Staples Q4 Earnings Call Transcript

123jump.com Staff
22 Mar, 2009
New York City

The office products supplier quarterly sales rose 16% to $6.2 billion. Net quarterly income declined 14% to $286 million on higher operating expenses. Earnings per share dropped to 40 cents from 47 cents a year earlier. The company generated record free cash flow of $1.3 billion in fiscal 2008.

Staples, Inc. ((SPLS))
Q4 2008 Earnings Call Transcript
March 11, 2009 8:00 a.m. ET

Executives

Laurel Lefebvre - Vice President, Investor Relations
Ronald L. Sargent - Chairman and Chief Executive Officer
Michael A. Miles, Jr. - President and Chief Operating Officer
Peter Ventress – President – Staples International
John J. Mahoney - Vice Chairman and Chief Financial Officer
Joseph G. Doody - President, North American Delivery
Demos Parneros - President, U.S. Stores

Analysts

Oliver Wintermantel – Morgan Stanley
Colin McGranahan - Sanford C. Bernstein & Co.
Daniel Binder - Jefferies & Co.
Kate McShane - Citigroup
Matthew Fassler - Goldman Sachs & Co.
Stephen Chick - Friedman, Billings, Ramsey & Co.
Gary Balter - Credit Suisse
Michael Baker - Deutsche Bank Securities
Joe Feldman - Telsey Advisory Group

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2008 Staples, Inc. earnings conference call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If, at any time during the call you require assistance, please press “*” followed by “0” and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today''s call, Ms. Laurel Lefebvre, Vice President of Investor Relations. Please proceed.

Laurel Lefebvre

Good morning, everyone, and thanks for joining us for our fourth quarter and fiscal 2008 earnings announcement.

During today''s call, we''ll discuss some non-GAAP metrics and our results excluding Corporate Express to provide investors with useful information about our financial performance. Please see the Financial Measures and Other Data section of the Investor Information portion of Staples.com for an explanation and reconciliation of such measures and other calculations of financial measures that we use to analyze our business.

I''d also like to remind you that certain information in this call constitutes forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed or referenced under the heading Risk Factors and elsewhere in Staples’ latest 10-K filed today.

Please also note that during the call we''ll refer to Staples'' performance excluding the impact of Corporate Express as Staples’ core business.

Here to discuss our performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer, Mike Miles, President and Chief Operating Officer, Peter Ventress, President of International, and John Mahoney, Vice Chairman and Chief Financial Officer. Also joining us are Demos Parneros, President of U.S. Stores, and Joe Doody, President of North American Delivery. Ron?

Ronald L. Sargent

Thanks, Laurel, and good morning, everybody. Thanks for joining us this morning.

While 2008 was an incredibly exciting year because of the acquisition of Corporate Express, we struggled with weak sales all year long and the fourth quarter was particularly tough. In both good times and bad our job is to deliver the positive results that our shareholders expect, and while we''re not satisfied with our absolute results, our relative performance has never been stronger.

We did a great job in many aspects of the business during 2008. We aggressively managed expenses to offset lower sales. We took out costs in every line of the P&L. We tightened our capital spend, cutting almost a third of our original capital expenditure plan. We did a good job managing inventory in all channels, and we reduced inventory per store by 17%. And as a result, we generated record free cash flow of more than $1.3 billion during the year. Most importantly, we achieved our best customer service metrics ever and we continued to differentiate ourselves from the competition.

Let''s take a look at our numbers for the quarter and the full year. Sales for the fourth quarter were up 16% versus last year, to $6.2 billion. This includes $1.6 billion of Corporate Express sales. If you exclude the impact of Corporate Express, total company sales decreased about 14% or about 10% in local currency.

Q4 earnings per share adjusted for special charges declined 23% to $0.36 compared to last year''s $0.47.

For the full year, total company sales were up 19% to $23.1 billion. Excluding $4.2 billion of Corporate Express sales, our top line declined about 3% compared to 2007 and our adjusted earnings per share declined 9% to $1.29 and that compares to last year''s $1.42.

Throughout 2008 we continued to see a shift in our product mix, with consumable products performing much better than durables. Customers became increasingly cautious and they put off purchases of discretionary products like computers and business machines and furniture, which accounted for 80% of our sales decline. The good news is that the higher mix of consumables helped our product margins, but the big decline in the top line once again made it difficult to leverage our fixed expenses.

In addition to strong product margins, the team did a nice job reducing distribution and delivery expense, squeezing our marketing spend, and effectively managing G&A. These efforts unfortunately couldn''t offset the cost of maintaining strong customer service levels as well as the fixed rent in our stores.

We''re working hard to manage our fixed expenses on the lower sales volumes we''re seeing, but we''re not willing to cut corners in customer service and damage our brand and reputation over the long term just to manage short-term results.

We''re also not willing to give up on growth ideas that''ll drive our long-term success. In 2008 we continued to invest in new store growth, supply chain efficiency, Copy & Print services, our Easy Tech initiative as well as several new merchandising ideas, and at the same time we made the largest acquisition in our company''s history. We''re extremely happy with our progress integrating Corporate Express. We''re now about 8 months into the integration and we''re on track to achieve $300 million of annual synergies by the end of 2011. In the fourth quarter we saw better-than-expected savings, primarily from buying. I''m really proud of the team''s hard work and commitment on the integration.

We''ve completed virtually all of our negotiations with vendors. We started introducing our new lines of business to our contract customers in the United States, and we''ve realigned our international business with a regional multi-channel focus versus strictly managing by channel, as we did in the past. We''re making solid progress on our brand transition in both the U.S. and Europe and recently began shipping Staples copy paper to Corporate Express customers. We''re also working hard on our new global contract offering for multinational customers and have begun to lay the groundwork for rationalizing our distribution network. Despite these accomplishments we''ve made some tough decisions across the board during 2008 in response to the current environment. We reduced headcount. We aggressively managed expenses in our stores and warehouses. We froze salaries for senior management, and we didn''t pay out bonuses to our corporate staff. Decisions like these are never easy to make, especially during a year when our team worked so hard, but I am grateful to our associates for their understanding of the choices we''ve made and their ability to stay focused and motivated.

Looking ahead, we expect to see soft sales trends throughout 2009 and we''re planning accordingly. We''re not going to stand still and wait for things to get better. We''re getting ahead of it by taking a hard look at everything we do and making some dramatic changes to our expense base.

At the same time, we have clear goals for driving our business for the future. We have several priorities for the year. We plan to work very hard on the integration of Corporate Express while building one global Staples brand. We''ll continue to focus on taking care of customers. We''ll drive sales productivity in our stores by doing a better job selling technology and services and improving the quality of our Copy & Print offering. We''ll continue to strengthen our team in Europe to drive growth and profit improvement, and we''ll continue to build a strong foundation for success in China, India and South America. Above all, we''ll maximize cash flow by carefully managing our business for the long term.

I''ll now turn it over to Mike Miles to talk about our results in North America.

Michael A. Miles, Jr.

Thanks, Ron. Good morning.

For the fourth quarter North American Delivery sales increased 43% including Corporate Express and declined 10% for the core business, 9% in local currency.

Operating margin in each of Staples'' three core business segments increased, with core NAD reaching an all-time high operating margin of more than 12%. We benefited primarily from leverage in marketing expense and G&A, but the team worked hard to treat every possible cost as variable to offset the shortfall in sales. Including the impact of the lower-margin Corporate Express business, NAD margin declined 303 basis points to 8.9%.

At this point we''re far enough into the integration of CE that we will no longer break out core and all-in results beginning in Q1.

Within North American Delivery, Staples Business Delivery and Quill experienced double-digit sales declines reflecting lower sales per existing customer, somewhat offset by customer acquisition, which remains positive. Our contract business performed better, particularly in the middle market segment, which was just slightly negative. In our Fortune 1000 business, industries like financial services remained weak and most other sectors saw big sequential declines relative to earlier in the year. Government accounts, a bright spot, continued to see nice growth.

Our customers in the contract business are buying more of the basic commodity items for which they''ve negotiated favorable prices and buying fewer discretionary products, which is squeezing gross margins quite a bit, worth about 50 basis points in the fourth quarter.

Across all businesses in NAD, demand for furniture and technology remains very soft, while consumables like ink, toner and paper are performing much better. Some of our share of wallet initiatives, like Staples promotional products are highly discretionary and they''re suffering a lot more than core supplies in this environment.

On the operational side, we''re very proud of our results in customer satisfaction and retention and logistics. Our working capital performance was excellent and we reduced our core capital spend year-over-year, resulting in stronger free cash flow for 2008.

Ron already mentioned some of the highlights of our Corporate Express integration, but I''d like to give you a little more color on what we''ve accomplished in NAD, where we expect to capture 70% of the synergies.

On the purchasing side, we''ve nearly completed our vendor negotiations for 2009 and are on track to reach our targets. quite far along with indirect sourcing, which covers everything from cell phone plans to travel expense to warehouse supplies and are achieving or beating the savings we projected.

In terms of the brand transition, operational changes are underway to rebrand trucks, buildings and driver uniforms. We''ve begun to deliver some Staples brand products to Corporate Express customers.

Historically, Corporate Express had a much higher percentage of delivery orders under $50 than Staples and our initiative to reduce small orders is going well. We''ve made significant progress in both SBA and SNA accounts. This effort targets thousands of accounts representing hundreds of millions of dollars in annual sales volume, and many customers have already agreed to consolidate their orders to improve average order size.

Our work to integrate the sales force into the Staples model is also going very well. We''ve accomplished the division of territories and target accounts. More importantly, we''ve established a stronger hunter-farmer approach, increased pricing discipline, and have begun to implement our performance-based compensation program.

Turning to our supply chain, we''re developing a plan to fully leverage the existing infrastructure of the combined networks and minimize the need to add new buildings. We still have a lot of work to do on the systems side before we can integrate our FC network, but we''ve already announced the closure of three Quill-only fulfillment centers later this spring, a first step in our network consolidation plan. We''ve also begun to deliver Staples orders through the former CE fleet. These are just a few of the highlights of what the integration teams have been working on, but we''re very pleased with the integration progress made so far.

Key 2009 goals include driving improvement in customer profitability and making solid progress in our systems and logistics area so that we can move forward with integrating our supply chain.

To wrap up the discussion on NAD, the top line is expected to be under increasing pressure this year as high unemployment persists and customers cut back. That said, we feel very confident in our ability to achieve our goals of improving our customer service metrics, investing in account acquisition to grow our customer file, driving strong cash flow, expanding gross margin rates, and reducing our cost structure as we continue to capture the acquisition synergies.

Moving on to North American Retail, sales for the fourth quarter were $2.4 billion, down about 14% or 10% in local currency versus Q4 of 2007. Same-store sales were down 13%.

We told you last quarter that sales took a step down in October and that trend continued through December. In January and February we''ve seen improvement in the trend, although comps remain negative. At this point, we are nearly halfway through the first quarter and we''ve seen some recovery. Our North American Retail comp for the first several weeks of Q1 2009 is trending down about 9%, but week-to-week trends remain very choppy. Comps for Q4 of 2007 and Q1 2008 in North American Retail were both negative 6%, so we''re seeing a moderate improvement in our two-year trend as well.

Traffic was negative in the fourth quarter, but sharply lower ticket was the primary factor in the comp decline. As we have seen in the last several quarters, purchases of higher-ticket furniture and technology hardware have dropped sharply. Desktop computers, digital cameras, printers and furniture were especially weak.

Anticipating this trend, we reduced marketing spend and carefully managed promotional intensity as we focused on preserving the bottom line instead of driving sales of these lower margin technology products. As a result of all this, durables comped down about 20%.

Consumables fared somewhat better, down in mid single digits, and we continue to see relative strength in our destination categories of ink and paper. For example, ink comped positive as we continue to gain share in that important category. Our value proposition of 10% back and $3 recycling credit in rewards clearly resonates with the cost-conscious customer. We''ve expanded that recycling effort to include all brands of ink and toner and are stepping up the marketing emphasis during Q1.

In spite of the sharp sales decline, we maintained an operating margin of 9.3%, down 129 basis points, with currency weighing on margin by 17 basis points. In addition to managing marketing expense carefully, the team also delivered improvements in product margin. This helped offset a significant percentage of the deleverage on both the labor and rent lines. We got ahead of the weak trend in sales and did a good job aligning purchases with demand, which helped us avoid deep markdowns and obsolescence.

Price and value are paramount in this environment. During the second half of 2008 we reoriented our TV advertising to emphasize Staples value and we continue on that theme in 2009. Staples brand products provide a great solution for our customers. In the fourth quarter we increased the in-store presence of our own brand products, which we are continuing in 2009.

Globally, own brand penetration in the core business increased to 23% in 2008 to over $4 billion, with several hundred basis points of growth in office supplies. In 2009 we''re launching several new owned brand initiatives, including a new and innovative line of Staples brand shredders that''s now in store.

Our unique multi-channel capabilities continue to contribute to the top line. The online circular has grown dramatically in customer acceptance and use. We''ve also implemented a number of online shopping and service tools for our retail customers, including customer reviews, ship to store, and real-time product availability.

Recognizing that we have suffered a significant step down in retail sales, we have reset our expense structure to bring it in line, working aggressively on every line of the P&L. Our improvement in vendor programs as a result of the CE acquisition will benefit the Retail business as well as Delivery. We continue to realize savings through direct sourcing, nearly $40 million in 2008 alone.

On the real estate front we''ve got an opportunity in the current market to go back to landlords to improve our rent expense. We''re in a good position to renegotiate rent for new stores. We also have about 400 stores coming up for renewal in the next four years, giving us a chance to renegotiate rent, downsize larger stores to smaller formats, or relocate stores as unit performance changes in the competitive environment or demographics dictate. We''re also looking at any performance clauses that could allow us to negotiate better rent or terminate leases, where appropriate.

We''ve developed a new operating model for our lowest-volume stores. We''re reducing our marketing spend and directing more marketing dollars toward our best customers. We''re also putting our remodel program on hold and we continue to trim G&A.

At the same time, we remain focused on cash flow generation, reducing overall inventory per store by 17% compared to last year''s levels.

But even in these tough times, we continue to invest in the business. In Q4 we opened 11 stores and closed six stores in North America, ending the year with a total of 1,835 stores. This includes our first two stand-alone Copy & Print shops in the Southern California market. For the full year we opened 106 stores and closed nine. While we have reduced our 2009 store growth plan, we still expect to open 55 stores, with five in Canada and 50 in the U.S., 10 of which will be stand-alone Copy & Print ships. Many of these stores will be in our newer markets, including our first stores in Reno, Las Vegas and Tucson.

Even though the top line remains challenging, we''re confident that our operations have never been in better shape. We recorded all-time highs on our customer service metrics in 2008 and saw a nice increase in our advantage over our office superstore competition. This advantage will be more important than ever this year as we work hard to win over the many customers impacted by the big box closures in our space. And we''ve got plenty of good ideas to work on our comps and customer satisfaction throughout 2009.

With that, I''ll turn it over to Peter to talk about International.

Peter Ventress

Thanks Mike. Good morning, everybody.

Including the impact of Corporate Express, Q4 sales were $1.3 billion, an increase of 62% in U.S. dollars and 76% in local currencies. Sales for the fourth quarter from our core business was $619 million, down 24% in U.S. dollars and down 11% in local currencies versus Q4 of last year.

Operating margin came in at 4.5% of sales, a decrease of 227 basis points from the same period in 2007. The margin decline during the fourth quarter reflects the impact of including the lower-margin Corporate Express business as well as moderate margin compression on lower sales in Staples'' core Retail and Catalog businesses in Europe. Excluding Corporate Express, operating margin for the core business declined about 100 basis points. Again, we''d like to remind you that we won''t break out the impacts of Corporate Express on the core margins going forward.

In European Retail, comps declined 10%, with negative comps across all countries except Germany, which had a slightly positive comp for the fourth quarter and for the year. Similar to what we experienced in North America, the holiday season was quite weak, but we saw slightly improving trends beginning in January, with strength in paper and office supplies.

Consumables remained relatively healthy in the fourth quarter, comping down just a point or two, while durables comped down in the mid-teens, driven by weakness in tech hardware and furniture. Particularly hard hit were our retail businesses in the Netherlands and Portugal, where we sell a much higher mix of technology products.

Despite the shortfall in sales, careful buying and stock management kept year end inventory levels low and quality high and helped to maintain respectable margins. We added one new store in Portugal, ending the year with 335 stores in Europe. For 2009, we expect to add about 10 new stores in Europe.

On the Catalog side, sales declined double digits, but margins held up relatively well. The team maintained their strong focus on execution and achieved 500 basis points of improvement in our perfect order metric. Inventory turns improved almost 50 basis points and online penetration reached an all-time high. We''re seeing good trends in customer loyalty and response rate, but clearly the top line remains a big challenge going forward.

In Contract, our International accounts team continues to gain momentum from our post-merger global capabilities. During the quarter we were awarded several new global accounts, including the largest European account win in our history when we signed on a Fortune 100 customer.

Moving on to our Printing division in Europe, as you can imagine, this is a very tough business right now as purchases of capsule goods have significantly declined, especially those requiring financing. We''re seeing steep declines in machine orders, particularly in Spain, where unemployment is reaching 20% and financing has essentially dried up for the printing trade. Sales of parts and service are also declining, although not as drastically, and overall profits for the division were down year-over-year.

Looking outside Europe, our newest markets are clearly not immune to the global slowdown. While sales declined, we continued to invest in China, India and South America, which are important markets for Staples several years down the road.

Corporate Express Australia publicly announced their financial results two weeks ago. Sales were flat, with a slight decrease in profits, but they maintained very strong operating margin of 7.5% for the year. Their e-commerce platform is gaining traction, with online order penetration up 250 basis points to 76.5%, and recently they opened a new warehouse in South Wales on time and on budget, which will improve customer service and supply chain efficiency.

To give you an update of the Corporate Express integration, we''re very pleased with the progress we''ve made in the past several months. We''ve launched our new regional management structure in Europe and finalized the leadership team. The new matrix established five major regions (inaudible), Central Europe, the Nordics, Southern Europe, and the U.K. and Ireland with much greater coordination and sharing among the sales channels. This structure will allow us to move forward quickly with the integration and streamlining of the back office functions.

We recently launched our one brand strategy, with the intention of transitioning to one Staples brand over time. We also made the decision to go forward with SAP, which was the Corporate Express system, as our primarily IT system across Europe.

On the G&A front, we expect to realize about $10 million of savings from rightsizing our International corporate headquarters in Amsterdam. We''ve identified significant savings in indirect procurement and discussions with vendors on the merchandise front have been very productive.

Despite the challenging environment, we''re quite happy with the work we''re doing to position our International business for long-term success.

And now I''d like to turn it over to John to review our financials.

John J. Mahoney

Thanks Peter. Our fourth quarter GAAP earnings per share on a fully diluted basis declined 15% to $0.40 versus the fourth quarter of 2007. Excluding special charges, our adjusted earnings per share declined 23% to $0.36 versus the fourth quarter of 2007.

Let''s walk through the special charges that impacted our GAAP earnings in Q4. We recorded pre-tax integration and restructuring expense of $19 million or $0.02 per diluted share related to Corporate Express during the fourth quarter. We also recorded a $22 million charge or $0.02 per share related to software in our European business which we will no longer use as a result of our decision to move to the SAP platform.

Additionally, the company finalized its tax planning strategies to optimize the benefits of net operating loss carryforwards of Corporate Express during the fourth quarter of 2008. As a result, Staples reversed the previously disclosed non-cash charge of $57 million incurred during the third quarter of 2008, resulting in a one-time decrease to the company''s effective tax rate in the fourth quarter of 2008.

As a result of Corporate Express acquisition, during Q4 we saw significant year-over-year increases to net interest expense, which went up by $64 million, and amortization expense, which grew by $20 million. This reduced EPS by about $0.08 per share for the fourth quarter and more than offset early synergy benefits.

For the year, our fully diluted GAAP earnings per share of $1.13 declined 18% compared to the fully diluted GAAP earnings per share of $1.38 in 2007. Excluding special charges incurred during 2008, our adjusted earnings per share of $1.29 declined 9% versus our adjusted earnings per share of $1.42 for 2007.

The stronger U.S. dollar continued to drag on both the top line and bottom line during the fourth quarter. The negative impact to core sales was about 430 basis points and EPS was reduced by a little more than $0.02. For the full year, the FX impact was about neutral to the top line and impacted EPS by less than $0.01.

Gross profit margin decreased by 222 basis points to 26.9% during the quarter. This decline reflects the combination of lower margin Corporate Express business partially offset by gross margin improvement in our core business and purchasing synergies that we continue to realize. Our team''s doing a great job controlling expenses, but the significant decline in sales once again drove deleverage on the rent line. For the full year, gross profit margin decreased by 159 basis points to 27.1%.

SG&A leveraged 20 basis points versus last year''s fourth quarter to 19.1% of sales. The lower SG&A of Corporate Express as well as reduced marketing spend drove this change. This improvement was somewhat offset by labor expense deleverage. For the full year, SG&A leveraged 52 basis points versus 2007 to 20.1% of sales.

Including the impact of the lower-margin Corporate Express business and excluding integration and restructuring expense, adjusted operating income declined 232 basis points for the quarter to $456 million or 7.4%. This includes about $16 million of incremental amortization expense from Corporate Express. For the full year, excluding integration and restructuring expense, adjusted operating income declined 150 basis points to $1.55 billion or 6.69%. This includes about $51 million of incremental amortization expense from Corporate Express.

2008 capital expenditures, which include seven months of Corporate Express, came in at $378 million, down from the $470 million we spent in 2007.

With strong operating cash flow of about $1.7 billion, we generated a record of $1.3 billion in free cash flow for the year versus free cash flow of $891 million in 2007.

In 2009 we''ll continue to trim capital expenditures and have reduced our forecast to about $350 million from the previous guidance of $400 million. Keep in mind that next year''s numbers include a full year of capital required for the Corporate Express business.

At the end of 2008, Staples had approximately $1.6 billion in liquidity, including cash and cash equivalents of over $600 million and available lines of credit of more than $900 million.

To update you on the status of our debt, during the fourth quarter we used cash on our balance sheet to reduce our gross debt by approximately $650 million, ending the year with $3.4 billion of debt. Before the Corporate Express deal, we had less than $400 million in debt, which grew to $4.4 billion once we made the acquisition. We''ve now reduced that by $1 billion. Our debt at year end was $3.4 billion, which includes the new $1.5 billion five-year notes that we issued in early January.

We also had about $1.2 billion in commercial paper as of year end, backstopped by our $750 million existing revolver and our 364-day bridge loan, which we''ve reduced from the original $3 billion to $1.26 billion of available credit.

We continue to make good progress to ensure a smooth exit from our bridge loan before it expires in July. We recently signed an agreement with our banks to put in place a $300 million on balance sheet asset securitization program for Staples and Corporate Express contract receivables. This latest step will leave us with less than a $0.5 billion dollars remaining to refinance in the bridge. Given the continued strength in the bond market and the high demand for our January bond issuance, there may be an opportunity to do a short-term bond deal. We also have the option to do a bank deal with our supportive bridge banks. We still expect to generate about $1 billion of free cash flow in 2009.

Since 2004, Staples has returned excess cash to shareholders through an annual dividend. We announced this morning a quarterly dividend of $0.0825 per share or $0.33 on an annual basis, equal to what we paid last year. This change to our dividend payout schedule reflects the more common practice of paying dividends quarterly and will help us to manage our cash flow more effectively.

Turning to our outlook, we''ll try and be as transparent as possible on many of the factors that will influence profitability, such as anticipated synergies from the Corporate Express integration, depreciation, amortization, integration and restructuring costs, and net interest expense.

We remain cautious on the revenue outlook and therefore we aren''t providing specific sales or earnings per share guidance for 2009.

We''re forecasting depreciation expense to be about $105 to $115 million for the first quarter and $430 to $440 million for the full year. We expect amortization expense to be about $25 to $30 million in the first quarter and $105 to $115 million for the full year.

Integration and restructuring expense is expected to be $15 to $20 million in the first quarter and $90 to $110 million for the year.

And net interest expense is expected to be about $70 to $80 million in the first quarter and between $260 and $280 million in 2009, which is a little higher than our previous estimate as we now have a more concrete view of what our 2009 capital structure will look like.

In addition, we expect foreign currency headwinds to continue dragging on both the top and bottom line during Q1 and Q2 of 2009 until we anniversary the strengthening of the U.S. dollar that began during Q3 of 2008. We anticipate FX will negatively impact operating income by $25 to $30 million in the first quarter and by $70 to $90 million for the full year, assuming rates stay at today''s levels. The vast majority of this impact would hit us in the first half of the year.

In terms of share count, you should expect about 720 million shares outstanding for the first quarter and about 730 million for the full year as we''re not planning to repurchase shares to offset equity compensation activity.

To wrap up, we''re prepared for a challenging 2009 and we''re committed to generating strong cash flows while managing the business aggressively, tightly controlling expenses and conservatively deploying capital.

Thanks for your time this morning and I''ll now turn the call back over to our conference call moderator for the Q&A session.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press “*” followed by “1” on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press “*” followed by “2”. Please press “*1” to begin. And our first question comes from the line of Oliver Wintermantel with Morgan Stanley. Please proceed.

Oliver Wintermantel – Morgan Stanley

Good morning guys. In Contract, could you give us some color on sales per existing customers versus acquisition of customers? And secondly, did this vary by geographic location?

Ronald L. Sargent

I’ll ask Joe Doody to follow up on that one. Joe?

Joseph G. Doody

The declines that we''re seeing, Oliver, in Contract first are more heavily towards the larger customer, Fortune 1000, and they are the mid-market. And as far as the split between existing customer sales versus new account, almost all of our decline is due to lower sales from existing accounts. We''re very satisfied with our new customer acquisition, both in the mid-market as well as the larger Fortune 1000, so you''re seeing the decline really being driven by lower sales from existing customers, and again, heavily around the durables, the discretionary items, and furniture.

Oliver Wintermantel – Morgan Stanley

Geography?

Joseph G. Doody

Geography, it''s gotten more broad-based throughout the country. If you go back to the beginning of the year, we were seeing sales declines in just one state. By the fourth quarter throughout NAD we''re seeing negative sales in more than 30 states. So it''s pretty broad-based; no geographical areas of great strength or weakness.

Ronald L. Sargent

Oliver, the only thing I''d add is that about 10% of our sales in the Delivery side is related to financial and financial institutions, which certainly isn''t helping us any right this very minute.

Joseph G. Doody

Yes, and they weakened earlier in the year. It then spread to insurance and it spread through pretty much all sectors. The one sector that has held up pretty well is government - government across the board, be it federal or state and local.

Oliver Wintermantel – Morgan Stanley

Okay, thank you very much. And I just have one question on Retail. Could you comment on your new market entries and how they performed for the last year and if you plan to enter more new markets this year?

Ronald L. Sargent

Let me ask Demos Parneros to handle that one. Demos?

Demos Parneros

Thanks Ron. Good morning. As you know, we''ve been entering a number of new markets. A few examples include Minneapolis, Houston, which is a bigger one, Austin, Kansas City, San Antonio and Omaha, and actually we''re quite pleased with the way that these new markets have opened up despite the difficulties out there, so no plans for any major big-bang markets but a continuation of the plans that we''ve got in place.

Oliver Wintermantel – Morgan Stanley

And in 2009?

Demos Parneros

2009, I think the total number is 50 or so and no major markets, just a continuation of the current strategy.

Ronald L. Sargent

But we just entered Las Vegas last week.

Demos Parneros

Yes, opened the first store in Las Vegas last week; off to a great start.

Ronald L. Sargent

And Tucson.

Demos Parneros

Tucson will be the next and then Reno, that we mentioned.

Ronald L. Sargent

Thank you very much. That’s very helpful.

Demos Parneros

Thanks Oliver.

Operator

Our next question comes from the line of Colin McGranahan with Bernstein. Please proceed.

Colin McGranahan - Sanford C. Bernstein & Co.

Good morning. Given that you''re not providing any guidance, Ron, maybe you could just tell us how you''re thinking about the economic outlook, what kind of outlook your economists had and what kind of outlook you expect in some of the key drivers in your business, whether that''s unemployment or industrial production or things like that. What''s your view going through the year?

Ronald L. Sargent

Well, Colin, as you know, I''ve never been good at predicting the economy. I was feeling a little more optimistic three months ago when we had this call.

From my perspective I think the economy is on life support, but I do think it will recover. When I look out I think there''s some early indications that things are getting better in our Retail business. I think when you look at our Delivery business, it''s really a function of job shedding and when you''re losing 600,000 jobs a month, it''s really tough to predict are we at the bottom or we''ve got a little ways to go.

In my heart of hearts do I think the business is going to get better as the year progresses? Yes, I think the economy will get better toward year end. There''s a lot of stuff going on to indicate that and a lot of stimulus activity to support that. But having said that, we''re planning on 2009 being a tough year all year long. I think when you look at our plan for the year it''s really to take care of customers, it''s hunkered down on expenses as well as capital, and I think it''s to selectively invest in growth ideas that are going to position us even better when this thing''s over. But I think 2009 is going to be an improving year, but not a good one.

Colin McGranahan - Sanford C. Bernstein & Co.

Okay. And then assuming things are bad and continue to be bad, you mentioned earlier that you''d had, quote, ""some dramatic changes to the expense base"" planned for the year. Can you talk a little bit more about what those might be and what kind of expense flexibility you have from here if things continue to deteriorate?

Ronald L. Sargent

Yes. I mean, we wouldn''t be talking about it unless it we''d already done it. We have been working on this for the last several months, and both Joe Doody and his business unit as well as Demos as well as Peter on the International side. We''ve been pretty aggressive in positioning the business for the sales that we have not for the sales that we expect, so it really touches every area of the business, every line on the P&L. I think you''ve already seen the squeeze on the capital side. Anything''s up for grabs with the exception of investing in growth for the future and taking care of customers. I think everything else we''re looking at. But I don''t see any dramatic restructuring or anything like that because I think we''re running the business pretty tightly day to day and we''ve already made a lot of those changes in the business.

Colin McGranahan - Sanford C. Bernstein & Co.

Okay. And then you also mentioned that the synergies, obviously you reaffirmed the $300 million, but the purchasing synergies in the fourth quarter were better than expected. Can you provide any more clarity? I know you''ve had significant headcount reduction in the Corporate Express legacy business, about 1,000 people, and as the purchasing synergies have come in better than expected, can you break down a little bit where you are and what''s working better?

Ronald L. Sargent

We''ve always said that the purchasing was probably the early days and one of the big ones. We also said that G&A would be a big part of the synergies, and then later we would get to systems integration and warehouse integration. And I think we''ve been fairly consistent. We still feel good that 40% of the $300 million that we expect to get by 2011 will probably be a 2009 number, another 40% in 2010 and then the remainder in 2011. So the next three years it''s like 40% of the $300 million, 40% of the $300 million and then we''ll have it all by year end ''11.

Colin McGranahan - Sanford C. Bernstein & Co.

Okay. And then just two quick follow ups for John. One, given your tax planning strategies are now in place, what''s the tax rate you expect for ''09? And secondly, on the interest expense, given you''re going to generate $1 billion of free cash flow and it sounds like use that to pay down debt this year, why would you extrapolate the $70 million that you''re going to see in the first quarter basically for the full year? Should interest expense be tapering down through the year?

John J. Mahoney

Okay, first on the interest expense, I agree with what you''re saying, but we''re paying interest at higher rates than we originally expected. The $1.5 billion was a higher rate bond issue than we had planned in the original guidance. And as you know, commercial paper is our cheapest money and that''s what we have the most flexibility to pay off quickly, so it will have less impact on the total.

So I think that overall we expect that through a combination of carefully paying down the debt and some of the activity we have in the public markets where the interest rate, if we do a public bond deal towards the end of Q1, the interest rate for that will likely be higher than the commercial paper it replaces, and that''s really what drives the difference. That''s what sustains the same rate of interest throughout the rest of the year.

Colin McGranahan - Sanford C. Bernstein & Co.

That makes sense.

John J. Mahoney

And your first question -

Colin McGranahan - Sanford C. Bernstein & Co.

Tax rate, now that you''ve finalized your tax planning strategy?

John J. Mahoney

I think the challenge with the tax rate is really that many governments are being much more aggressive in terms of looking at tax strategies. We''re expecting our tax rate will remain about the same for 2009 but really the wildcard is legislative activity so, as we sit here today, I would say about flat with this year.

Colin McGranahan - Sanford C. Bernstein & Co.

Thank you.

Ronald L. Sargent

Thanks Colin.

Operator

Our next question comes from the line of Dan Binder with Jefferies. Please proceed.

Daniel Binder - Jefferies & Co.

Hi, good morning. A couple of questions for you. You commented on North American Delivery to date. It sounded like International was slightly better. Just curious if you had any color on Delivery.

And then also it looks like, from my calculations, the Corporate Express organic local currency growth as well as the Corporate Express business in the U.S. may have been a bit slower than the core Staples business. I was wondering if you could discuss those rates and sort of highlight where the greater softness was there versus your core Delivery.

Ronald L. Sargent

Let me take the first one. I don''t think we''re seeing a big positive or negative trend in our Delivery business in the first quarter. Again, I think it''s really driven by job growth. Where we''re starting to see some improvement on the Retail side, I think it''s premature to predict improvement on the NAD side.

And the second one on CE and North America. Joe?

Joseph G. Doody

Yes, CE in North America, first, Dan, let me make sure everybody understands when you look at NAD growth, which we said was down about minus 9% in local currency, it was worse than that for both SVD and Quill - we''ve said down double digit - but better than that for our Contract business overall. And the Contract business, as you know, we split between our national accounts, SNA and our more mid-market accounts, SVA. Our national accounts was more consistent with our overall NAD number for the quarter, but our SVA was much better. It was more or less flattish. It''s our strongest business in that mid-market.

As far as CE is concerned, it is very consistent with more the larger Fortune 1000 and its sales in the quarter were pretty consistent with our core larger account business, so down pretty consistent with our overall NAD business.

Daniel Binder - Jefferies & Co.

Okay. And then what about CE for International? That looked a little bit softer.

Peter Ventress

On the Contract side, yes, we saw the headwinds, but probably later than in the U.S. In the fourth quarter CE, we were beginning to see a sales decline reflecting really what Joe said - the preponderance in the large accounts just ordering less. But at the same time we''re pretty pleased with our ability to win new accounts, and towards the back end of 2008 we probably had a more significant number of big wins than we had earlier in the year.

So encouraging on the sales acquisition, but just as tough on the existing accounts buying less and ordering less through us.

Operator

Our next question comes from the line of Gary Balter.

Ronald L. Sargent

Good morning, Gary. Gary? Hello. Erica, maybe we can move to the next caller so Gary is not there.

Operator

Our next question comes from the line of Kate McShane. Please proceed.

Ronald L. Sargent

Good morning, Kate. Erica, we seemed to have lost the connection. Could you check into that please?

Operator

Kate McShane, your line is open. Please proceed.

Kate McShane – Citigroup

I am speaking. Can you hear me?

Ronald L. Sargent

Sure. Thank you.

Kate McShane – Citigroup

I am sorry. You walked through the opportunities in real estate for the next few years. What do you expect for this year in terms of rent renegotiations and how much do you think rent expense could go down?

Ronald L. Sargent

Demos?

Demos Parneros

Sure. Good morning. I think to expect a lot in the current year is probably not very realistic. As you know, we are in longer-term deals, 10, 15 years, and to simply walk in and ask for a lower rent, it''s just not that simple.

I think the bigger opportunity for us lies ahead in the lease renewals that we mentioned earlier. Over the next few years we''ve got an average of roughly 100 lease renewals that we can make decisions on. We can choose to stay, renegotiate for a better price, in some cases downsize our stores where we''ve got some very large 25,000 square foot stores, particularly in some of our smaller markets.

We are seeing some impact this year from the stores that we''ve been renewing leases on over the last 12 months or so. So I''d say less this year, more in the ''09, 2010 and 2011 years.

Kate McShane – Citigroup

Okay, thank you. That’s helpful. And then with your Corporate Express acquisition I wondered if you could help us better understand how you''re able to maintain your synergy numbers despite the fact that the environment''s deteriorated so significantly? Just as an example, I know you mentioned that you combined orders to make some of the former Corporate Express orders more profitable going out the door, but I would assume these orders are still lower than the average Staples’ order.

Ronald L. Sargent

That''s true.

Kate McShane – Citigroup

Okay. So do you expect them to get higher over the next year and that''s why your synergy number''s still on target?

Ronald L. Sargent

The synergies, there are a lot of different moving parts. John?

John J. Mahoney

We''ve talked about the synergies being in three major buckets - buying synergies, G&A and then operating expenses, generally in supply chain.

As far as the buying synergies are concerned, while we are buying slightly less, that hasn''t had a material effect on our ability to get about $100 million of buying synergies.

Similarly, in the G&A area, most of those are really cost savings and frankly, because of the lower levels of volume, we''ve been able to take more variable G&A expense out, which has allowed us to sustain that rate of savings.

And most of the supply chain stuff are things that are really longer term. Some in the transportation and logistics areas we''ve been able to save more this year. And again, given the market environment, it''s given us a little bit more buying power with our providers and so, although the volume''s down a little bit, the rate''s probably a little bit higher.

So overall, I think that we expect that the synergies will achieve the targeted $300 million by 2011.

Kate McShane – Citigroup

Okay. Thank you very much.

Ronald L. Sargent

Thank you Kate.

Operator

The next question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed, sir.

Matthew Fassler - Goldman Sachs & Co.

Thanks a lot and good morning everybody. A couple of questions. First of all, just to understand the timing of the cost cuts, how many of the efforts that you''re talking about for 2009 would you say were in place for most of the fourth quarter of 2008? Is most of that truly incremental or did we see some of those efforts already reflected in the P&L?

Ronald L. Sargent

No, I think as we budgeted late in the year we kind of looked at the environment we''re going to have. And I think it''s hard to parse it out, but obviously we''ve been squeezing costs all year long and we''ll continue to do that. But no, I think the bulk of the impact was more of a 2009 impact than it was a 2008 fourth quarter impact.

Matthew Fassler - Goldman Sachs & Co.

Understood.

John J. Mahoney

And as you can imagine, Matt, there''s some costs associated with putting those cost savings in place, and they probably came pretty close to offsetting in the fourth quarter.

Matthew Fassler - Goldman Sachs & Co.

And are those costs basically digested at this point, John?

John J. Mahoney

They are.

Matthew Fassler - Goldman Sachs & Co.

Okay. And second question, you gave us some pretty clear color on your Retail trends quarter to date. I guess two follow ups from that. First of all, within Retail would you theorize perhaps that your business was particularly disadvantaged at holiday or lost market share at holiday and that the high single-digit trend that you saw really in Q2, Q3 and that you''re seeing now was more of the underlying trend?

And second, since you gave us an update on Retail, any color on the rest of the business, the Delivery and International first quarter to date would also be helpful.

Ronald L. Sargent

Well, I will ask Mike to --

Michael A. Miles, Jr.

Hey Matt. I think your hypothesis about the fourth quarter is probably accurate. I think we probably lost share in some of the consumer business at holiday, somewhat by our own initiative because I think we were not that anxious to compete for some of that very low margin or sometimes negative margin technology business that''s kind of the staple of our holiday business in the fourth quarter. We cut back on that and we saw that in the sales line, but you also saw the benefit of that strategy on the margin line for us. So I think the return really as the year turned over in January to a little bit better number on the Retail side reflects more of our kind of underlying core business.

With respect to the other two businesses, I think you heard kind of in the overview the fact that although we look at Retail numbers firming up a little bit, Delivery''s looking at a tough year as it''s so tied to employment. And as we continue to see the unemployment rate increase, NAD is going to have a real challenge with the smaller orders from existing customers, even though customer attention''s great and new customer acquisition remains strong.

Matthew Fassler - Goldman Sachs & Co.

Got you. And one final follow up on Delivery, your margins, again, held up pretty well relative to your sales numbers and you spoke about some of those drivers. That really started to be the case, I guess, in the third quarter when your profit performance looked terrific, particularly relative to your sale performance, which had started to move a bit more with the market. Do you feel like you still have some more room in Delivery in particular on the cost side to help weather those sales declines or is that going to become harder and harder?

Ronald L. Sargent

Joe?

Joseph G. Doody

Well, I think it becomes harder and harder as the sales declines become a little bit more severe. But clearly, we''ve shown in both the third, as you noted, and now again in the fourth some pretty good expense control. And we were leveraging in both the marketing expense G&A and also, I''d say, delivery cost as well in the fourth, and there''s room for that. However, as we look forward we''re taking on a large lower-margin business with CE, so the numbers you''re going to be seeing, obviously, from a margin performance standpoint for NAD will now go down as we look to build that back up to NAD''s levels over the next several years.

Matthew Fassler - Goldman Sachs & Co.

Got it. Thank you so much.

Joseph G. Doody

Thanks Matt.

Operator

Our next question comes from the line of Stephen Chick with Friedman, Billings, Ramsey. Please proceed.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Hi, thanks. Two questions - one is a little more of a follow up on the NAD trends, the down 10% for the quarter in sales and down 9%, it sounds like, in local currency and I apologize if I missed this, but my understanding is that January is probably the highest volume month of the quarter.

Ronald L. Sargent

That''s correct.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. So did the trends accelerate where January was actually down worse than that trend or is that the January trend? And then to that end, when you said that the trends post-quarter end have been consistent, is that kind of consistent with that trend as well?

Ronald L. Sargent

Yes. I think it''s consistent with the quarter that we just announced. I don''t want to parse out Delivery sales by week or by month, but I''d say the first five weeks of this quarter looks pretty consistent with how the fourth quarter was.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. All right. It sounds like January was pretty consistent with that, too, I guess. That''s what I guess is implied.

And second, related, John, to free cash flow, the free cash guidance of $1 billion and if I look at CapEx of $300 million, it looks like you''re expecting operating cash flow in ''09 of about $1.35 billion or so. Are you expecting the NOL or any other cash benefits to contribute to operating cash flow whether it be working capital or the net operating loss carryforward?

John J. Mahoney

Yes, I think that we''ve done a really nice job of having inventory get more productive. I think one of the advantages we do have is with a strong balance sheet we want to make sure that we are in stock for our customers. And so, as we endeavor to achieve that, to make sure that we get all the sales that we have a chance of getting, we''re not planning on seeing dramatic improvement in inventory in our cash flow guidance.

Regarding the tax rates, as I think we''ve described, the NOLs only affect cash, they don''t affect the tax rate because they''re part of purchase accounting. And we''ve said that we expect to see some of that cash in relatively modest amounts, you know, in the $20 or $25 million per year for the next couple of years and as a result it certainly isn''t going to be a big driver of fluctuations in the cash flow versus the guidance.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. So I guess, just so I understand, so in your operating cash flow thinking next year, it sounds like working capital benign or to a slight benefit maybe and then call it $25 million in NOL benefit? Did I understand that correctly?

John J. Mahoney

Yes, I''m trying to not be too precise because with the size of the cash flows and all the moving parts in all the businesses around the world. We''re saying generally speaking we don’t expect a big benefit from working capital and that the tax cash will not be material to $1 billion.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. And then related to that - two other things related to that. Your G&A guidance with amortization, I add them together it looks like it''s $535 to $555 million. Does that compare to what you just ended the year here for 2008 of $548 million? So you''re expecting, if I read that right, G&A to be flattish, maybe even down a touch in ''09. Is that right?

John J. Mahoney

I think that''s accurate.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. How is that when you got Corporate Express in not even half of ''08 and in the full year of ''09, how does your G&A end up being flat to down?

John J. Mahoney

Well, there are a number of elements. First of all, we reduced capital versus what it had been a few years ago, and a lot of the capital items like in software and technology have relatively short lives. Also, the purchase price allocation goes to a variety of different assets, some of which have short amortization lives and we are continuing to use some of the software that we wrote off in the third quarter at increased amortization rates over the short period of time that we''re using it.

Again, there''s a lot of moving parts there, but generally it includes the capital expenditure trend down over the last couple of years coupled with some of the shorter lives on the intangibles associated with the acquisition.

Ronald L. Sargent

G&A synergies, too.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. And then last, John, do you have kind of a pro forma rent expense number that would be annualized as we look at leverage ratios with rents and leases and so forth for the whole company?

John J. Mahoney

No, I don''t have that right handy with me here. I think that we''ve talked about the fact that rent has been deleveraging largely as a result of the decline from sales. And I think as Demos mentioned, we won''t see any material benefits associated with renegotiating rents in stores that would be enough to offset the decline in sales.

Stephen Chick - Friedman, Billings, Ramsey & Co.

Okay. All right. Thank you.

Operator

Our next question comes from the line of Gary Balter with Credit Suisse. Please proceed.

Gary Balter - Credit Suisse

Good morning. Some of the questions were numerical questions, so maybe John will follow up on them, but the general one, which is also a numerical question, is just looking at the math it looks like the impact from foreign currency and the interest expense is greater than the synergies that you''re going to get, so we''d lose, I don''t know, maybe $0.10 or so from that.

When you put all that aside and you just look at the operating trends in the business and we look at what we''ve seen in the last few quarters, we heard already that comps are a little bit better in Retail, etc., but what are some of the other drivers we should be thinking about that''s going to move the needle one way or the other, putting aside synergies, putting aside foreign currency, that we should be considering?

John J. Mahoney

Well, I think on the revenue side the new account acquisition and the continued sales of share wallet items in the Delivery business are going to drive revenues in NAD. In the Retail business, the initiatives in tech like Easy Tech and Copy & Print as well as the new sales models are going to be significant to help improve those trends. We mentioned that the market represents a good opportunity for us. With closures of a lot of stores across the country, that hopefully will make our stores more productive.
From the perspective of earnings and cash flows, we mentioned that we''ve substantially reduced our expense base. As we looked at our plan for 2009, we tried to, by looking ahead a whole year instead of chasing expenses down the way we did in 2008, make many more of our fixed expenses variable, which gives us more flexibility to drive improving expense rates really on every line. And from a cash flow perspective, I think the combination of the improvements that we have in our cash flow from operations and the reduced CapEx will drive our ability to sustain that $1 billion in free cash flow.

Gary Balter - Credit Suisse

So without putting words in your mouth, if you had the same sales trends and hopefully they stop at some point, but you had the same sales trends, the earnings would be slightly better because you''re more on top of expenses? Is that fair? Like earnings will be down, but they''ll be not down as much because expenses are under better control. Is that the way we should be thinking about it?

John J. Mahoney

Well, again, I think it''s all about what you assume for revenues and, because our visibility is poor, we''ve tried not to provide any guidance in terms of either revenues or earnings. And it feels like we''re getting narrowed in more and more to try and get guidance and I think that''s not where we want to be.

Gary Balter - Credit Suisse

And just on the minus 9% comp, how much of that is a function of the fact that Office Depot closed stores in some of your markets?

Demos Parneros

Not yet.

John J. Mahoney

Well, I think early on the stores are still operating in clearance mode and Demos probably has more visibility to that than I do. Go ahead.

Demos Parneros

Thanks, John. I don''t think there''s much impact at all, Gary. The stores are still open and while they''re almost completely out of product, in some cases they actually do pick up a little bit during the liquidation process, so I''d say no impact.

Gary Balter - Credit Suisse

So that could be a positive impact going forward?

Demos Parneros

Yes.

John J. Mahoney

We agree with that.

Ronald L. Sargent

Sure.

Gary Balter - Credit Suisse

Okay. Thank you.

Ronald L. Sargent

Thanks Gary.

Operator

Our next question comes from the line of Michael Baker with Deutsche Bank. Please proceed.

Michael Baker - Deutsche Bank Securities

Thanks. So two quick questions - one, on the synergies someone asked how you can still achieve the $300 million synergies in this tough environment; I''ll ask the other side, why couldn''t it be better only because it sounds like you said you were ahead of where you thought you''d be in the fourth quarter, yet you''re still sort of giving that same guidance? So wondering if you''re just being conservative and don''t want to get ahead of ourselves.

And then the second question, you had been asked about Corporate Express''s business, that that''s sort of (inaudible) business on the top line. What about on the margins? Are the margins down? We know that the margins drag to pull the company down because they''re lower margins, but what about Corporate Express itself versus Corporate Express last year, how are the margins trending in that business? Thanks.

John J. Mahoney

I will talk about the synergies Michael. We''ve talked about $300 million by 2011, and we''ve given you a pretty good idea of the run rate. And there are plusses and minuses associated with the environment, and I guess I would say that obviously in looking at expenses we''d like to get synergies to accelerate as much as we possibly can, but at the same time there are offsetting ideas. I don''t see us getting, in spite of our efforts, synergies dramatically above the rate at which we''ve talked about it, either in ''09 or going forward.

Joseph G. Doody

On the margins from CE business, no real significant improvement there, Michael. We''re working on actions that will do that in terms of both pricing as well as we''ve talked about increased average order and reduction of small orders and how that will have an impact on the margin performance ther