bear Stearns

Okay. Thank you.

Don Civgin - Executive Vice President and Chief Financial Officer

Sure.

Operator

And you have no further questions at this time.

Sam K. Duncan - Chairman and Chief Executive Officer

Thank you for joining us everyone.

Operator

This concludes today's conference. You may now disconnect.

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Source: OfficeMax Q2 2007 Earnings Call Transcript
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