Liquidity Services F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

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 |  About: Liquidity Services, Inc. (LQDT)
by: SA Transcripts

Operator

Welcome to the third quarter 2008 Liquidity Services, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Julie Davis, Director of Investor Relations.

Julie Davis

Welcome to Liquidity Services Inc.’s earnings release conference call for the fiscal third quarter 2008 and the three months ending June 30, 2008. During this call, we will refer to Liquidity Services Inc. as LSI. Presenting today are Bill Angrick, our Chairman and Chief Executive Officer, and Jim Rallo, our Treasurer and Chief Financial Officer. This conference call is also being broadcast through the Internet and is available through the Investor Relations section of the Liquidity Services Inc. website.

Before we begin I'd like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties concerning LSI's expected financial performance as well as LSI's strategic and operational plan. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future and we undertake no obligation to update these statements after this call. Please refer to our SEC filings as well as our current earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

To supplement the company's consolidated financial statements presented in accordance with GAAP we use certain non-GAAP measures. These non-GAAP measures include EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS. We believe these non-GAAP measures provide useful information to both management and investors. These measures, however, should not be considered a substitute for or superior to GAAP results. A reconciliation of all non-GAAP measures included in this conference call to the nearest GAAP measure can be found on the financial tables included in the press release.

We also use certain supplemental operating data as a measure of certain components of operating performance which we also believe is useful for management and investors. This supplemental operating data includes GMV and should not be considered a substitute for or superior to GAAP results.

At this time I’d like to turn the presentation over to our CEO, Bill Angrick.

William P. Angrick, III

As detailed in our press release Q3 was a very productive quarter for LSI as we delivered strong financial performance while also taking important steps to create long term value for our shareholders. During the quarter we reported record GMV of $104.2 million representing a growth rate of approximately 67% over the prior year excluding the acquired GovDeals in Geneva Group business, GMV grew approximately 29% over the prior year period. Adjusted EBITDA grew 41% over the prior year period to $8.2 million for the quarter. We also generated cash from operating activities of approximately $5.5 million during the quarter against only $500,000 of capital expenditures.

There were several highlights during the quarter. GMV in our DOD Surplus business grew 35% year-over-year, GMV in our DOD Scrap business grew 51% year-over-year and 27% sequentially, GMV in our Commercial business grew 18% year-over-year, GMV from our Commercial Consignment business grew 28% year-over-year and 18% sequentially during the June quarter. Finally our acquired GovDeals business generated approximately $20.9 million representing 31% sequential growth in consignment GMV for the quarter.

We continue to be excited by the progress we are making in building the leading online marketplace for the large and fragmented state and local government market sector with GovDeals. Because of the focus and dedication of our employees LSI is well positioned to grow despite a weakening economy due to our strong customer value proposition, overall diversification and sound business model.

First we have a strong customer value proposition. In the current economy corporations and government agencies are looking to operate more efficiently. Our online marketplaces enable our customers to generate a source of working capital by auctioning their surplus assets and excess inventory efficiently and transparently without any upfront investment on their part. Indeed our strong buyer base which encompasses 2 million annual auction participants is very compelling for sellers of surplus goods. We also provide sellers multiple flexible pricing models to suit their needs including consignment, profit sharing and purchase arrangements. We provide all the necessary value added services to transport, warehouse and sell goods which enables our clients to reduce their own operating costs thus LSI is an elegant solution to improved net cash flows and returns for corporations and government agencies.

Finally LSI uniquely supports our clients’ increasing focus on stewardship of the environment. Our online sales programs reduce overall transportation and shipping costs for sellers and buyers and extend the life of goods that might otherwise enter the nation’s waste stream. We are proud of the role we play in delivering safe and compliant solutions for our corporate and government customers and believe this is a source of competitive advantage. Due to the growth of our buyer base and service offerings we have erected strong competitive barriers around our revenue streams, many of which are exclusive.

During the quarter we announced that LSI won the competitive re-compete of the DOD surplus contract positioning LSI for an up to five year extension of this important program through 2013 which I’ll comment on in a moment. Second we continued to diversify and strengthen our business. At the time of our IPO in February of 2006 our DOD Surplus business represented nearly 70% of our GMV. In the current quarter our DOD Surplus business represented approximately 20% of our GMV. This diversification is a result of our consistent impressive growth in other areas including Commercial, Scrap and state and local government.

During the quarter we also established a platform for growth in the European commercial market through the acquisition of the Geneva Group which was completed on May 1. This acquisition will enable us to serve major European union retailers and manufacturers and establishes a foothold with UK based wholesalers and international export buyers in Europe and the Middle East. Third LSI has a sound business model with a demonstrated track record of delivering profitable growth and high returns on invested capital. The current quarter was our 23rd consecutive quarter of profitability.

In our June quarter we generated free cash flow net of capital expenditures of approximately $5 million while invested capital was a negative $11.4 million. Our low capital intensity and high returns on invested capital is a result of our innovative business model and the focus of our management team on continuous improvement. Moreover these results have been achieved while building the infrastructure to support a $1 billion plus GMV business including the opening of seven new distribution centers over the past three years and transitioning to a public company operating environment.

I would also like to update you on our surplus contract with the DOD. We previously announced that LSI was the winning bidder in the re-compete of this contract. We are pleased to share with you that the new DOD surplus contract was formally awarded to LSI on July 31 of this year. The new contract is a base term of three years with two one-year options and enables LSI to extend its relationship with an important client and secure a multi-year source of attractive supply in our marketplace. Under the terms of the new contract LSI will pay DOD approximately 3.26% of the DOD’s original acquisition value for all usable surplus items referred and LSI will retain 100% of the profit from the resale of these items. Unlike the current contract there is no requirement under the new contract to operate a separate single purpose subsidiary entity. LSI will bear its own costs for merchandising and selling these items. We expect to remove and transport property items from DOD locations to LSI distribution center hubs where items will be screened and prepared for sale.

This will require LSI to expand some of our existing facilities and open one to two new facilities in the first year of the contract depending on DOD’s internal plans and space availability. In addition we will be developing new software and processes to sort and screen property items in partnership with DOD based on the new business rules of the surplus contract. We expect to begin selling property under the terms of the new surplus contract within approximately 90 days. Until then LSI will continue to operate under the terms of the current interim sales contract under which LSI receives a 39.5% share of net proceeds.

I will now turn the presentation over to Jim Rolla, our CFO and Treasurer.

James M. Rallo

The company continues to experience strong top line growth as the amount of gross merchandise volume, or GMV, increased $41.9 million or 67.2% to $104.2 million for the three months ended June 30, 2008 from $62.3 million for the three months ended June 30, 2007 primarily due to one, our DOD Scrap business which generated 32.4% of our revenue and 22.2% of our gross merchandise volume for the three months ended June 30, 2008 and grew to 50.9%. Two, our DOD Surplus business which generated 29.8% of our revenue and 20.4% of our GMV for the three months ended June 30, 2008 grew to 35%. Three, the acquisition of GovDeals completed on January 1, 2008 which generated 2.1% of our revenue and 20% of our gross merchandise volume for the three months ended June 30, 2008 and four, the acquisition of Geneva which was completed on May 1, 2008.

Revenue increased $19 million or 36.1% to $71.5 million for the three months ended June 30, 2008 from $52.5 million for the three months ended June 30, 2007 primarily due to the items driving GMV growth. Cost of goods sold excluding amortization increased $6.3 million or 47.1% to $19.6 million for the three months ended June 30, 2008 from $13.3 million for the three months ended June 30, 2007. As a percentage of revenue cost of goods sold excluding amortization increased to 27.4% from 25.3%. These increases are primarily due to one, an increase in the volume of goods sold by existing sellers utilizing our purchase model, two a mix shift to apparel items which realized a lower margin during the three months ended June 30, 2008 and three, the acquisition of Geneva which was completed on May 1, 2008 utilizes the purchase model.

Profit sharing distributions increased $6.6 million or 37.8% to $24.2 million for the three months ended June 30, 2008 from $17.6 million for the three months ended June 30, 2007. As a percentage of revenue profit sharing distributions increased to 33.9% from 33.4%. These increases are primarily due to 35% growth in our DOD Surplus business and 50.9% growth in our DOD scrap business.

Technology and operation expenses increased $2.3 million or 28.1% to $10.4 million for the three months ended June 30, 2008 from $8.1 million for the three months ended June 30, 2007 primarily due to one, the addition of 74 technology and operations personnel the majority of whom were needed to support the increased volume of transactions in merchandise discussed above, two the acquisition of GovDeals which completed on January 1, 2008 and three, the acquisition of Geneva which was completed on May 1, 2008. As a percentage of revenue these expenses decreased to 14.5% from 15.5% primarily due to our growth in revenue while leveraging our fixed expenses such as programming personnel.

Sales and marketing expenses increased $900,000 or 25.7% to $4.5 million for the three months ended June 30, 2008 from $3.6 million for the three months ended June 30, 2007 primarily due to one, our hiring of 23 additional sales and marketing personnel, two $500,000 in increased expenditures on marketing and promotional activities across our marketplaces and three, the acquisition of GovDeals with was completed on January 1 of 2008. As a percentage of revenue these expenses decreased to 6.3% from 6.8% primarily to our growth in revenue while leveraging our fixed expenses such as marketing personnel.

General administrative expenses increased $1.1 million or 23.9% to $5.8 million for the three months ended June 30, 2008 from $4.7 million for the three months ended June 30, 2007 primarily due to one, expenses of $200,000 related to the adoption of Statement 123R, two cost $100,000 for travel related expenses associated with business development efforts, three expenses of $200,000 associated with GovDeals which was acquired on January 1, 2008 and four expenses of $300,000 associated with Geneva which was acquired on May 1, 2008. As a percentage of revenue these expenses decreased to 8.2% from 9% primarily due to our growth in revenue while leveraging our fixed expenses such as corporate staff.

The company continues to have strong cash flow generation and growth. LSI generated $5.5 million of operating cash flow during the three months ended June 30, 2008 an increase of $9.1 million over the $3.6 million used in operating activities during the three months ended June 30, 2007. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA increased $2.4 million or 41.3% to $48.2 million for the three months ended June 30, 2008 from $5.8 million for the three months ended June 30, 2007. Adjusted net income increased $1.1 million or 35.1% to $4.5 million for the three months ended June 30, 2008 and $3.4 million for the three months ended June 30, 2007.

Adjusted diluted earnings per share increased $0.04 or 33% to $0.16 for the three months ended June 30, 2008 based on 28.2 million diluted weighted average shares outstanding from $0.12 and 28.3 million diluted weighted average shares outstanding for the three months ended June 30, 2007.

I will now discuss the company’s other key operating metrics as I’ve already touched on GMV which management believes allows us to monitor the success of our marketing programs as well as our lotting and merchandising strategies. During the last 12 months we also benefited from our ability to more effectively market assets to potential buyers. Our marketing efforts along with the acquisition of GovDeals and Geneva resulted in a 46.1% increase in registered buyers to approximately 948,000 at June 30, 2008 from approximately 649,000 at June 30, 2007. Auction participations which consists of registered buyers who have bid in an auction during the period and are counted more than once if they bid in more than one auction increased to a record 499,000 including GovDeals for the three months ended June 30, 2008 representing an increase of 212,000 or 73.5% over the 287,000 auction participants for the three months ended June 30, 2007. Completed transactions including GovDeals and Geneva increased 107.7% to approximately 108,000 for the three months ended June 30, 2008 from approximately 54,000 for the three months ended June 30, 2007.

The company continues to have a strong balance sheet. At June 30, 2007 LSI had $51.3 million of cash, current assets of $79.5 million, total assets of $129.9 million. The company continues to be debt free with current liabilities of $34.2 million and long term liabilities of $3 million for total liability of $35.4 million. At June 30, 2008 stockholders’ equity totaled $94.5 million at June 30, 2008. Capital expenditures during the three months ended June 30, 2008 were $500,000. We expect capital expenditures to be less than $2 million for fiscal year ended September 30th, 2008.

Management is providing the following guidance for the next quarter and fiscal year 2008. The following forward-looking statements assumes the current business trends and their operating environ continue including one, improvement in margins and product mix in our Commercial business, two continued improvement in inventory turnover within our Commercial marketplace, three startup costs associated with the opening of our new distribution center in Bentonville, Arkansas, four a seasonal slowdown in the fourth quarter and five our believe that we’ve yet to realize the full potential of our distribution center network, personnel and value added services necessary to support a much larger Commercial business in the future which has resulted in less than our target profitability. Our results may be materially affected by changes in business trends and our operating environment as well as by other factors including investments we expect to make in our infrastructure and value added services to support new business in both commercial and public sector markets.

Our scrap contract for the DOD includes an incentive feature which can increase the amount of profit sharing distribution we receive from 23% up to 25%. Payments under this incentive feature are based on the amount of scrap we sell for the DOD to small businesses during the preceding 12 months as of June 30 of each year. We earned $1.4 million under the incentive feature for the 12 months ended June 30, 2008 and we recorded this amount in the quarter ended June 30, 2008. We are eligible to receive this incentive in each year of the term of the scrap contract.

Under our surplus contract there are incentive features that allow us earn up to an additional 4.5% of the profit sharing distribution above our base rate of 26%. This incentive is measured quarterly during fiscal year 2008. For the purpose of providing guidance regarding our projected financial results for the next quarter and fiscal year 2008 we have assumed that we will receive a portion of the surplus contract incentive payments. Our guidance adjusts EBITDA and diluted EPS for the affects of the adoption of FAS 123R which we estimate to be approximately $1.2 million to $1.4 million for the fourth quarter of fiscal year 2008.

We expect GMV for fiscal year 2008 to range from $354 million to $356 million. We expect GMV for the next quarter to range from $94 million to $96 million. Our expected adjusted EBITDA for fiscal year 2008 is unchanged from prior guidance. We expect adjusted EBITDA for the next quarter to range from $6.7 million to $6.9 million. Our estimated earnings per diluted share for fiscal year 2008 is unchanged from prior guidance. For the next quarter we estimate adjusted earnings per diluted share to be $0.13.

As always if anyone has any questions on the information that we have provided or if there is information in the public domain which appears to be inaccurate and we have noted such instances over the last several quarters please call me or Julie Davis.

I will now turn the discussion back over to Bill.

William P. Angrick, III

We are very pleased with our overall progress to date. We surpassed $100 million of quarterly GMV for the first time. We now have approximately 2 million annual auction participants in our online marketplaces and this metric grew 48% year-over-year excluding acquisitions in the June quarter which is an all time record for LSI. Our team continues to strengthen LSI’s customer value proposition and grow our market share in both the commercial and government sectors. We have continued to erect competitive barriers around our solutions and significantly diversify our business. We are also making the necessary investments today to sustain our growth many years into the future.

I would also like to share with you our current assessment of fiscal year 2009 performance for the 12 months ending September 20, 2009. Based on current business trends we expect to grow our GMV by 20% to 25% in fiscal year 2009 in line with our stated growth target. We expect to grow our adjusted EBITDA and net income by approximately 10% in fiscal year 2009 which reflects our expectation of reduced profitability in the short term related to the startup and transition to the terms of our new DOD surplus contract. As we move through this phase in period during fiscal year 2009 we expect to achieve our historical EBITDA net income annual growth rate target of approximately 25%.

In closing LSI has a long track record of fiscal discipline and consistent performance. This has only been possible through the effort of our dedicated employees and the support of our shareholders as we build the leading online marketplace for surplus and salvage goods. We thank you for your time and attention today and look forward to answering any of your questions at this time.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Colin Sebastian – Lazard Capital Markets.

Colin Sebastian – Lazard Capital Markets

I was wondering if you could help us out a little bit with the new surplus contract, perhaps give us a sense of the trailing 12 months original acquisition value and what the typical recovery level is on those goods? Secondly if you were to look at the two contracts on an apples to apples basis perhaps by contribution margin, how you might suggest they compare?

William P. Angrick, III

Let me first say as a matter of LSI’s competitive position in the marketplace we have not been disclosing information regarding segment level profitability, original acquisition value information. Obviously that’s important particularly in light of the recent competitive environment for the new contract. With regard to the guidance and the outlook I think the fundamental question is more likely the primary reason for outlook and that relates to this new DOD surplus contract which effectively resets our base line expectation in this part of our business and I think first and foremost it’s important to understand that we’re trying to provide investors our outlook without having actually operated under the terms of the new contract. I think it’s fair to say that we’ll have a much understanding of the impact of the new contract terms on profitability in the next quarter or two we’ve actually been operating under that new contract and accordingly we’ll update as we move forward.

I would also add that there are really three distinct areas that we would want people to understand with respect to the new DOD surplus business. I think first is startup costs. We will be required to develop new processes and systems to transport, warehouse, sort and screen property under the new DOD surplus contract. For example we anticipate in many cases LSI will be required to remove items from DOD installations and ship these items to our facilities at our cost to support the needs of the DOD under the contract. We expect to bear the costs of establishing one to two additional storage facilities to receive DOD surplus items. Both the out-of-pocket costs to set these facilities and processes up and a learning curve of working in this new environment we anticipate to reduce profitability early on in the new contract.

I think the second distinct area related to the new contract would be volume. We anticipate some future reduction in volume as the government performs their own assessment of what to continue to sell in light of national security considerations and also in light of the costs of continuing to handle items relative to the added value potential. And I think third, margins. We anticipate lower margins under the new surplus contract as reflected in our guidance than that experienced over the past few quarters which have benefited from higher profit sharing ratios based on our achievement of performance based incentives and our guidance assumes no improvement in the rate of return on what we sell while also bearing these additional storage and transportation costs which has the net effect of reducing margins.

Colin Sebastian – Lazard Capital Markets

If you were to quantify the costs of the new systems that you need to put in place, where would you ballpark those?

James M. Rallo

I think at this point we’re still in discussions with the DRMS as far as exactly how everything is going to roll out. As Bill discussed we potentially may have one or two distribution centers. We haven’t even identified those yet or where they would be officially located in the United States yet. So it’s hard for us to really gauge exactly what the startup costs will be. Obviously the contract is slightly different than what we started off back in 2001 so we don’t really have an historical basis to even estimate at this time. It’s something that we feel like we can get our hands around in the next three months and come back to you in December with some more detailed answer when we give our official full year guidance.

Operator

Our next question comes from Shawn Milne – Oppenheimer & Co., Inc.

Shawn Milne – Oppenheimer & Co., Inc.

I guess there isn’t a lot of granularity on how that’s going to roll out at this point, but are you suggesting it’s 10% EBITDA growth for next year or it starts out lower and then ends faster in terms of EBITDA growth? If you can talk about perhaps the shape of that. Secondly, in terms of the guidance in the fourth quarter, if you strip out the acquisitions it looks like it’s about 17% organic growth. We seem to be not seeing a lot of seasonality in the commercial business right now although albeit it’s still early. Bill, if you could comment what you’re seeing from your commercial partners.

William P. Angrick, III

I think that the short answer to the first question is we don’t know. There are things that impact the phase in of the new contract and as we’re cutting over from the current contract arrangement where we’re achieving what I would say abnormal profits, 39.5% share is higher than we’ve ever achieved in the last seven years under the DOD surplus contract. So for every month that that continues that affects the curve of the year. But the strategic long term view is there will be upfront costs as we move through fiscal 09 that will be amortized beyond fiscal 09 and all things equal I think two or three our four quarters in to the start up of the new contract we’re going to be better at executing and I think our past experience with DOD is we’ve been able to adapt as an organization to whatever the new terms and conditions are and overtime optimize and refine our business footprint and what we’re doing with merchandising and selling items. I think over time that will also be the case here. As it relates to what we’re seeing across our businesses as we go to Q4, on the public sector side this macroeconomic headwind that we’ve all been talking about has been a catalyst in many respects for what we do in the state and local marketplace. I think state and local governments feel a little bit under duress, lower tax receipts, lower real estate property tax rolls so they are looking to convert idol assets in to working capital and that’s been part of the success GovDeals is enjoying.

I think on the federal side on the scrape business we’ve had consistent property flow. We’ve always been reluctant to annualize what we feel is a strong quarter. The scrape quarter has very high quality events and a mix to high value alloys so that benefitted that quarter and our forward guidance is not run rating that. On the commercial business, we talked a quarter ago about a new business, the store fixtures and equipment business which now has its own tab on Liquidiation.com. I think that part of our commercial business which is largely consignment has been a direct beneficiary of retailers really taking a step back and looking at their overall growth plans and many of them are retrenching and looking for our assistance to dispose of equipment that comes from stores that are being reconfigured or closed as they sort of adapt their footprint in to their next year’s growth plans. So, we’ve seen several national retailers work with us on the store fixtures and equipment side. We’re seeing good business. Now, there is seasonality to retail supply chain and seasonality is certainly built in to our fourth quarter guidance.

James M. Rallo

Shawn, let me just add on the seasonality point that Bill mentioned because I’m not sure how you were getting your year-over-year math on the organic growth of the business but, if you strip put the acquisitions, we expect the business organically actually to grow about 27% year-over-year and the commercial business will be stronger than that. I think what you have to understand is GovDeals, as we mentioned before, the strongest quarter of the year for GovDeals is that June quarter. We do expect a down quarter in GovDeals. We also expect a down quarter in scrape. As Bill mentioned, we had a couple of unique things this quarter, one was a $2.5 million [Inkenal] sale which is obviously a pretty big sale for us, we’re not anticipating that again. Although it is always possible, we’re not going to put that in our guidance.

Additionally, most and when I say most, anywhere from 60% to 65% of the metals that we receive for the scrape business is mostly steel and last quarter we had a tremendous mix shift where we had more copper and brass which, as you know, are higher value metals and that really drove tremendous GMV in the scrape business. Obviously, we really have no control of that mix but at this point, and what we see in the quarter, we’re not seeing that continuation of that copper and brass shift so we kind of have annualized what I would say is a more normal mix of product from the DOD for scrape and thus we do expect a decrease in that quarter-over-quarter too. Hopefully, that clarifies the point.

Operator

Our next question comes from Stephen Ju – RBC Capital Markets.

Stephen Ju – RBC Capital Markets

Given that you’re guiding EBITDA growth to 10% for fiscal 09 versus [inaudible] I would imagine it could be if margins were staying the same. I guess you’re estimating startup costs of being around $4 million or so. And, kind of building on Shawn’s question, would you expect this to be more front end loaded or do you expect this to be more spread out throughout the course of the year? But also, the quarter that you just recorded, the gross margin seems a bit softer than what we thought it would be. Given the amount of the GMV upside versus your guidance, I would have thought it would have flowed a little bit more to the bottom line. Was there anything going on in the purchase model side of the business that may have impacted your gross margins?

William P. Angrick, III

I’ll give you some remarks on that Stephen and then pass it over to Jim Rallo. I think we’ve obviously been working on a new leg of the stool with the GovDeals state and local business and that business, as you know, has grown nicely in the first two or three quarters of our life with it. That business is a lower EBITDA to GMV margin business because of the lower take rate. So, I think one of the things you’re seeing is just the structural lower consignment commission model of GovDeals as we roll that out. I quickly add however, that we are working on some initiatives with particular sellers to bolt on some additional services, payment collection in particular that will, we think, over time provide some upsell opportunities for the company.

As far as the other parts of your question on start up costs and so forth, I think there’s sort of a false sense of accuracy when we’re working with a large bureaucratic organization that has 200 locations throughout the country and they’re on their side undertaking a lot of planning and that planning includes providing their partner LSI space in certain locations. When they can provide the space, then the timing of that is subject to brack initiatives and planning which our agency DRMS which we work with under this contract may not even have direct visibility too. I would say if we wanted to try and talk about a curve during the year, I would think the first quarter after we start the phase in earnest you would have more of a depressed operating margin and then incrementally from there forward you’re going to hopefully get some positive movement in margins. How quickly that happens is subject to a lot of factors outside of our direct control.

James M. Rallo

Let me add a couple of things. One, as I mentioned in my comments, on the gross margin we did have what I would say is the majority of that inventory that we discussed on the last two calls, it moved through the commercial business. That did affect gross margins mostly in the apparel arena this quarter. As far as rolling out, I would say that we expect to be operating under the interim agreement at least for most of the first quarter of fiscal 09 so from a profitability standpoint that should be a pretty good quarter. And, as Bill indicated, when you look at fiscal 09 the second quarter is probably going to be a big roll out quarter for us under the contract and so that’s going to be one of our toughest quarters of the year.

William P. Angrick, III

Steve, just to add to your question and my response, I think we very much see opportunities with the DOD business overtime. I think first, you’re locking down a proprietary source of supply and it’s a large supply and it’s a continuous flow in to our marketplace over multiple years and that of course is useful as we continue to attract buyers not only just federal but state and local. There’s about a 55% overlap of the products with commercial buyers as well, is very important. I think, you do get scaled benefits overtime because this new contract provides us the freedom to pursue synergies with our other businesses to maximize efficiencies and yield on what we sell. So, for example where as today under the DOD surplus contract we receive property in over 40 individual staffed DOD locations, under the new contract we expect to obtain economies of scale related to centralizing these operations and transporting and processing items in maybe one or a few locations. So, you’re going to get over time leverage from those activities.

I think improved merchandising is certainly a part of our DNA as company and I think with this new contract as we centralize operations, we expect to improve our merchandising actions and focus on improving the value obtained for DOD surplus and we obviously want to study the pattern of property flow over time to pinpoint where we’re going to do that, but I think there’s an opportunity here in the mid-term for getting resources focused on better merchandising whereas before under the DOD surplus contract we really emphasize rapid throughput to clear these items from DOD installations where they have a very important war fighting function not really a warehouse to sort and merchandise property.

It’s important but maybe a subtle point that people should know there are favorable cash flow dynamics with this new contract. We plan to continue to sell the property to buyers in all cash transactions, we collect the money up front. In turn relative to DOD we pay them in arrears with approximately two-thirds of the payment due 15 days after the month in which we receive property and one-third of our payment due 120 days after receipt. So therefore we would expect to have very favorable cash flow dynamics over time and as a result higher returns on capital.

I think the bottom line is that we’ve been able to once we have economies create very high cash-on-cash returns because of those cash flow dynamics. Those are thoughts to keep in mind as we get into this new surplus contract.

Operator

There are no further questions.

William P. Angrick, III

I appreciate everyone’s time and attention. As Jim Rolla pointed out if there’s any additional follow up please do not hesitate to call him or Julie Davis. Thank you.

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