The ODP Corporation

Good morning and welcome to the ODP Corporation's fourth quarter and full year 2020 Enhanced Earnings Conference call. All lines will be on a listen-only mode for today's call, after which instructions will be given in order to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations. Mr. Perrott, you may now begin.

Good morning, and thank you for joining us for the ODP Corporation's Enhanced Earnings Conference Call. This is Tim Peratt, and I'm here with Jerry Smith, our CEO, and Anthony Scaglione, our Executive Vice President and CFO. Also joining us today is David Bleich, our Executive Vice President and Chief Legal and Administrative Officer. As most of you know, given recent events, we have decided to push back our previously planned Investor Day to a date later in the year. That said, today we will cover both a review of our performance in the fourth quarter and full year 2020, and provide more insight into our strategy moving forward in 2021 and beyond. We will begin today's call with David Bleich, who will provide commentary regarding the public proposal made by USR, an entity controlled by Sycamore Partners, the owner of Staples, to acquire the ODP Corporation. After David's commentary, Jerry will provide a review of our accomplishments in 2020, as well as our focus for 2021, including our progress on our B2B pivot and digital transformation. Anthony will then cover our financial results for the fourth quarter and 2020, including insight to our maximized B2B retail optimization initiative. We will then move to Q&A. Before we begin, I need to inform you that certain comments made on this call include forward-looking statements. which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in the company's filings with the U.S. Securities and Exchange Commission. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as our earnings press release, presentation slides that accompany today's comments, and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investor.theodpcorp.com. Today's call and slide presentation is being simulcast on our website and will be archived there for at least one year. I will now turn the call over to ODP's Chief Legal and Administrative Officer, David Bleich.

David? Thank you, Tim. Before we turn to our performance for the most recent quarter, we will begin today with a summary of where we stand with regard to the public proposal made by Sycamore Partners, the owner of Staples, to acquire the ODP Corporation. On January 11, a Sycamore Partners subsidiary, USR Parent, which I will refer to as Sycamore, issued a press release publishing the contents of a letter it had sent to the board of the ODP Corporation proposing to acquire 100% of the issued and outstanding stock of the company for $40 per share in cash. Sycamore's proposal contemplated divestiture of our B2B business unit to a hypothetical third party buyer that is yet to be identified. Our board carefully reviewed the Sycamore proposal in consultation with our financial and legal advisors. The Board concluded that there is a more compelling path forward to create significant value for ODP and its shareholders without introducing the material regulatory risk inherent in Sycamore's proposal. The Board set forth that path in a letter to Sycamore dated January 19, 2021, which we published in a press release on the same date. Specifically, we stated that we are open to combining our retail and consumer-facing e-commerce operations with Staples under the right set of circumstances, and on mutually acceptable terms. We believe a joint venture that combines only the retail and consumer-facing operations of both Office Depot, OfficeMax, and Staples would be a viable path to both maximize the synergies and efficiencies for both companies, while equally sharing the risk and benefits between our companies, and would also help the combined business maintain competitiveness against nontraditional retailers and optimize ongoing choices for consumers. In our letter, we also noted the significant regulatory risk inherent in Sycamore's proposal, particularly in light of the prior failed merger attempt between the companies that regulatory authorities and the federal court blocked in 2016. In that regard, we recently received a civil investigative demand from the U.S. Federal Trade Commission, which is conducting an investigation of Sycamore's proposal. The CID makes clear that the FTC is not only reviewing the proposal's potential impact on competition with respect to the B2B businesses, regardless of any proposed divestiture, but is also conducting a thorough and broad review extending to every aspect of our businesses across every distribution channel. In our letter to Sycamore, we also called on Sycamore to expressly address the financial impact of the regulatory risk by committing to bear it through a customary hell or high water provision. A hell or high water provision is a customary clause incorporated into a purchase or merger agreement that generally requires the buyer to take all necessary actions, including required divestitures, to close the transaction and secure approval from competition authorities, as well as litigate any antitrust challenges. We have received no substantive response from Sycamore to our January 19 letter, but instead have been informed that Sycamore does not want to engage in substantive discussions until the regulatory process is completed. In the meantime, we continue building on our B2B strategy and other growth initiatives, which include our recent acquisition of BuyerQuest and other matters that Jerry and Anthony will discuss a little later. With respect to CompuCom, as previously disclosed, we have initiated the sales process, which is well underway. We do not intend to provide any update on this process until such time as it is completed. We hope this was a helpful recap of the current situation. You will understand that we will not be able to go further into our discussion than the information I have just provided, and so we would ask that your questions during the Q&A part of the call focus on the other matters discussed on today's call by Jerry and Anthony. On a separate matter, given these developments and other related matters in Q4, the company did not repurchase any shares in Q4 under its existing share repurchase authorization. And now I will turn the call over to our Chief Executive Officer, Jerry Smith.

Thank you, David, and good morning to everyone joining our call today. We appreciate you joining us this morning, and we hope that all of our listeners and their families are safe and healthy. I'm very happy to be here with you today to discuss the results for 2020 and the progress that we have made on our B2B pivot and digital transformation. We are building a very exciting future as we expand our value proposition and continue to position ODP to provide greater value to our customers and pursue growth in higher value markets. I would like to begin by discussing a performance in 2020 in the light of the significant challenges that were posed by the pandemic highlighted on slide five. 2020 was a year of unprecedented change as the world was turned upside down as the COVID-19 pandemic raged across our nation and the world, impacting the daily lives of us all. Conditions caused by the outbreak resulted in local restrictions and stay-at-home orders across the nation, and the operations of many businesses were paused, employees were sent home to work, and schools were closed for in-class learning. People quickly were forced to adapt to how they interacted with one another, how they worked, and how they learned. Businesses and consumers needed to be supported in multiple ways, with different products and services, and in many cases, different environments. The protocols for safety and the need for connectivity and collaboration became top of mind as individuals and businesses shifted away from the offices and schools into a work-from-home and learn-from-home environment. Needless to say that this amount of change and uncertainty brought about in such a short period presented significant challenges for everyone in almost every industry. For ODP, this also presented unique challenges, and as we look back on 2020, I'm happy to report that our team rose to meet these challenges. Remaining true to our core tenets, our team focused on meeting the rapidly changing needs of our customers using our expanded value proposition and omnichannel presence to help our customers thrive through the pandemic. Our execution was outstanding during this unusual period, resulting in solid operating performance and free cash flow. Additionally, we remain steadfast in our journey to build a more valuable company by making significant progress on our B2B pivot and digital transformation, positioning ODP for a more prosperous future. This would not be possible without the relentless efforts of our entire team. And I'd like to say thank you to all of our associates for the continued commitment in supporting our customers throughout the pandemic. I can't express enough gratitude to our team in living up to our 5C culture, serving customers and supporting our communities during the challenges posed by the COVID-19 outbreak. As shown in slide six, we continue to set the highest standards for corporate responsibility, investing in and giving back to our communities throughout the year. To help with the pandemic conditions, we donated $1.5 million to Feeding America's COVID-19 Response Fund, supporting local food banks across the country as they distributed food to communities in need. We also kicked off our Keep Schools Going campaign, connecting students with the tools and resources they need to learn from anywhere and teachers with the supplies they need to continue to engage and inspire students. And we continue with our Start Proud program, donating school supplies in support of students and teachers. In 2020, we also initiated our Elevate Together program in support of minority-owned businesses and continue to expand our diversity and inclusion efforts in the company. Additionally, we remained a strong steward of the environment, continuing with initiatives reducing greenhouse gas emissions. I'm so proud to be the leader of a company with such a strong commitment to our communities, the environment, and a culture that elevates us all. Now turning to slide seven. As we begin to discuss our accomplishments for 2020 and our focus for the future, I wanted to share with you our core strategic tenets for our path forward. These tenets act as our guide as we address the challenges that have been present in our industry, from maturing product categories to declining overall macro retail trends, to now the challenges posed by COVID. And over the past several years, as you know, we've been taking action. We've been evolving our business improving our risk profile and expanding our value proposition by leveraging our strong B2B platform to meet our customers' growing needs. This evolution has positioned us to pursue growth in higher value end markets with the right assets, right relationships, and the right team to execute as we create a more valuable company for our stakeholders. The first tenet is focused on optimizing our retail footprint because we know the low-cost model wins. We have taken action in all areas of our business, improving our cost structure through targeted initiatives, including our business exploration program that has resulted in cost efficiency throughout our entire business. We've also initiated our maximized B2B plan that optimizes our retail footprint, lowers our lease exposure, and helps us build a more scalable cost structure in the future. Next, we are flexing our model to move into higher growth opportunities. including expanding our value proposition to include product categories beyond our traditional offerings. Customers are asking us for more, be it more personal protective equipment or PPE, or more cleaning and break room supplies. We're also growing in our office furniture and workspaces to support work from home and technology, including peripherals, to enable remote workforces and remote learning. These are all categories driving growth in our business as we are evaluating opportunities within these and other related categories, specifically working toward researching other areas where we'd have a right to win and the right partnerships to succeed. We're also continuing to evaluate additional high-value growth in one of our key assets, our supply chain. In the current environment, customers recognize the valuable capabilities that our supply chain provides, and we are continuing to look at ways to optimize what we have to offer. And lastly, we're evolving into higher value businesses. This is a key component of our future growth. As you've heard and seen in our recent press releases, we are building and driving a B2B digital platform experience that combines the physical assets of our B2B ecosystem with a new digital platform designed to meet the needs of our current and future customers. This positions ODP to participate in a much larger growing and dynamic market. And as you will see, we are moving in that direction as we are executing our B2B pivot and digital transformation, positioning us to leverage our robust assets to pursue growth in a large business commerce market. Also embedded in everything we do is our 5C culture. We are very proud of the winning culture we have created at ODP, and it starts with the customer at the center of all we do. We cultivate the commitment of our employees encourage a change culture, and reward creativity, and perhaps most importantly, our caring culture for all stakeholders and the strong support and involvement in our communities. I am very proud of the culture that we have created. It is also a useful tool as we recruit new talent to our organization to help us reach our goals. Turning to slide eight of the many accomplishments in 2020, perhaps the most important was our focus on safety. maintaining a safe environment is and remains our top priority. We took several actions last year at the beginning of the outbreak to enhance safety measures for our employees and customers. We implemented safety measures in our operations and in-store locations, offering curbside pickup options at most locations, expanded our use and availability of PPE, and regularly sanitized our facilities. We have continued these actions to enhance safety protocols to help protect our employees and help create a safe environment for our customers. Turning to the highlights for the year, despite the challenging conditions posed by the pandemic, the powerful combination of our low-cost model and balanced channels to market have helped us meet the evolving needs of our customers during this unusual time. This combination, coupled with our team's strong execution, resulted in solid operating results and free cash flow generation in 2020. We also expanded our value proposition throughout the year to meet our customers' evolving needs during the pandemic. Not only did we leverage the diversity of our channels, both our digital and physical channels, we also expanded our product set, including launching a new personal protective equipment or PPE category. We also support our customers through our technology, workspaces, and cleaning and break room product offerings, and flexed our supply chain and distribution capabilities to serve our customers anywhere, whether working or learning remotely, or in the office or at school. Managing our supply chain with the assets we own has allowed us to reliably serve our customers in all locations. We also made significant foundational progress on our B2B pivot throughout the year, and most recently on our digital transformation initiatives. We invested and expanded our distribution footprint, expanding our influence with business customers, improved our supply chain relationships and capabilities, And we recently made significant progress on our digital transformation. As I will describe in more detail shortly, more and more business customers are demanding an end-to-end integrated digital platform solutions in order to more effectively manage their businesses. We are evolving our platform, combining our physical assets with a new and modern digital experience in order to position ODP to meet these needs and capture growth in the B2B commerce market. And lastly, we further enhanced our balance sheet, repaying our term loan during the year and entering into new financing. Our balance sheet continues to be a strong asset as we evolve and invest in our business. Turning to slide nine, as we've echoed throughout the year, the pandemic has impacted the business environment and altered, at least temporarily, the way most of us work, learn, and live. Several businesses have paused to reduce operations, and many schools have either restricted in-class teaching are moved to a hybrid environment. In fact, even at the state, over half the school systems we serve have yet to reopen for in-class learning. This environment has shifted product demand and channel mix in our business, but we've been able to leverage our balanced ecosystem, including our supply chain, distribution flexibility, and expanded product portfolio to address these evolving needs. At the heart of our ecosystem, serving our customers is our unique and reliable supply chain. We have one of the largest and most scalable supply chain operations in North America, consisting of multiple distribution centers, cross-docs, a large private fleet, and an established network of third-party and international freight arrangers. Our supply chain assets give us the ability to consistently and cost-effectively serve customers at home, in the office, or through our retail facilities. And in many markets, we provide next-day and even same-day delivery. During the pandemic, supply chain reliability and capacity has been a significant challenge for many, and the capabilities that we have developed have positioned us to reliably serve customers when others can't. We intend to invest in our capabilities, leverage our supply chain to serve our existing customers and our future customers on our B2B digital platform. Another key attribute of our ecosystem is our balanced routes to market, providing options for our customers to source the products and services they need and where they need them. We have a direct supply chain serving our large enterprise customers, a robust e-commerce platform serving both businesses and consumers, and retail locations offering the convenience of buy online, pick up in store, or BOPUS, and curbside pickup options. Our growing set of products and services was another key attribute in positioning us to meet the evolving needs of our customers. Not only do we provide the official office supplies that we are well known for, we also have a wide variety of products to support our customer work and learning from home needs, as well as cleaning products and PPE supplies. We also provide a broad set of services including copy and print, as well as technology services. We continue to evaluate launching new categories, leveraging our capabilities and customer relationships. Slide 10 highlights the dynamics of diverse routes to market, and how they work together to help meet our customer needs. During this unusual year, we experienced increased demand in our retail channel and in our BSD e-commerce channel as customers sourced the products they needed to be effective and safe working or learning from home. Our retail team did a phenomenal job under difficult circumstances to remain nimble to serve our customer needs. This strong demand in both channels helped to offset the lower demand in our contract and technology services channel as many enterprises closed their offices and schools closed for most of the year. Putting this into perspective, slide 11 highlights how our growing digital presence and omni sales helped us to partially offset some of the COVID impacts. In total, demand in our e-commerce channel increased 15% year over year, and our total omni demand, which includes BOPAs, ship from store, and same-day delivery increased about 27%. This is a true testament of how our digital and omnipresence helped to meet the needs of our customers during the pandemic. As a component of this increase, demand for our BOPUS offering increased 75% in the year. E-commerce traffic and mobile traffic were also up double digits. Slide 12 highlights the importance and value of our expanded product portfolio. As I mentioned, we've been driving stronger demand in our non-traditional product categories, and this has never been more important than in 2020. As many of our customers are working from home and many students and teachers are participating in distance learning, demand for products supporting our customers in this capacity have been very strong. Technology products and communication peripherals were up 18% in the year. Home office categories and workspaces and furniture experienced strong demand, up 8%. Cleaning and break-in supplies also experienced a sharp increase in demand of over 20% year-over-year. Our new PPE category that we quickly launched in the second quarter also experienced very strong demand. This strong demand in these areas helped to offset weaker demands in our copy and print category as in-store traffic was impacted due to COVID restrictions and local ordinances. In total, our expanding value proposition has led to our adjacency categories comprising about 45% of total sales in our BSD division. As we continue to execute our growth plan, we expect this percentage of total sales to grow over time. As shown on slide 13, the combination of all these factors working together helped us drive solid operating and free cash flow results against an extremely challenging business environment. We delivered $300 million in adjusted operating income and over $470 million in adjusted free cash flow for the full year 2020. I am proud of our team for the continued dedication and commitments in driving these outstanding results. When we step back and look at our business progression over the past few years, as shown on slide 14, you can see how our B2B and low-cost focus is transforming our business model. B2B revenue is now comprised approximately 60% of our total revenue up from about 49% three years ago. Our efforts to diversify our product portfolio outside of our traditional categories have resulted in growth in our adjacency product categories. And our low-cost model focus, including efforts through our business acceleration program and other cost efficiency measures, have significantly improved our cost structure. We are accelerating this evolution as we initiated and executed our maximized B2B retail optimization plan, and complete our B2B pivot and digital transformation, moving into higher value and scalable business models. Another key accomplishment is our recent progress on our B2B pivot and our digital transformation. We have taken several steps, both recently and in the past year, on our evolution to become a leading B2B platform company. We initiated our Maximize B2B plan that I mentioned previously. This plan helps to optimize our retail assets reducing our overall lease liability exposure over time, generating cash to help fund investment in our future, and provides more flexibility to enhance capital returns to shareholders over time. We executed several B2B-focused corporate actions, including our holding company reorganization, launched a strategic review to maximize the value of CompuCom, added to our adjacency categories, and improved our supply chain capabilities. And as you have seen through our recent announcements, We have added to our B2B and tech talent pool, adding key team members to help lead us through our digital transformation. We've also taken several steps to position the company to address higher value and growing market opportunities, making a key technology acquisition and forming a collaboration with the most respected technology companies in the world. In all, we're making strong progress on creating a more valuable company and improving our position to pursue profitable growth. Now I'd like to provide some insights to your head. 2021 will be a pivotal year and our bridge to continue to grow a more valuable company. And consequently, we believe helping deliver greater shareholder value as we work to combine the power of our B2B assets with our expanding digital presence to meet the expanding needs of our customers, suppliers, and partners. On slide 17, we highlight our areas of focus in 2021 that supports accelerating our B2B pivot. There are four key areas that work in tandem to support our goals throughout the year in accelerating our pivot and driving growth on our B2B platform. First, as we've mentioned, we will continue to optimize our retail business by executing our maximized B2B plan and continue to invest in growth in our end-to-end B2B business, including our BSD segment, supply chain, and through our expanding digital capabilities. Next, we will continue to invest in one of our key assets, our supply chain, improving our capabilities and capacity to serve our needs and the needs of our B2B customers. This creates the opportunity to drive exciting and valuable future growth engines and support for our digital transformation. Finally, we also expect to complete our strategic review of CompuCom to optimize value, either selling or improving the trajectory of this business. And perhaps most importantly, we will continue to drive our digital transformation, create a new and modern value-added experience for our customers, suppliers and partners, and leveraging our physical B2B assets. At a high level, as we reduce our retail exposure, we are investing to drive growth on our B2B platform, leverage our supply chain to serve existing and new customers, and complete our B2B pivot through a modern digital platform experience allowing us to pursue growth in the larger and profitable B2B commerce market. Continuing on our B2B transformation, I will spend a few moments on how our BSD supply chain and digital transformation will continue to accelerate over the next few years. Turning to slide 18, I will spend a moment on a few of our execution priorities for BSD. As we discussed starting in the Q2 of 2020, we experienced a significant amount of pressure in our BSD division related to the effects of COVID causing disruptions in the businesses and cancellation of in-class learning in schools. In fact, even today, well over half the K-12 and higher education school systems that we serve remain closed to in-person learning, impacting one of the largest industry components in our contract channel. Our business is well positioned to recapture growth and serve our education customers as schools begin to reopen in 2021. In addition to the natural rhythm of components of our business recovering post-COVID, we're focused on driving our growth priorities. We're continuing to drive growth in our adjacency categories, expanding our value proposition, and capitalizing on the strong demand for technology, workspace solutions and furniture, cleaning and break room, and PPE. We're also ready to help our customers as they return to work. implementing smart and safe facility solutions and ergonomics to enable businesses to operate and employees to remain safe. We are also evaluating bringing new product categories to market with strong affinity to our existing business that can be leveraged through our supply and distribution capabilities. We're also leveraging new tools and sales processes to improve customer experience and drive growth in existing categories. And of course, we remain committed to driving our low-cost model. Moving on to our supply chain as shown on slide 19. Our supply chain represents one of our key B2B assets and creates a significant competitive advantage in how we reach and serve our customers today and tomorrow. It consists of a large private fleet of over 1,000 vehicles, over 9 million square feet of space in distribution centers and cross-docs, and numerous third-party relationships to enable us to deliver reliably to our customer base. Our customers are also realizing the logistics capabilities our supply chain offers, and they're asking us for more. We've entered into several supply chain logistics agreements, beginning first with a few vendors and now to a small number of third-party customers. The contribution of our supply chain as a service to our overall business is still relatively small today, but the margin and growth opportunity is promising. With these opportunities and the critical role that our supply chain assets play in our B2B platform, We are investing with discipline in our capabilities organically and evaluating inorganic opportunities. These supply chain assets and our strong market presence in BSD have us well positioned to drive growth on our BDB platform. Enhancing this position, we're executing our digital transformation initiatives, investing in and creating a powerful, integrated BDB digital platform to deliver greater value to existing and new customers. As shown on slide 21, we are building an integrated source-to-settle digital business platform that when coupled with our robust suite of B2B physical assets, strong customer relationships, and deep knowledge of B2B commerce requirements creates a strong value proposition for both buyers and suppliers. Customer demand for these services are very compelling as B2B purchasing is rapidly moving online and procurement organizations are beginning to embrace end-to-end digital sourcing and purchasing. And for suppliers, they need B2B-grade e-commerce technology and flexible supply chains to remain competitive. Leveraging the assets that we have put in place over the last several years and combining this with our new digital platform have us uniquely positioned to drive customer value and pursue growth in this high-value and growing industry. We are excited about how these initiatives position us to positively disrupt the over $8 trillion B2B commerce market in the U.S., of which today less than 20% is digitally enabled. We have made significant progress on these efforts. We have been systematically and methodically executing our digital transformation initiatives, benefiting each of our businesses and further strengthening our core. An overview of our recent progress on our digital transformation initiatives is shown on slide 22. These accomplishments included adding key talent to our team, accelerating our technology development with an important acquisition, and forming a collaboration with one of the world's most recognized technology companies. I want to provide additional color on these. First, as shown on slide 23, we had a key talent enhancing our team's capabilities with deep B2B technology and industry experience. We are thrilled with the team we've built thus far. We've attracted Prentice Wilson, a proven industry veteran and former head of Amazon business, to our team to lead our digital transformation go-to-market efforts and scale our new technology business aimed at transforming how businesses of all sizes buy and sell. Prentice, coupled with the team he's building, joins Terry Leeper, who came on board as our chief technology officer last year, both of whom created a powerful blend of talent to drive our digital transformation efforts forward. Along with the talent we are attracting organically, we're also looking at ways to accelerate these efforts and recently announced that we acquired BuyerQuest, a recognized leader in cloud-based enterprise security-to-pay software solutions. As shown on the next slide, this acquisition accelerates our technology development path, immediately enhancing our B2B platform capabilities and customer experience. BuyerQuest is a world-class company in the PDP software market, managing billions of dollars of monthly spend for some of the world's most reputable organizations. Building on the investments we are making and helping to expand the reach of BuyerQuest positions us to drive efficiencies for customers as we combine their procure-to-pay platform with our digital commerce technology and supply chain capabilities. Next, on Monday, we announce a strategic collaboration expanding our long-standing relationship with Microsoft teaming up with them to help transform how businesses buy and sell. Our collaboration aims to bring the power of our new digital technology platform to Microsoft Dynamics 365 Business Central customers to help them realize immediate procurement efficiencies in automation and positioning ODP to further penetrate a very large market. Additionally, as part of this collaboration, we will leverage Microsoft Azure to migrate our existing workloads and legacy systems, driving efficiencies as we scale. We are very excited about this collaboration and it's further proof of our evolution. Our broad reach to B2B customers, advanced distribution capabilities, and new technology platform development, combined with Microsoft's capabilities and technology know-how, positions us to bring solutions to the market and further capture growth. Before I turn the call over to Anthony, I want to highlight some important aspects of our business that gives us the right to win and positively disrupt the $8 trillion business commerce market. First, we recognize that more and more customers are looking for an end-to-end integrated digital solution for their procurement requirements that leverage key components of an enterprise supply chain, distribution and procurative pay functionality. In addition, there continues to be unnecessary friction in end-to-end supply chains and procurement functions causing lost revenue and expense leakage. By combining our robust set of physical assets that we discussed earlier, including our supply chain and distribution platform with the investments we are making in our digital assets, positions ODP to bring value to customers and drive future growth, helping customers across the e-commerce and e-procurement landscape. Additionally, I would point out that by building this integrated platform and leveraging our capabilities, we are beginning to attract other companies, namely suppliers, who want to work with us to enhance and expand their reach in the market. And of course, as I mentioned, we have the pieces and key team members to further drive this effort. While we are still in the early innings, we are thrilled with our progress and very excited about our future. With that, I will now turn the call over to Anthony for a review of our financial results.

Thank you, Jerry, and good morning, everyone. I'm happy to be here today to discuss our financial results for the fourth quarter and full year 2020 and the progress we are making on our B2B pivot and digital transformation. As I begin, I'd like to say how proud I am of our entire team for remaining focused against a very difficult economic backdrop. As I reflect on the year, delivering on one of the key priorities that I outlined when I joined as CFO, our low-cost model approach helped to offset many of the challenges of the pandemic while we continue to support our key initiatives across our platform in support of our B2B pivot, improving our position to drive long-term growth. And it's not only what we achieved, but how we achieved it, as our team lived the 5C culture, a dynamic and innovative culture that cares about people and the communities we serve. I want to thank all of our associates for delivering in 2020. Turning to the highlights of our financial results as shown on slide 28, Consistent with previous quarters, we have provided our results on both a gap and adjusted basis. Our financial results in the fourth quarter continue to be impacted by conditions caused by the COVID-19 pandemic, the effects of which intensified during the quarter. A rise in COVID infections in the fall resulted in continued local and state restrictions and a reduction in business activity overall. The rise in cases also impacted the pace of school reopenings. which was slower than expected, with half of the school systems across the nation remaining closed to in-class learning. As you heard from Jerry, school systems represent one of the largest industry categories in our BSD contract channel. All of these factors impacted our top-line revenue results. However, our cost discipline helped partially offset these impacts and helped us drive quarterly cash flow results in line with our expectations. In addition, by managing our inventory in key categories with added discipline given the headwinds, we were able to keep key products in stock with the right sales throughput, reducing the need for significant price adjustments. Turning to the quarterly results, total revenue of $2.3 billion in the fourth quarter was down 9% over last year, largely driven by the effects of COVID-19, resulting in lower sales in all three of our reporting divisions, as well as 153 fewer retail stores in service relative to last year. Included in the total store closure amount for the year we closed 90 stores during the fourth quarter. Additionally, as the pace of school reopenings were impacted due to COVID, the demand shift for some of the back-to-school selling season from the third quarter did not materialize as anticipated during the fourth quarter. Partially offsetting these impacts was our balanced channel approach and broad product assortment, both helping us address evolving needs of our customers. This approach gave us the ability to handle changes in our channel and product mix. with strong demand for work and learn-from-home products, driving increases in our e-commerce and omnichannel sales year over year. For the quarter, GAAP operating income was $21 million, down from $74 million last year. Included in operating income was $15 million in merger and restructuring charges, primarily associated with our maximized B2B restructuring plan, and $8 million of non-cash asset impairment charges, mostly related to operating lease right-of-use assets, associated with planned retail store closures. Excluding these and other items, our adjusted operating income for the fourth quarter was $44 million compared to $92 million in the same period last year. Unallocated corporate expenses were $30 million in the quarter up versus the prior year. Adjusted EBITDA was $89 million for the quarter compared to $156 million in last year's pre-COVID fourth quarter. This includes adjusted depreciation and amortization expense of $45 million and $50 million in the fourth quarter of 2020 and 2019, respectively. Excluding the after-tax impact from the items mentioned earlier, adjusted net income for the fourth quarter was $30 million, or 55 cents per diluted share. Despite the continued challenging conditions, Q4 free cash flow was in line with expectations. Cash used from operating activities was $4 million in the quarter, which included $15 million in restructuring and integration costs, as well as a cash tax payment of approximately $15 million. This cash tax payment is in contrast to a $44 million AMT tax refund that we received in last year's fourth quarter. For the full year, normalizing for timing, the year-on-year difference in cash taxes was an inflow of $46 million in 2019 versus an inflow of $14 million this year. Going forward, we do not expect tax refunds to be material. Capital expenditures in the quarter were $14 million compared to $27 million in the prior year period, reflecting lower investment in our retail channel while continuing investments in our B2B platform and e-commerce. Turning to slide 29, I've highlighted some key performance measures for the full year 2020. We delivered impressive results against an extremely difficult backdrop caused by the pandemic. We leveraged our low-cost model, utilized our diverse channels to market, and expanded our product portfolio to help offset the COVID impacts, resulting in solid operating results and very strong free cash flow. Customers look to ODP for more than just their core office supply needs, resulting in our adjacency category growth as well as expanding supply chain reach. We also maintained and further enhanced our balance sheet throughout the year, repaying our term loan and refinancing our line of credit. Total company sales for the year totaled $9.7 billion, a 9% decrease compared to the prior year. The decrease is primarily due to lower sales in our DSD and CompuCom divisions related to the conditions caused by the pandemic, as well as fewer retail stores in service. More specifically, sales in our BSD contract channel were impacted by business and school closures throughout the year. And CompuCom sales were impacted by business disruptions and project delays, including our technicians' access to key client sites. Our diverse distribution channels and broad product portfolio helped to offset some of these impacts. As reflected on a full-year gap basis, we recorded an operating loss of $252 million compared to operating income of $191 million last year. The difference compared to last year was driven by a $375 million increase in non-cash asset impairment charges, including $363 million in non-cash charges related to Goodwill and other intangible assets that we recorded in Q2. Excluding these and other items, our adjusted operating income in EBITDA for 2020 was $300 million and $491 million, respectively. An impressive result given the challenging business conditions. Excluding the after-tax impact from the items mentioned earlier, 2020 adjusted net income from continuing operations was $189 million or $3.50 per share compared to $228 million or $4.13 per share in the prior year. All amounts have been adjusted for the reverse split we enacted during Q2 of last year. Finally, for the year, we drove very strong cash flow results, with cash provided by operating activities of $485 million, which included $57 million in cash costs associated with our restructuring programs. Including the $68 million in CapEx investments in the year, we generated adjusted free cash flow of $474 million for 2020, compared to $310 million in the prior year. I would like to cover our business unit performance, starting with our BSD division on slide 30. As a reminder, BSD is the primary component of our B2B integrated distribution platform, serving large enterprise customers, including education customers, to small and medium-sized businesses. The business consists primarily of serving customers through both our contract and direct e-commerce channels. As we discussed, the outbreak of COVID-19 caused significant business disruption for our business and education customers. As we exited Q3, there was some optimism that business conditions would improve heading into the holiday season. However, we saw conditions that intensified in the fourth quarter as the infection rate rose, impacting businesses and further delaying school reopenings. Reported sales in the quarter for BSD were $1.1 billion, down about 10% relative to last year. Total 2020 DSD sales were $4.7 billion, down 11%. As I stated, our channel mix and product breadth helped offset some of the negative impacts from COVID. In the quarter, demand increased over 15% in our e-commerce channel. Demand also increased for products supporting work and learn from home, with technology sales up over 33% in the quarter versus last year. Our total adjacency categories grew relative to last year and comprised approximately 45% of total revenue in our BSD division. This balance helped to partially offset the impacts related to the pandemic, which negatively impacted core supply categories. While we expect these effects to continue through much of the first half of the year, we remain optimistic with the rollout of vaccines and through conversations with our business and education customers. The key is we are continuing to monitor the pace of business reopenings and, importantly, school reopenings, as this will have an impact to the speed of our top-line recovery in 2021. As we stated earlier, the pace of school reopenings is crucial, as this is one of our largest industry sectors we serve today. And currently, many school systems continue to remain closed for in-person learning. Operating income was $18 million in the fourth quarter, compared to $69 million in the prior year period. The decrease in operating income versus last year was related to the impact of COVID impacting sales and product mix, partially offset by SG&A cost improvements related to our cost efficiency programs and the contribution of our e-commerce channel, which continues to perform well. Turning to slide 31, our retail division's performance in the fourth quarter and for the year was terrific. During the COVID pandemic, our retail presence has played an important role in reaching customers for their essential needs. be it work and learn from home setups, technology, or PPE. Our retail team also quickly enacted curbside pickup options and implemented measures to safely serve customers during the pandemic and served as an important access point for our business customers. Reported sales in the quarter for our retail division was $951 million, which was down 6% from the same period last year, largely driven by 153 fewer stores in service as compared to last year. Included in this amount was 90 store closures during the fourth quarter of 2020. In Q4, as most of the school systems in the US were not open for in-person classroom learning, we didn't experience as strong of a shift in back-to-school demand from the third quarter as we had anticipated. Offsetting lower store traffic was higher average order volume and sales per shopper, helping drive stronger performance during the quarter and year. This lift in sales per shopper was driven by increased demand for work and learn from home products, supporting business customers and consumers, as well as essential cleaning products, including PPE, to address customers' needs posed by the pandemic. Categories such as furniture, technology, peripherals, and cleaning products saw increases in demand in the quarter and year, which helped to offset lower demand in office supply categories and in copy and print. The combination of our curbside pickup option and BOPIS offering remained popular, with BOPIS demand up over 50% in the quarter, as customers chose the convenience of this option to limit time spent in the store. Ship-from-store and same-day deliveries were also up, highlighting the flexibility in our delivery capabilities. We once again delivered strong operating performance. Operating income was $50 million in the fourth quarter, up 47% compared to the same period last year. or as a percentage of sales, a 190 basis point improvement in margins. Operating income was up 42% for the full year, highlighting strong performance throughout the pandemic. Helping to drive this performance was an improved labor operating model that was implemented at the beginning of 2020, driving cost efficiency while enhancing customer service as evidenced by our improvement in our net promoter scores. These helped to lower our cost to serve. The efficiency initiatives along with the improvement in distribution and inventory management costs, and lower operating lease costs as a result of store closures, all contributed to our improved operating performance. Looking at slide 32, we highlight the performance of the CompuCom division. Sales in the fourth quarter were $207 million, down 13% over last year, and $854 million for the full year 2020. The conditions related to the COVID pandemic continued to negatively impact CompuCom's revenue performance in the quarter and year, affecting service volumes and product sales, but we saw incremental improvement as we closed out the year. The CompuCom division reported operating income of $4 million in the fourth quarter of 2020, compared with $9 million in the prior year period. Cost efficiency measures helped lower SG&A, partially offsetting the reduced pull-through of lower sales. Despite the performance challenges, CompuCom's support for its customers during the pandemic has been stellar, and their core competencies and support platform has them well positioned for the future. CompuCom's pipeline of new business remains solid, and the support they have provided to customers can be seen in their strong contract renewal rates of 93%, in addition to 10 new logo customers gained in 2020. And as we recently reported, Our board of directors announced that as a result of business review of CompuCom, management has initiated a process to explore a value-maximizing sale of our CompuCom division to help maximize CompuCom's full potential and drive forward its future value and success. We are still in the early stages of that process, and the interest thus far has been high. We plan to further communicate our progress as appropriate. Now turning to the balance sheet and cash flow highlights as shown on slide 33. We ended the quarter with total available liquidity of approximately $1.7 billion, consisting of $729 million in cash and cash equivalents and $934 million of availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $378 million, primarily comprised of our long-term IRB bonds. Our balance sheet remains a source of strength and provides us flexibility as we execute our strategy and pursue growth. As I mentioned earlier in my remarks, cash flow was in line with expectations in the fourth quarter, despite the challenges in the business environment and the investments we are making in the business. I will point out that despite the challenging conditions in the year, we prudently managed cash through strong working capital improvements, including solid inventory management, resulting in adjusted free cash flow generation of $474 million in 2020 versus $310 million in the prior year. Now I would like to spend a few moments and share more insight with you on our maximized B2B retail optimization plan as shown on slide 34. As you heard from Jerry earlier, we are accelerating our B2B pivot and digital transformation, expanding our value proposition and driving new growth engines for the future. This evolution leverages the strong set of assets that we have developed and the relationships that we have built over many years, creating the opportunity to extend our digital platform to a much larger and growing market. One of the foundational components supporting our growth strategy is our maximized B2B restructuring plan. This plan, which we announced earlier in 2020, is a multi-year effort designed to optimize our retail footprint unlock underperforming assets, and shift these resources into our B2B business, generating higher longer-term returns. Through this plan, we will de-risk our balance sheet by reducing the average duration of our retail lease exposures while generating significant cash flow to help fuel investments in our B2B growth strategy and provide opportunities to enhance future capital returns to shareholders. The evaluation criteria and KPIs are shown on slide 35. maximizing cash flow and reducing least liabilities are at the Center driving our evaluation criteria we evaluate each location with a store level for wall castle maximization review. Our decision making process evaluates least terms and conditions working capital opportunities, including inventory and the percentage of sales recapture at adjacent stores. The decision to keep a store open or close a location is then based on which path maximizes cash flow on a risk adjusted basis. As you might expect, landlord negotiations dictating lease terms and conditions may affect these variables. Therefore, the number and pace of store closures may vary based on these and other factors. The long-term KPIs that we will focus on are overall lease liability, duration of leases, and cash flow expectations over the course of the next 12, 24, and 36 months. We will provide more clarity on these KPIs during our investor day meeting that we are planning to host later in the year. Before moving to Q&A, I wanted to touch on capital allocation and provide color on our decision to not provide guidance at this time. Regarding capital allocation, as discussed by David Bleich earlier on the call, we are currently continuing to evaluate the situation with Sycamore, including the proposed tender offer. As a result, we do not anticipate initiating any share repurchases at this time. However, we remain committed to returning capital in the form of share repurchases under our current share repurchase authorization or a larger revised authorization if approved by the Board once there is further clarity on the situation. Additionally, because of the continuing challenges posed by COVID and recent events, including the public proposal and the strategic review of our CompuCom Division, We are not issuing guidance for 2021 at this time. That said, 2021 is an important bridge year to our future. We've been systematically and methodically executing our digital transformation, which benefits each of our businesses and furthers our core strengths. Our digital transformation focuses on providing our customers a complete B2B commerce platform designed to meet the needs of both buyers and suppliers. We are thrilled with the team we've built attracting Prentice Wilson, a proven industry veteran, coupled with the team he is building, our steady investments in world-class technology resources, and the acquisition of BuyerQuest enables our transformation to address key customer pain points in their end-to-end B2B commerce needs. Furthermore, we will leverage our strong customer relationships, deep knowledge of B2B commerce requirements, and robust suite of physical, logistic assets to create compelling value for both suppliers and buyers on our platform. While the revenue contribution in 2021 from BuyerQuest is not expected to be material, this acquisition is an important component of providing a better experience to our customers and a key ingredient in our digital B2B platform in the future. It is also important to note that the investments that we are making in our digital transformation are consistent with our historical CapEx amounts allocated to our growth initiatives and fit within the framework of our traditional total company CapEx investment. We are reprioritizing our capital expenditures to build out our digital platform and strengthen our core e-commerce and supply chain platforms. And as we mentioned in our earnings release, in 2021, we expect to make growth investments in the company's digital transformation initiatives in the range of 20 to 25 million in capital expenditures and 30 to 35 million in operating expenses. In summary, We've made progress on our overall transformation strategy. We are accelerating several elements, including our focus on digital and omnichannel sales, improving customer value, and building the digital platform to support the growth of our business. We believe these actions position us well for the future. With that, I will open the call for Q&A.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. Our first question comes from the line of Chris McGinnis. Please state your company name and then proceed with your question.

Good morning, Sidoti & Company, and thanks for taking my questions. Just got a few questions just on the B2B pivot and the transformation. Can you just talk a little bit about the recent announcements, you know, the Microsoft agreement? Why did they choose ODP? And can you talk about how the acquisition changes maybe, you know, the way you service the market prior to that acquisition and how that fits within the portfolio a little bit more? Thanks.

Sure. Thanks, Chris, and good morning. So from a buyer request perspective, it obviously accelerates our ability as we build out our digital platform. The digital platform has a procure-to-pay piece. It has a supply chain piece and e-commerce piece. And all that obviously addresses the $8 trillion market. The BuyerQuest acquisition, Jack and his team have a world-class product. It's rated very highly by Gardner. What it has done is it accelerated our ability to really get into that procurative pay marketplace. And we think that's a huge opportunity, especially as we have announced a relationship with Microsoft. Microsoft is excited to partner with us from both an Azure perspective, and we thank them for that support, as well as the ability to move into that procurative pay marketplace be the procurative pay element of their Dynamics 365 ERP package. So obviously we think that's a huge opportunity for both companies, especially being on that front end of procurative pay, more to come on that because obviously once we have that procurative pay platform in Dynamics 365, there's huge opportunities of having all those customers have the ability to buy on a marketplace or a platform to go off and buy and more to come on that investor day. Obviously, that's a huge market opportunity in the future, partnering with Microsoft. And obviously, we're going to help Jack and the FireQuest team accelerate their existing customer base, open up broader opportunities of procure-to-pay, and really work on the go-to-market activities around that as well.

Okay. Thanks for that. And I guess just, is this intended to be an open marketplace, like the Amazon business or Alibaba, and you have an agreement with Alibaba? Is there... something that you've taken from that that can help you build on the transformation? Thank you.

I think it's actually really different than Amazon and Alibaba. Think of a curated platform defined by contractual agreements, a source to settle from a B2B perspective, where you're not looking at loose spend or some of that tailspin, but it's really contractual relationships connecting buyers, B2B buyers and sellers. And we're trying to give a simpler perspective And that's where Buy Request comes into this. Very effective, world-class e-commerce procurement platform. But also very important, Chris, leveraging our supply chain assets as well. We think we have a huge capability with our supply chain. We deliver the next day to almost 99% of the zip codes to the back dock. And so we can leverage our physical assets with the digital assets. We think it's a market that is very underpenetrated. There's only 20% of B2B at the $8 trillion market that's digital now. But there's no real... you know, forced to settle, you know, procurement, curated marketplace that exists. And we think we have a huge opportunity, especially with Prentice and Terry and the team that we've built, to have that capabilities and know how to be very, very successful in that marketplace.

Great. And just one last question on following up on that. You know, what's the cost to kind of compete in this? Is the asset largely in place now, or is there going to be more cost to kind of pursue that?

Anthony said it at the very end of the script, but it's about $20 to $25 million in CapEx this year, about $30 to $35 million in OpEx. But we will stay within the confines of our traditional capital spends anywhere between $150 to $180 across the entire business. We've reallocated some of the other investments, but this is not a massive investment. It's an investment within our confines of what you guys have seen traditionally from an office people perspective. And obviously, again, having people who've done it before and successfully, obviously it will help our ability to be very efficient with the investment of those dollars as well. Anthony, anything else you'd like to add on that?

No, I would just say, you know, as we approach the go-to-market later this year, it'll dictate future capital investments we plan to make going forward. As Jerry mentioned, it's really a reprioritization of our capital spend, and we'll ensure that it throttles with the returns that we're going to see from an ROI perspective and to the point of this is an investment year. So as we build out the capabilities and we look at the future, we'll be providing more details around some of the returns that are expected from that platform.

Thanks for taking the questions and good luck in Q1.

Thank you. Thank you.

Our next question comes from the line of Michael Lasser. Please state your company name and then proceed with your questions.

Good morning. It's actually Mark Cardin on today for Michael. Company is UBS. Thanks a lot for taking the questions. I guess first, building a bit on the last question, how fast do you expect to see a return on the $30 to $35 million investment in experimental operating expenses in 2021? And then are you expecting this to be pretty evenly spread across BSC, supply chain, and digital? Or are there other sizable buckets for where these investments could be going? Thanks.

Well, from a 2021 perspective, this is an investment year, as we said in our presentation. And obviously, we're building a foundation and a platform in the future. So the first thing I wanted to answer your question on, this is a much better business model. It's a low-cost model. Once you have the platform built, it's very scalable and very accretive. And so relative to our strategy, it's a low-cost model, ability to enter high-value markets, ability to enter high-growth markets, and obviously making sure it fits with our culture. This is perfectly aligned with that because longer term, it's a superior business model. And that's where Anthony, myself, and the team focused on as we, and with Prentice as we built this out. So nothing material in 21, but obviously building on the future and more to come as we make more announcements, I think it will make a lot more sense in the future. Anthony, you had a little bit of color too.

Yeah, thanks, Jerry. Yeah, Mark, you know, if you look at the reduction in CapEx in 2021, Most of that was deferral based on the impact that COVID had on the business and us deferring projects. And most of the projects that we worked on were what I would characterize as maintenance-based projects. So as we look into 2021, while we're not providing specific guidance, the way I would characterize, we're going to be moving more towards levels you've seen in previous years and probably between the levels that you saw in 2019 and 2020.

That's really helpful. And then more on the quarter, what was primarily responsible for the change in the trajectory of adjusted SG&A dollars? It had been declining double digits in recent quarters, but it was only down 5% in 4Q. So any additional color there would be great. Thanks.

Yeah, we had additional SG&A associated with the investments that we're making. So we were starting those investments from a new business platform perspective. We also had some additional accruals associated with true-ups at the end of the year related to legal accruals as well as bonus accruals. So there are some one-time items that impacted this quarter when you compare it on a year-over-year basis.

Got it. That's great. Thanks very much. Thank you. Thanks, Mark.

We have time for one more question. Our final question comes from the line of Christian Carlino. Please state your company name, then proceed with your question.

Hi, good morning. It's Christian from JP Morgan. I was wondering more on the CSD division. Could you talk about the gap between adjacency categories and your core products and whether or not that's contracted a bit over the quarter, whether that be from adjacency slowing or core product improving?

Well, we still continue to strengthen our adjacency categories, as we mentioned on the call. Our core is Products continue to be challenged given the back to work and back to school and the impact it's having specifically on our BSD channel. But we saw continued strength in the adjacencies, strength around our PPE, strength around furniture tech. So our broad channel mix as well as our broad distribution capabilities allowed us to bridge some of the gaps that we saw in our core supply and office supply categories.

Got it. And then for operating margins, they seem to decline more year over year than in 3Q. Can you talk about what the differences were? You called out higher supply chain costs within BSD, but that was actually a good guy within retail. So, yeah, could you speak beyond the negative flow through what drove the operating margin decline in B2B?

Thanks. So when you look at our supply chain costs, we continue to see favorable mixed shift to retail locations because the cost to serve to a retail location on a relative basis is cheaper than the cost to serve in the BSD channel. This is offset by some costs that we saw incrementally as there were higher residential deliveries. So from a supply chain perspective, residential deliveries that are coming through impact our BSD channel. And we were also impacted, which you've seen probably in many other industries, higher overall third-party logistics costs. Now, one of the things that we have the benefit for is we have our private fleet. We were able to mitigate many of the challenges that you saw other e-commerce providers have, and many of those challenges were mitigated by our own private fleet, as well as having relationships with local third-party logistics firms, reducing overall supply chains on a relative basis.

Got it. And if I could just ask one more. On the recent FireQuest acquisition, could you just talk through thoughts that drove the purchase of the company itself? What synergies do you think could come out of it? What could you potentially add to the business to make the asset better? And what needs it fills within your B2B platform?

Yeah, I think, as I said before, I mean, it's a world-class business from a customer feedback on the software package itself was excellent. Gardner ranked it extremely high. But at a very high level strategically, it's an acceleration of our ability to get our platform to market faster. That's one of the primary reasons. And obviously, we've already announced a significant partnership with Microsoft with the BuyerQuest software as a platform around that. And so... Very significant. Jack and his team have done a great job of building a key market, a key platform, and we'll integrate that into our overall digital platform. And obviously, we believe we can take that product and with our reach and our capabilities in our cross-dirt business and make that even more a stronger go-to-market in the future. And we're excited to have Jack and his team on board. But it's a great platform and a great acceleration of our ability to get to market faster. Got it. Thank you very much, and best of luck. Thank you.

That concludes the Q&A session for today. I will now turn the call back over to Office Depot's CEO, Jerry Smith, for any closing remarks.

Thank you, everyone, for joining the call today. I just want to point out and thank our team again across the company of outstanding performance across 2020. We did well from an operating result to free cash flow. The way I like to look at it, we're in a stronger position today than we were before the pandemic. We expanded our value proposition. We're building our digital platform for the future. We have made significant progress on our evolution, and we have a very, very strong balance sheet. We're very excited for our future. We'll have an investor day later in this year, and we're looking forward to giving more details around our digital platform and the great team we've built and the opportunities in the future. So thanks, everyone, for joining the call today. Stay safe and have a good morning.

Thank you for your participation. This concludes today's call.