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United Stationers Inc. (NASDAQ:USTR)

Q1 2008 Earnings Call Transcript

May 2, 2008 11:00 am ET

Executives

Dick Gochnauer – President, Chief Executive Officer

Vicki Reich – Chief Financial Officer

Analysts

Dan Binder – Jefferies & Co.

David Cohen – Noonday Asset Management

Jonathan Lichter – Sidoti & Co.

Greg Halter – Great Lakes Review

Operator

Welcome to the United Stationers first quarter results earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Dick Gochnauer, President and Chief Executive Officer.

Dick Gochnauer

Welcome to United Stationers’ first quarter 2008 results conference call. With me today are Vicki Reich, our Chief Financial Officer, Cody Phipps, President of United Stationers Supply and Pat Collins, Senior Vice President of Sales and Marketing for United Stationers Supply. Before we begin discussing our results for the quarter, I’d like to remind you that the information shared during this call may contain forward-looking statements that are based on certain assumptions.

What we say may be affected by the risks and uncertainties in our business, markets and the economy. Despite our best efforts, actual results may be different from what you hear today. To learn more about why this might happen, please review the cautionary language in yesterday's news release and in our filings with the SEC.

Also remember that the information on this call should be considered current only as of today. After this, please use it for your reference and understand we assume no duty to update it. Shortly after we conclude the webcast of this call you may find an archived version of it on the investor information section of our website at www.unitedstationers.com.

And if you don't already have a copy of our first quarter news release, you can find it there too. A couple of weeks ago we issued a news release with the preliminary first quarter results because we faced a number of challenges during the period.

This included weakness in the economy which resulted in lower sales in certain categories and customer channels, a reduction in supplier allowances due to lower inventory purchase volume, a shift of product categories and lower margins in supplier allowances and timing of the Easter holiday which fell in the first quarter this year versus the second quarter of 2007.

Today’s call will address these issues in greater detail. Vicki will begin by reviewing the first quarter financials with you. Then I'll talk about our sales for the quarter, give you an update on our six value drivers and discuss what we see for the remainder of 2008. After that Vicki, Cody, Pat, and I will be happy to answer your questions. Now I’ll turn the call over to Vicki.

Vicki Reich

Two weeks ago we issued a news release announcing preliminary first quarter results. Our final results are within the ranges we shared in that release. Before we discuss our first quarter performance, I’d like to remind you that last year’s first quarter included a pretax charge of $1.4 million or $0.03 per share related to a workforce reduction. The numbers we will discuss today exclude the effects of this charge.

It’s also worth noting that the first quarter results include the incremental impact of the December 2007 acquisition of ORS Nasco which I will describe in further detail. Let’s start with sales for the quarter, which were up 5% from last year. While these results are in line with our long-term growth target of 4-6%, we are seeing a decline in certain areas of our business due to a weaker economy.

Excluding ORS Nasco, sales were down 1.2%. Our office supplies, technology products and furniture categories saw lower sales with higher margin more discretionary products being affected the most. This was partially offset by strong sales results in our janitorial and break room category.

Most of the sales decline occurred in the month of March when the office supplies, technology and furniture categories were down a combined 9%, largely driven by lower sales to the national accounts. Dick will offer you more details on sales results in a few minutes.

Moving on to gross margin, it was 14.7% for the quarter, down 40 basis points from 15.1% a year ago. Two factors really contributed to the lower gross margin. First, our sales mix was heavily skewed to lower margin products. Customers reacted to the difficult economy by cutting back on the more discretionary products, which offer higher margins for us and instead focused on the basics, which are typically our lower margin products.

Second, supplier allowances were affected by actions we took to cut purchases to keep inventories in line with lower sales. The purchase cutbacks were magnified by the investment buys completed in late 2007, which focused on the higher margin, high supplier allowance products.

As a result, our first quarter purchases of inventory in these products were down by about two times the amount of the first quarter sales decline. Our lower sales and purchases of high allowance products resulted in a substantial cut to the volume related supplier allowances we earned in the first quarter.

The inventory adjustments alone accounted for about a 30 basis point reduction to the first quarter gross margin rate. First quarter gross margin also reflected the negative impacts of a competitive pricing environment and significant fuel cost inflation with diesel costs up 40% from last year.

However, three positive factors partially offset these pressures. First, the addition of ORS Nasco, with gross margin rates higher than our base business average. Second, product cost inflation that’s running higher than last year, resulting in positive inventory cost adjustments. And third, significant war on waste savings from some our margin cost elements.

In particular, advertising costs where the team continues to realize outstanding productivity savings and freight costs where our WOW efforts enabled us to partially offset the rise in fuel cost. We’ve had some great success with GPS equipment resulting in reduced idle times and delivery route optimization.

Moving on to operating expenses as a percent of sales, operating expenses increased from an adjusted 10.7% last year to 11.2%. Operating expenses totaled $139.9 million for the quarter versus $127.7 million last year. The addition of ORS Nasco accounted for $9.2 million of the increase. So the base business was up about 2% versus the first quarter of 2007.

Several factors contributed to the increase. First, costs ramped up in LaGasse to serve a significant increase in new business in our janitorial and break room category which grew at a 15% clip. Second, inefficiencies resulted from the steep sales in our supplies categories in March. We reacted quickly to align variable costs with sales, but other costs take longer to adjust and resulted in some deleveraging.

Third, general inflation rates are having an effect on many expense categories. And lastly, we saw some timing factors and investments in key initiatives, including IT upgrades and marketing related projects. Our progress on WOW continues with initiatives such as warehouse productivity improvements in both our office products and ORS Nasco businesses, enabling us to partially offset inflationary pressures on our operating expenses.

The tough economy is leading us to make some course corrections for the balance of the year, including further expense reductions which I’ll touch on in a moment. Operating margins for the quarter declined from an adjusted 4.4% to 3.5%. EPS was down 5% from an adjusted $0.93 to $0.88. The first quarter results included about $0.06 per share in net benefit from share repurchases completed during the past 12 months and approximately $0.04 per share net benefit from ORS Nasco.

Speaking of ORS Nasco, this business is performing very well. Sales were $74 million in the first quarter and are trending to achieve the 8% to 10% growth target for 2008. We are realizing the plan’s synergies. The $0.04 of accretion in the quarter puts us on course to deliver the expected $0.15 to $0.20 of EPS accretion this year.

Now let’s take a closer look at the balance sheet, where our working capital improvements initiatives are continuing to progress. Inventory management was a highlight in the first quarter as our teams are diligently optimizing the investment here while providing high order fill rates for our customers.

Excluding the impact of ORS Nasco, inventory declined by $46 million or 7% versus the prior year and inventory turnover improved from 6.1 to 6.4 times. Accounts payable excluding ORS Nasco was down about 10% or $39 million from last year. Our accounts payable leverage or AP as a percent of inventory, excluding ORS Nasco, was 58% versus 60% last year. The decrease in accounts payable is a result of reduced purchases in March.

We are making good progress working with suppliers to optimize our supply chain to improve terms, lead times and order quantities which will drive future inventory turns and stronger payables leverage. Accounts receivable excluding the impact of ORS Nasco and the affects of securitization were down $43 million or 7% versus last year. This reduction reflects the impact of slower sales in March and improved collections of supplier allowances, offset by a slight increase in the delinquencies of trade receivables.

Our receivables performance remains solid with first quarter average days sales outstanding up about 1 days reflecting the affects of the slowing economy. Bad debt expense was up slightly versus a favorable result last year. We are monitoring credit exposures and collections very carefully.

Our overall working capital efficiency improved from 15.5% to 15.3% of sales, despite a negative impact from ORS Nasco of about 30 basis points. To date this year, net cash from operating activities adjusted for the effect of changes in accounts receivables sold totaled $45 million.

This compares with $65 million in the same period a year ago when we were coming off a higher yearend 2006 working capital balance. Capital expenditures of $8 million in the first quarter included investments in our new Florida distribution center which Dick will discuss and IT system upgrades, including new financial systems.

During the first quarter of 2008, we bought back nearly 1.2 million shares for about $68 million. Our goal is to return value to shareholders while optimizing United’s capital structure and our share repurchase activity reflects this.

Our debt to EBITDA leverage was at approximately 2.7 times at the end of the first quarter, slightly above our objective of 2.5. Looking forward, in light of the challenging environment we face in the first quarter, we’ve made a number of course corrections to help us navigate successfully in this economy. Our crystal ball is no clearer than yours with respect to the economy and we’re managing with a disciplined approach to expenses and working capital, while investing for the future and driving profitable growth.

With that said, here’s what we see on the financial horizon today. While April sales trended higher, with sales up 10% or 3% excluding ORS Nasco, when we normalize March and April for the holiday and timing effects, the underlying run rate is about flat excluding ORS Nasco.

That’s down slightly from the January, February growth rate of about 1% excluding ORS Nasco. Despite the near term pressures in the office products, technology and furniture categories, we fortunately see continuing strong growth in our janitorial break room category and ORS Nasco.

Our gross margin for the rest of 2008 may continue to reflect pressures from a lower margin product mix, the pricing environment and fuel costs. We will work diligently to offset these challenges with WOW initiatives; including various avenues we are exploring to mitigate the impact of higher fuel costs.

With respect to supplier allowances, with the first quarter inventory adjustment behind us, product receipts should track more closely with sales for the balance of the year. So allowances should track with sales and the mix of sales. Gross margin may also benefit from inventory cost adjustments due to higher product cost inflation as it appears inflationary pressures are building for the second half of 2008.

Relative to operating expenses, we plan to accelerate our WOW programs and hold annual expenses close to 2007 levels, excluding the impact of ORS Nasco. We recently announced actions to freeze hiring and cut back travel and discretionary spending while we’re continuing our WOW efforts to permanently reduce our cost structure.

Our WOW savings are happening but we are finding it more challenging to offset the higher levels of cost inflation we are seeing across many areas of our business. Even in these challenging times, our investments in mission critical areas will continue, including IT and marketing upgrades.

We’ll also continue our disciplined management of working capital and expect our free cash f low to exceed $100 million for 2008. This anticipates approximately $30 million of capital spending and depreciation and amortization of about $45 million. Our continuing success in working capital efficiency improvements should enable us to hold our year over year working capital investment about flat, including ORS Nasco, despite the economic pressures on receivables.

In summary, we are actively managing all aspects of our business to maximize our earnings and cash flow performance this year. We have every confidence that United will emerge from this challenging period as an even stronger company. Now I’ll turn the call back to Dick so he can give you more information on our sales, the progress we’re making on our initiatives and what we see for the remainder of 2008.

Dick Gochnauer

I’ll begin by adding some color to Vicki’s discussion of our sales by looking at revenues by the type of customer and by product category. Sales to national accounts were down almost 11% with this group contributing 17% of our first quarter revenues. Here’s the story behind these numbers. First, the slowing economy is reducing sales for our national account customers.

Second, a large percentage of the business the nationals do with us is through furniture. This often is one of the first areas to slow down in a softening economy. Third, as we’ve been reporting for some time, national accounts continue to focus on their internal supply chains, with some of them aggressively buying more of their products directly from manufacturers.

While I expect this trend to continue, we also believe that there are opportunities for us to grow with the national accounts in new areas, including jan-san and break room supplies and safety products that leverage our recent investments in these categories. Sales to our independent dealers and other distributors were up nearly 9%. I’d like to point out that this group includes independent dealers, new customer channels and for the first time, ORS Nasco.

These customers contributed 83% of our total sales for the quarter. Excluding ORS Nasco, sales were up 1%, driven largely by the growth in new customer channels and by janitorial break room supplies. Speaking of new customer channels, we are still experiencing double-digit growth from this group. We continue to add customers in this area during this quarter.

Their focus on the growing small office, home office market is creating demand across our office products, technology, janitorial and break room and furniture categories and we believe this trend will continue. Now I’ll move on to sales by product category. Sales in the janitorial and break room supplies area, our fastest growing product category, increased 15% for the quarter, contributing 20% of our total sales.

Higher revenues include new businesses we began serving toward the end of 2007 and continued growth in food service, paper and janitorial sanitation supplies. Our largest customers continue to grow at above market rates. They take advantage of our ability to lower their cost to serve and minimize their inventory needs, allowing them to invest their capital back into sales and marketing efforts.

Our janitorial and break room team is also collaborating with ORS Nasco leadership team to expand its offering to traditional industrial, safety and MRO customers. Our largest category is technology products, which contributed almost 34% of our revenues for the first quarter. Sales were off nearly 8%.

It appears that end consumers are focusing on their basic technology needs like ink and toner cartridges and are holding off on discretionary purchases of higher ticket items, such as computer accessories, printers and other computer hardware. Price competition on consumable products, particularly imaging supplies, continues to intensify as more sellers opt to stock fast moving commodity items to lower their cost of goods.

We have a number of new initiatives however to improve sales of technology products in the second half of the year. This includes expanded promotional programs and marketing tools. For example we have just launched an in-house marketing program which will provide our resellers with the tools and capabilities to create local marketing materials in-house rather than outsourcing the job.

This gives them more flexibility to customize these printed items and save time and money. In July, we plan to roll out additional printer upgrade programs which will also drive new supply sales and encourage the expanded use of color printing in the office. Our next category is office furniture where sales were down 9% for the quarter.

This category represents about 10% of our total revenues. We view furniture as a leading economic indicator. Our sales decline is in line with the results reported by some of our major furniture suppliers. They too are seeing general weakness in transactional furniture sales to small and medium sized businesses, which account for most of our revenue.

Our bright spot is Alera, our private brand, which offers an attractively prices alternative. We are experiencing strong demand with the added benefit of better margins. Sales of traditional office products were relatively flat for the quarter and this category contributed about 29% of United’s total sales.

Strong cut sheet paper sales enabled us to offset declines in other product lines. This too reflects the trends in consumers focusing purchases on the consumable commodity products needed in their day-to-day businesses, while delaying discretionary purchases of durable goods. We have a number of exciting new growth initiatives in this category, one of which is our green initiative. I’ll be talking more about that in a few minutes.

This is the first time that we are reporting category sales of industry supplies for ORS Nasco. This represented approximately 6% of our total sales for the first quarter. Revenues in this category are in line with our expectation and are tracking to achieve 8-10% growth in 2008. A large portion of the growth in this category is coming from new accounts that are seeing the value of purchasing products from a wholesaler rather than stocking these items themselves.

We are seeing a strong growth in the industrial and safety products channels. Revenues for our private label products, without ORS Nasco, were up 7% for the quarter and accounted to over 13% of our total sales, which is up from 12% at this time last year. ORS Nasco has a significant private brand offering also, which represents about 13% of their sales.

These results indicate that consumers are looking for value as the uncertainty about the economy continues and our private brands hit the mark. Now I’d like to give you an overview of the progress we’ve made on our value drivers during the quarter. Our first value driver is to deliver profitable sales growth which is of particular importance in this market.

We took several positive steps here; first, we recently opened a new distribution center in Orlando and are consolidating two-supply division and one LaGasse facility into one new building. This provides us with the opportunity to gain market share and increase sales by better serving customers in Florida.

Second, we continue to leverage our product category initiatives. For example, our green growth team is charged with delivering profitable environmentally friendly products to our resellers. In March we launched a green catalogue with 2,500 green choices, including such items as recycled papers, eco-friendly writing instruments and biodegradable cleaning products.

Many of our resellers have signed up for green training to help them understand the opportunities green initiatives offer to increase their business and to give them a number of tools to help them with their customers. Third, ORS Nasco gives us access to new product lines, such as safety supplies to sell across our various channels, as well as new customers interested in our existing products.

ORS Nasco’s growth, like LaGasse is based on continuing to increase share and convert customers and suppliers to the advantages of working with a wholesaler rather than being dependent on the overall market growth. Fourth, there are many success stories in new customer channels where we partner with companies to reach end users not served by our traditional independent office products resellers.

United’s business model makes it easy for these companies to broaden their product offering to their existing end consumer customers without having to stock or handle additional products. Our second value driver is to drive out waste. The goal of our war on waste or WOW squared, as we call the second phase of this initiative, is to remove $100 million of expenses from 2007 through 2011, while improving the customer experience.

In response to the current business environment, we are expanding our efforts to reduce our cost structure. For example, we have put in place a hiring freeze, a voluntary time off program in our distribution centers and cutbacks on travel and discretionary spending. Six sigma and lean management tools are helping us reduce costs and improve working capital.

The good results we’ve had at the corporate level in 2007 led us to expand this effort to our field operations. We have identified [ties] and projects that allow us to review current processes, make them more efficient, then create and implement best practices that generate substantial savings.

One project currently underway is our comprehensive carton sizing initiative. The purpose of this project is to analyze how we ship our orders and then to identify areas where we can reduce waste. This includes using fewer cartons, less fill materials and less tape.

We also expect to realize labor and transportation savings, since fewer cartons will need to be handled and shipped. We are also closely examining production expenses for print catalogues and other marketing materials. Our costs to create content continues to decrease as the same content from our electronic initiatives like e-catalogue is used for the core print materials, such as our general line catalogue.

Despite our efforts to drive out waste this year, many of our cost savings are being offset by higher inflation and some infrastructure deleveraging of our office products. Let me assure you, however, that we remain committed to our long-term goal of WOW squared objectives.

I’ve already spoken a bit about our third value driver, to expand our United private brands. But the positive contribution this is making to our revenue and product mix with a healthy 7% growth rate in the first quarter. This year our global sourcing team is focused on containing the inflationary effects on cost of goods from higher oil and raw material prices, as well as the weakness of the US dollar.

Our years of partnership and direct at source negotiations give us an edge to uphold our value proposition in private brands to our customers. Our fourth value driver is optimizing United’s assets. During the quarter we made strong progress on our balance sheet and cash flow. As Vicki explained, working capital efficiency improved through better inventory management.

We have improved our processes to collect supplier allowances, cutting out 15 days out of the process. Our $250 million accounts receivable securitization facility was successfully renewed. Total committed debt and securitization financing remains at slightly above $1 billion. We swapped an additional $100 million of LIBOR rate revolver borrowings for a fixed rate.

After the effect of the borrowings spread, the swap locked in the all-in rate to a range of 3.7% to 4.5%. And we continue our share repurchase program. Going forward, our priority will be to continue to invest in the business. Capital spending should be lower than depreciation and amortization. The focus will be on IT and facility related projects where we generate the highest return.

We will continue to make opportunistic investment buys in inventory. Because a large number of our suppliers are increasing prices, we expect to take advantage of purchases of inventory where it will generate an attractive rate of return. Beyond our capital expenditure needs, we expect to invest free cash flow in share repurchases and potential bolt-on acquisitions.

Our fifth value driver is to unlock the value from acquisitions. In the first quarter we saw major financial benefits from our Sweet Paper acquisition. Shipments to new accounts that LaGasse gained in 2007 were in full force during the quarter. In addition, the expansion of the platform provided by the Sweet Paper acquisition provided continued strong growth to customers who see the benefit of reducing their inventories and using LaGasse Sweet as their local warehouse and one stop source of products.

We are already seeing the synergies between ORS and United. We’re seeing synergies and reduced costs in key areas such as freight and other shared expenses. Combined scale of LaGasse and ORS Nasco is helping us work with vendors to unlock margin gains.

All of our category groups are developing go to market plans for cross selling a new and expanded safety offering in the supply division of LaGasse as well as a light version of the jan-san and break room offering at ORS Nasco.

Our sixth and final value driver is to use technology to enhance our marketing capabilities. Work has progressed on a catalogue initiative which imbeds our electronic catalogue into our dealer’s ecommerce storefronts. The e-catalogue concept is showcased in our new biggest book dot-com site. This has been very well received by the market and is a good catalyst and attention getter.

We continue to work with software providers and expect that those efforts to integrate the e-catalogue into reseller’s websites will pay dividends later this year. SAP completed a major new upgrade to their product for installed dealers and have successfully tested the enhancements with existing installed dealers.

With that as a background, let’s move to our outlook for 2008. Vicki already has given you a solid grounding in what we see financially. I’d like to add a few thoughts. We are dealing with a difficult economic environment and are doing everything we can to stay ahead of the curve. This includes taking advantage of all opportunities for profitable growth, aggressively managing our costs, continuing to focus on working capital management and finding the balance between investing for the future and delivering results for today.

We are using our six value drivers to guide us in this process because we are convinced that it will lead us in the right direction. I can reaffirm our long-term financial goals with you, to see annual sales growth in the 4% to 6% range with some upside in the years where macroeconomic growth is strong and vice versa and to deliver long-term EPS growth in the mid teens.

After hearing all of this, I’m sure you have some questions. Vicki, Cody, Pat and I would be happy to answer them.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Dan Binder – Jefferies & Co.

Dan Binder – Jefferies & Co.

The question was based on the fact that you haven’t signed all of your vendor contracts just yet, which hopefully will give you more flexibility year over year given the environment, what progress do you think you’ll make on vendor dollars, vendor support this year, will it be a down year or do you think as a percentage of sales it will be flat to up?

Dick Gochnauer

You’re correct that we’re about where we normally are at this time of year in our negotiations with suppliers. And clearly we always have the opportunity and we have been making progress year over year when we outlined specifically all the various components that we have in terms of objective supplier by supplier and that continues on and I think we think that that will continue to be positive in terms of how we work with our vendors.

With regard to the full year, the difficulty in answering that question is one of mix and forecast. The vendor allowances have always been tied to the higher margins discretionary products and the first quarter was as we commented, impacted by lower sales of those higher margin products and therefore vendor allowances and margin were both impacted by that.

So to answer your question on the full year, it partly depends on what happens there. If in fact we see some growth there, then I think it’s safe to say that we’ll come out positive for the year. On the other hand, that’s not what we’re seeing so far and if this trend continues, it will be difficult to come out on the positive side. So it’s difficult to answer that question specifically.

Vicki Reich

Dan I would add in terms of gross margin outlook for the year, I think we see some of the similar pressures and opportunities that we saw in the first quarter, although I would note specifically that the allowance challenges from the inventory reduction we experienced in the first quarter should be behind us. Some of the opportunities we see in regard to gross margin for the latter part of the year include product cost inflation adjustments. We do see more suppliers queuing up price increases for later in the year.

WOW programs have been very focused on some of the margin elements for good reason. Examples, fuel costs and doing our best to offset fuel cost inflation and then lastly in allowances I would note that we’re always working with suppliers on opportunities for new marketing programs, for example, in new channels where we are experiencing some very strong growth.

Dan Binder – Jefferies & Co.

You said 30 basis points was entirely due to lower vendor allowances on slower ordering or was that also including other inventory adjustments for inflation as well?

Vicki Reich

No that is specifically the allowance impact of the inventories being brought down at a rate greater than the sales decrease. So it isn’t the whole impact on margin of allowances, it’s just what I’m trying to isolate there is, call it the one time affect of the inventory adjustments.

Dan Binder – Jefferies & Co.

Since you have not assigned contracts with all your vendors at this point, do you just accrue based on the old contracts for last year?

Vicki Reich

That is correct, yes.

Dan Binder – Jefferies & Co.

Could you give us an idea of what the impact to margins was from the inflation in your inventory and then also if you have some sense of what inflation contributed to sales and how you’re viewing that for the balance of the year? And then lastly inflation that you expect from expenses this year. So just inflation on all levels is what you’re seeing.

Vicki Reich

Yes there’s many dimensions of inflation, specifically on product cost value adjustments. What we saw in the first quarter was about 1 point of inflation and that’s up about 25 basis points from last year. The outlook for the year is still subject to change is a little more than 2 points of inflation impact on our product cost. Looking at the sales line, there we need to look at trailing 12 months of inflation impact. Right now that’s running at about 1.5 points thereabouts.

Now the other side, the other edge of the sword of course is inflationary impacts on our cost structure. We noted that we are seeing significant inflation in fuel costs. We’re doing our best to offset that, we did offset a good chunk of it in the first quarter but that will continue to be a major focus of our WOW efforts. And then on the operating expense side, we’re seeing inflation come through in a variety of areas, including travels costs, packaging, supplies, and other areas.

Dan Binder – Jefferies & Co.

So would you expect 3-4% of expense inflation this year, is that reasonable?

Vicki Reich

Yes, I think that’s reasonable.

Dan Binder – Jefferies & Co.

And then on the expense side, when I originally looked at the numbers on the preannouncement the expenses appeared a bit higher than I would have expected even taking into account ORS Nasco and I was just curious, is there anything outside of what you mentioned on the call today that would fall into the increase, in other words, is there anything on the WOW programs for instance that you were able to make progress on last year but ended up giving back some this year for whatever reason or was it pretty much just as you outlined?

Vicki Reich

No it’s pretty much as we outlined. I think we had terrific progress in WOW programs last year and as I look at this year I think many of our first quarter WOW efforts were focused on some of the margin cost elements, battling the fuel cost inflation for example. We do see a good outlook for WOW programs and other cost restrictions that we put in place on the operating expense side, so I do think in future quarters we’ll begin to see some of the pressures that we saw in the first quarter come back into line.

And we did note that we saw some inefficiencies as we’re ramping up to serve significant volume increases in the janitorial and break room category. And we did experience some deleveraging in the office products business. So we’re working on those things and I think the WOW programs will continue, will have a good affect in the latter part of the year.

Dan Binder – Jefferies & Co.

I noticed that the balance on the accounts receivable sold through the securitization program had come down, is there any particular reason why that came down, is there any issues there?

Vicki Reich

No that is just managing our cost of funds. That historically has been our lowest cost of funds. There were conditions in the market during the first quarter at periods where it was actually more attractive to borrow under our revolving credit agreement. So we temporarily shifted, that has now shifted back by the way, but there have been no availability issues in the market with respect to the securitization facility.

Dan Binder – Jefferies & Co.

The rate on that facility is running where about now?

Vicki Reich

The rate on the securitization facility is less than 4% right now.

Operator

Your next question comes from David Cohen – Noonday Asset Management.

David Cohen – Noonday Asset Management

Payables leverage was down and I wasn’t quite sure if that was an ORS Nasco phenomenon or if you could just talk about it, a little lower than expected.

Vicki Reich

It wasn’t an impact of ORS Nasco; it was another impact of the March sales decrease and the steep cuts to our purchases in March. So unfortunately a less than normal amount of our inventory was financed with payables at the end of the quarter, we were about 57% accounts payable leverage which is quite low for us. So that should come back into more normal ranges as the year goes on.

Operator

Your next question comes from Jonathan Lichter – Sidoti & Co.

Jonathan Lichter – Sidoti & Co.

I think you had referenced that bad debt was up slightly. Can you quantify what percentage it was up or?

Vicki Reich

Bad debt expense was up modestly. But for the quarter was at historic levels which for us runs less than one-tenth of 1% of sales. So it was still in that range. We did see some unfavorability from that cost element in our operating expenses, principally because last year we had unusually favorable results in bad debt.

Jonathan Lichter – Sidoti & Co.

Is there anything that will get worse at all?

Vicki Reich

We’re watching it carefully; we are seeing some slowing of payments and some pressures, particularly with smaller dealers. But nothing at this stage that is alarming and we’re all over it.

Jonathan Lichter – Sidoti & Co.

And were the bad debt levels similar at ORS Nasco?

Vicki Reich

Yes, very similar.

Jonathan Lichter – Sidoti & Co.

Where would overall debt need to get to before you would be comfortable resuming the stock buybacks?

Vicki Reich

I think right now we’re at 2.7 times and as we’ve stated for quite a while now, our target is 2.5, so I think we’re still comfortably in that zone. We’re confident in the total year outlook for cash flow. And I think the Board’s view on that will just depend upon other potential uses in the business.

We noted we may have some opportunities with inflation heating up for investment buys, always looking for bolt-on acquisition opportunities and of course share repurchases have been and will remain a core part of our cash use.

Jonathan Lichter – Sidoti & Co.

So the additional buys would potentially increase your supplier allowances then.

Vicki Reich

Yes.

Operator

Your last question comes from Greg Halter – Great Lakes Review.

Greg Halter – Great Lakes Review

I think in your release you had indicated that ORS contributed about $9 million or so to the operating expense figure for the quarter. Is that the same type of run rate you would anticipate for the full year?

Vicki Reich

Yes it is.

Greg Halter – Great Lakes Review

Just to follow in on the share repurchase question, I think the current Board authorization is for right around $1 million, I presume that’s something that would need to be re-authorized or re-upped before you could even buy anything, even given the stock price at the current level of $43.

Dick Gochnauer

Correct.

Greg Halter – Great Lakes Review

And is there any plans to do so in the upcoming Board meeting?

Dick Gochnauer

Well we always talk about that at every Board meeting and evaluate the position. Clearly the stock price right now is very attractive so that’s on the plus side. But as Vicki indicated, we look at all the things that are in front of us and they’ll make a decision at that point or they may make the decision to wait before they authorize some more. That’s part of their discretion.

Operator

There are no further questions.

Vicki Reich

I’d like to make one statement please, on my earlier comments relating to first quarter and April sales, as well as working capital levels for the first quarter, I provided the amounts excluding ORS Nasco for comparability purposes. You can find a reconciliation of these amounts to the GAAP amounts on our website.

Dick Gochnauer

Well I don’t have to tell you that the economy is soft and the consequences seem to be that this will continue through the rest of the year. What I can tell you is that the focus of our six value drivers, we will be focusing there which gives us a chance to leverage whatever opportunities the year presents as well as minimizing issues that could negatively affect us and help us to end the year in a better operational shape then when we began.

Vicki, Pat, Cody and I want to thank you for being with us today. We look forward to sharing more of our progress with you during our second quarter conference call in August.

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Source: United Stationers Inc. Q1 2008 Earnings Call Transcript
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