US Office Products Q1
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US Office Products Q1
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
US Office Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OFIS)") else Response.Write("(NASDAQ: OFIS)") end if %> UNION CITY, Ca., September 10, 1996/FOOLWIRE/ --- US Office Products reported Q1 earnings from continuing operations of $0.22 prior to their one-time, non-recurring acquisition costs. The non-recurring charges were lower than expected this quarter. It typically will be between $2-3 million and, this past quarter it was $1.7 million. After the charges, earnings per share for the quarter were $0.20.
The charges last year were much higher because they had bought a company called Mills Morris Arrow and, in that situation, they had to take all the bonus compensation that the seller of the business had promised his employees through the P&L.
They are very pleased with this year's results. They saw their operating margins double from a year ago to 4.8% and, in terms of sequence, in their 4th quarter last year they had put up numbers of 4.6%. So, despite the fact that historically US Office Products' Q1 is the weakest in the office products industry, the fact that they are highly diversified in their product mix and service the middle market customer has led them to have a tremendous quarter and tremendous momentum moving forward. They are very pleased that, unlike some of their industry competitors, they are seeing no problems with their growth or earnings. They are very comfortable with analyst estimates for Q2. They do not see the issues that are affecting Boise Cascade, Corporate Express, BT, Office Depot, Viking, etc. They are immune to that, they feel, because they have bought the companies with the best practices in the industry and they are thriving in this middle market segment. The superstores, mail order companies, and corporate segment have been focusing on the 0-25 and 0-50 employees segment. US Office Products focuses on companies with 25-500 employees and they believe that a lot of the weakness in their competitors' results is coming from the fact that they are getting beaten up by purchasing managers at the Fortune 1000 companies that they are all competing for. US Office Products does not compete for the Fortune 1000 customer. The largest customer in their system is $5 million. They have a total of 50 customers doing $1 million or more with them. As a result, the vast majority of their annualized run rate of $2 billion plus is coming from the middle market customer. Their average customer tenure, because US Office Products retail sites are local companies that keep their own names, tends to run at about 14 years.
Office supplies last quarter was 43.5% of their sales. Of that, 15-20% was paper sales. System-wide their paper sales are 7-10% so they are not having the problems that their competitors are having with declining paper prices. Office furniture, which is both the middle market segment plus contract and catalog furniture, had a very fine quarter at 19% of their total sales. School supplies, which enjoy their strongest quarters this past quarter and in Q2, were 17.8% of sales. Business equipment was 13% of sales -- that is largely sales of business equipment at their New Zealand and Australian operations (Blue Star) where they have a total systems approach to selling office equipment, supplies, and furniture. Coffee, beverages, printing, and miscellaneous categories was 6.7% of total sales.
They are very pleased that they have closed a number of their coffee and beverage company deals announced in June including the five companies that have a relationship with Starbucks. Starbucks has announced its move into selling coffee into the office place and US Office Products now has a 5-city exclusive relationship with them. They are looking to expand that relationship over time.
Their school supplies sales were very strong, in line with new all-time back to school enrollment records being reported in the news media. US Office Products says that they are the number one school supply distributor in the US with an annualized rate of sales in that category of $300 million due to some very good acquisitions they made in their "June Class."
Their Pacific Rim operations do not include the purchase of Whitcole's which occurred on the last day of the quarter. That is a company doing about $32 million in EBITD. They paid $220 million for the company and it's historical rate of sales for the year ending June 30th was $450 million. Whitcole's continues to have very good growth. US Office Products' market share in New Zealand is dominant. They received clearance from the New Zealand equivalent of the FTC. They have a very healthy share of that market and are gaining share each day now in the Australian market as they approach making some more hub and spoke acquisitions there.
US Office Products is well known by their acquisitions. They are pleased to be getting some recognition for the success they have been able to achieve in the operations. They have a 5-step program for acquiring companies. The first step they do when they acquire a company is to reduce the administrative overhead. They lower the company's banking and insurance costs; outsource certain functions relating to payroll, real estate, legal costs; so in a corporate services approach, they lower costs almost immediately to those acquisitions. Step 2 is to align the inventory of the company to match US Office Products' catalogs. They do this for four reasons: it optimizes gross profit because they are able to leverage their purchasing power, it optimizes the asset utilization, they increased the turns through the acquired company's warehouses, it enhances the customer service levels, and it has a cyclical effect - it then increases their purchasing power wo they can go back to the vendors with even more strength. Step 3 is to take the catalog and marketing program out to the companies. They have developed a custom catalog. Within 10 days they will issue their second edition of the catalog. It is a 5000 SKU catalog. What it does is focus the customers on key products and increases the gross margin through those companies. Step 4 is the merging of the spokes into the hubs. They have well over 19 companies that they have merged either various parts of the real estate or functions of those companies into hub operations, eliminating costs and increasing sales.
The one part of the program that they are unveiling now is the move to the district fulfillment center model. That is where they take a cluster of operating companies, or hubs, and they merge that into one warehouse and distribtion process. There is a difference in how they do it and how their competitors do it. With US Office Products, an operating company, those companies that they have acquired, will continue to perform the functions that touch the customer. The district fulfillment center focuses on a warehouse that can improve efficiency through technology and anything else that can be improved by scale. Some of the functions that the operating company performs are sales, customer service, credit and collections, local delivery. At the district fulfillment center they handle all the warehouse functions, the inventory, the picking and packing, delivery to the operating companies, computer MIS function at the district level, human resources, etc. They are rolling that system out. They have one district fulfillment center in place in the Mid-Atlantic area and have plans on the books for two in the next 8-12 months.
The savings are divided into three sections. The first section is "real-time" improvements which are going to happen as they grow regardless of acquisitions, when they come in, etc. It includes their catalog allowances and buying power. The larger they get, the more buying power they get and they start getting a better gross profit. They have seen that starting already. They think it is about 2 points in total and is a three year process that started with their fiscal year that just ended.
The second types of improvements happen related to an acquisition. Those are things like the SG&A savings (worth about 1 point) the direct purchases and inventory savings when they start aligning their inventory to the catalog (worth another point), and then there are spoke acquisitions where hubs start getting more spokes (another point) and lower their SG&A.
The final type of improvement is geographic improvements and those relate to the district fulfillment centers (2 points). * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |