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spk00: Good morning and welcome to the ODP Corporation's first quarter 2021 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.
spk05: Good morning, and thank you for joining us for the ODP Corporation's first quarter 2021 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. During today's call, Jerry will provide an update on the business, focusing much of his commentary on our accomplishments in the first quarter, including our operational performance and progress on our B2B pivot and digital transformation. David Bleich will then 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 then provide comments on our decision to pursue a tax-free spinoff of our B2B businesses, creating two independent, publicly traded companies. Anthony will then review the company's financial results, including highlights of our divisional performance. Following Anthony's comments, we will open up the line for your questions. 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 the 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, 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 Executive Officer, Jerry Smith. Jerry?
spk04: Thank you, Tim, 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 remain safe and healthy. I'm very happy to be here with you today to discuss our results for the first quarter and and our announcement we made to separate into two independent publicly traded companies. It is a very exciting day for ODP as we mark the continued evolution of our B2B pivot and digital transformation and take the next step into unlocking shareholder value. As separate companies, each business will benefit from increased strategic focus and enhanced flexibility to invest in distinct growth opportunities with separate capital structures and growth profiles. We are very excited not only about our progress we are making across our business, but also about the strategic flexibility and enhanced prospects for value creation through this exciting step. Our performance and strategic actions are supported by the key tenants of our business, as I outlined last quarter. As shown on slide four of our presentation, These tenants act as our guideposts as we address the challenges, pursue growth, and position our business to unlock value for shareholders in the future. These core tenants are centered on driving a low-cost model, expanding our value proposition to customers, and moving into higher-value businesses through new growth engines. As you have seen, we have been executing along these priorities, evolving our business model and structure, and leveraging our ecosystem to meet our customers' growing needs in higher value markets. Also, at the center of everything we do is our winning 5C culture. I'm very proud of the culture we have created at ODP and the foundation it provides as we attract new talent and execute our strategic priorities. In the quarter, we delivered solid operating results, made progress on our B2B pivot, and took actions to build greater value for shareholders by pursuing structural improvements to our business and authorizing a new stock buyback plan. The highlights of these accomplishments for the quarter are shown on slide five. First, as I've stated on previous calls, we are remaining vigilant as we maintain a safe environment and continue to employ the enhanced safety measures that we implemented last year for our employees and customers. We are pleased to announce we are anticipating reopening our corporate facilities later this month on a limited basis with further expansion as we progress throughout the year. Turning to the highlights, our performance in the quarter reflects our continued commitment to driving our low-cost model while leveraging our foundation to meet the needs of customers during the ongoing pandemic. The flexibility of our ecosystem allowed us to deliver our value proposition to customers at home, in the office, and through our retail stores. Coupling this with our low-cost model approach, we delivered solid operating results and generated significant free cash flow, both that exceeded our internal plans. Building for our future and evolving into higher value businesses, we made significant progress on our B2B pivot and digital transformation. We integrated our new procure-to-pay e-procurement platform, BuyerQuest, advanced our collaboration with Microsoft as we continue to gain strong interest from the supplier community. All these actions have advanced our position to pursue profitable growth in the highly valued business commerce market. And as I stated in my opening, in our effort to unlock further value for shareholders and with the unanimous approval of our board of directors, we have announced plans to separate ODP into two independent, publicly traded companies. We believe this action will enhance our strategic flexibility, creating two highly focused, pure play companies, unlocking significant opportunities by improving our ability to meet customer needs while aligning our assets and investment profiles to generate greater value for our shareholders. And lastly, Supporting our strategy and strong liquidity position, our board has authorized a new $300 million stock repurchase program to enhance return to shareholders. Now turning to more details regarding our operating results as shown on slide six. As I have mentioned, conditions related to the pandemic continue throughout the quarter. Additionally, it is worth noting that adverse weather condition in the Southwest, which is a large market for us, impacted certain operations for a period of time during the quarter. That being said, I'm happy to report that our low-cost model and flexible channels helped offset these challenges. We drove our SG&A lower while generating strong demand in work-from-home product categories, and our balanced approach helped deliver sequential growth in our retail channel and an uplift in our buy-on-line, pick-up-and-store offering. Performance in our retail division was again excellent. And despite the continued pressure from COVID impacting our contract channel sales, we did achieve one of our highest quarterly rates of net new customer wins in our BSD division. This bodes well for our future. Overall, solid execution by our team resulted in $91 million in adjusted operating income and nearly $79 million in adjusted free cash flow. We remain in an excellent position to recapture growth as more businesses ramp up operations and more school systems, including K-12 and higher education, return to in-class learning. We were encouraged by the increase in school activity we experienced as we progressed throughout the months in the quarter and continuing to date, giving us confidence in our thesis of driving better growth in the second half of the year. The standout among our operational performance was once again our retail division, as shown on slide 7. Our retail division again drove strong overall performance, satisfying the increased customer demand for work and learn-from-anywhere products, particularly technology and furniture, hoping to offset the year-over-year mix shift in core supplies and copy and print. We continued to leverage our BOPAs offering, which was up 35% over last year. Sales per shopper also increased, and when combined with our strength in BOPIS, helped to offset a decline in retail store traffic. Fewer stores in service as we optimized our retail footprint drove lower reported revenue results. However, although we are not specifically reporting it, we estimate that our comparable store sales were roughly flat to last year. Our operating performance again improved significantly, driven by our efforts to optimize the store operating model, manage our inventory, and execute upon our maximized B2B plan. Moving forward, we believe our retail business is in an excellent position to capture some of the pent-up demand in the upcoming back to school season as more students return to in-class learning and look to restock school supplies that for many have been depleted since 2019. We remain bullish for our home and school office supplies as we continue to execute through the coming quarters. In fact, We believe that our retail chain is becoming the home office headquarters for small and medium businesses and for those operating in a hybrid or work from home model and we're well positioned to provide for all of their business needs. Turning to our business solutions division as shown on slide eight. Performance in our BSD division overall continues to be pressured relative to last year from the continuing effects of COVID as well as the adverse weather in the Southwest, impacting both our top line and operating results. Primarily impacted was our enterprise contract channel, which serves businesses and school systems, as both of these have been impacted by business and school shutdowns. This was partially offset by slightly stronger performance year over year in our e-commerce channel, as customers continued strong demand from Work From Anywhere products. As we begin to move past the pandemic, we are continuing to drive strength in our JCCC categories, including furniture, technology, and cleaning products. And despite these headwinds in the quarter, we did see month-to-month improvements in demand as the education sector began to ramp, as well as the commercial sector, as many businesses began migrating staff to return to work. This has continued to date and supports our thesis of delivering a stronger second half in 2021. Additionally, we're continuing to win net new business as our customer retention rate remains strong as we win new business. This resulted in one of our highest levels of net new customer wins during the quarter, which should improve our position to generate stronger growth in the second half and beyond. Now turning briefly to CompuCom's performance as shown on slide nine. Overall, CompuCom's performance has still experienced the effects of COVID with reduced volume levels from some customers. Like a number of companies, we were affected by a malware incident that occurred in March, which resulted in an impact to the top line as we were unable to deliver service to certain customers for a limited period of time. As we shared previously, we engaged leading cybersecurity experts, which allowed us to address the incident, contain the malware, and restore services to substantially all of our customers by the end of March. Additionally, as part of our restoration efforts, we have strengthened our systems with enhanced security measures. I am very proud of the incident response that our team exhibited, and despite the incident, nearly all of our customers remain intact, our pipeline remains strong, and we're again focused on scaling the business. Also, our process of exploring a value-maximizing sale of our CompuCom division continues to move forward. We remain encouraged by the opportunities ahead for CompuCom, particularly in relation to their capabilities to address the evolving trends in their future work and cloud-based services. CompuCom continues to be well-positioned to capitalize on opportunities in the future. Now turning to our progress on our B2B pivot and our digital transformation initiatives as shown on slide 10. As we announced during our year-end call in February, we made tremendous progress on our B2B pivot and digital transformation initiatives. We formed our new technology business focused on transforming B2B sourcing, purchasing, and supply chain operations for suppliers and buyers. We built an incredibly powerful team to lead our efforts, with some of the most prominent and proven leaders in the business, commerce, and technology space today. We significantly accelerated our technology development through the acquisition of BuyerQuest, one of the leading e-procurement software platforms in the world. And we announced our collaboration with Microsoft to bring the power of our new digital procurement technology platform to Microsoft Dynamics 365 Business Central customers in the future. Over the past two months, we've moved with rapid precision, making progress on both our business initiatives and technology development, driving our digital transformation. Let me highlight a few areas. We've integrated BuyerQuest, launching new customers on the platform and building a pipeline of new business opportunities. We've advanced our collaboration with Microsoft, successfully executing a live technical demonstration of BuyerQuest capabilities on the Dynamics 365 platform to integrators at an industry conference. This represents an important step as we prepare for a full launch of Microsoft's Business Central customers scheduled for later in the year. And lastly, we will continue to generate strong interest from the supplier community as they begin to recognize the expansive reach and innovative capabilities of our new digital platform. We're in the right place with the right team and the right technology platform to pursue growth in this very large and growing business commerce market. Before I discuss the spinoff transaction that were announced this morning, I want to turn the call over to David Bleich, our Executive Vice President, Chief Legal and Administrative Officer, who will provide an update on the status of the public proposal previously made by Sycamore Partners, the owner of Staples, to acquire the ODP Corporation.
spk03: Thank you, Jerry. Before Jerry discusses the spinoff transaction that we announced this morning, I will provide an update on the status of the public proposal previously made by Sycamore Partners, the owner of Staples, to acquire the ODP Corporation. As a reminder, on January 11th, USR Parent, the owner of Staples, a Sycamore Partners subsidiary, which I will refer to as Sycamore, made a public offer to acquire 100% of the common stock of the ODP Corporation. Their public letter stated that sycamore intended to commence a tender offer for the stock of ODP in March 2021 if they did not reach negotiated agreement with us. In response, we publicly communicated that we were open to combining our retail and consumer facing E commerce operations with staples under the right set of circumstances and on mutually acceptable terms. As we previously disclosed, we received no substantive response from Sycamore, but instead were informed that Sycamore does not want to engage in substantive discussions until the regulatory process initiated by Sycamore is completed. As part of that regulatory process, we previously received a civil investigative demand from the U.S. Federal Trade Commission, which is conducting an investigation of Sycamore's proposal as a result of Sycamore's filing of a Hart-Scott Rodino notification. That filing was based upon Sycamore's previously stated intention to commence a tender offer by the end of March. Instead of commencing such an offer, on March 31, Sycamore publicly announced that it decided to defer the March 2021 launch of a tender offer for the company's common stock, while reserving the right to commence one in the future. We received no additional communications from Sycamore since Sycamore's March 31 public communication. Accordingly, in order to relieve the company from the continuation of a costly and burdensome process, after a limited response by the company to the civil investigative demand, the FTC has agreed to defer requiring further responses from the company unless and until Sycamore formally launches a tender offer or the parties execute a negotiated agreement. Additionally, on May 4, 2021, The Canadian Competition Bureau advised the company that it has determined that Sycamore's proposed acquisition of the company would likely result in a substantial lessening or prevention of competition in the sale of business essentials to enterprise customers in Canada. While we do not know for certain what the Bureau would do if Sycamore actually launches a tender offer in the future, the Bureau's determination signals that the Bureau would likely challenge the acquisition. With respect to CompuCom, we are in the midst of the previously disclosed sale process. We do not intend to provide any update on this process until such time as it is completed. Now I'll turn the call back over to our CEO, Jerry Smith.
spk04: Thank you, David. Now let me turn to comments regarding our plans to split ODP into two companies. This begins on slide 12. As we announced this morning, our board has approved a plan to separate the ODP Corporation into two independent publicly traded companies through a tax-free spinoff of our B2B business and related assets. We believe this initiative will unlock significant value for shareholders by positioning both companies to enhance their focus on customer needs with a unique and highly focused strategy and investment profile. Before I get to the specifics, I thought it would be helpful to reflect on the journey that has led us to making this decision. As most of you know, over the past several years, we've been executing a plan to pivot our business to B2B, leveraging our assets and customer relationships to drive a distribution business and digital platform. Supporting this effort, we have created a strong foundation consisting of valuable assets that we have leveraged in order to drive our business. This includes our supply chain, one of the largest in North America, capable of covering nearly 99% of the US population next day, our vast global sourcing operation, a growing distribution presence serving a large business customer base, and a robust digital platform. Our B2B business today serves nearly 10 million business customers, over 200,000 large enterprise, and nearly half of the Fortune 500 companies. With the exception of the COVID environment over the past year, we have been successful in utilizing these assets to create a much more viable BSD business from where it was five years ago. We have stabilized and grown our presence. We rebuilt our pipeline of new business, added distribution in underserved markets, and improved our go-to-market strategy, all resulting in net new customers. We are now leveraging all these valuable physical assets, combining them with our new digital presence to develop a next generation business commerce platform in order to pursue growth in the very large and growing buyer and supplier commerce market. As a component of our B2B pivot, we have worked to optimize our legacy retail business, a business that continues to thrive during COVID with a focus on serving consumers and small businesses through a network of about 1,100 retail stores. We've been optimizing our store footprint and driving cost efficiencies in order to position our retail division to most effectively serve consumers and small businesses. The performance of our retail division has been stellar, serving customers and small businesses through a variety of means, including our in-demand BOPUS offering. From a corporate structure perspective, our holding company reorganization last year has provided greater flexibility and better alignment for operating assets to improve our ability to serve the increasingly different needs of our customer base. Concerning this progress and realizing the increasingly unique needs of business customers and consumers, along with the recognition that the value we have created has yet to be fully recognized, led to our decision to split ODP into two companies, each with a unique strategy and asset base to serve their respective customers. A description of each company and related assets are shown on slide 13. Through the spin of our B2B-related businesses to ODP shareholders, we will create NUCO, a leading B2B solutions provider serving enterprise-level companies, including small and medium-sized businesses as well. NUCO will consist of a business solutions division contract business, our Canadian business, Grand & Toy, as well as our independent regional office supply businesses. NUCO will also include our newly formed B2B digital platform business, including BuyerQuest, as well as our sourcing, global sourcing, supply chain and logistics assets. The remaining company will be ODP, a leading provider of retail consumer and small business products and services distributed through more than 1,100 Office Depot, Office Max retail locations as well as through our award-winning e-commerce site, OfficeDepot.com. While ODP and NUCO will be separate, independent companies, they will share commercial agreements that will allow them to continue to leverage the scale benefits in such areas as product sourcing, supply chain, and IT-related services. Many of these areas will be further refined and adjusted as we proceed with the separation, and we will provide updates along the way. We believe creating two focused, pure-play companies will unlock significant opportunities for all of our stakeholders by improving our ability to meet the needs of our customers while better matching our assets and investment profiles to generate greater value for our shareholders. The value we intend to unlock for our stakeholders, including our customers, investors, and employees, are shown on slide 14. First, for our customers, The split will allow each company to increase its focus on the unique needs of the respective customer base through aligned go-to-market strategies and customer-specific innovation. This customer-specific innovation will lead to building new capabilities to improve the customer experience for each customer set. For investors, the separation will allow for a better matching of assets, investments, growth and return profiles, leading to greater value for shareholders along with investor and analyst base more aligned with these attributes. We believe that much of what we have created today and the valuable collection of assets we have built has not been fully recognized by the investment community largely because of the different investment requirements, risk profiles, and return characteristics of the combined entity. This separation will create a much cleaner and understandable investment thesis and will allow us to pursue more targeted investment opportunities and capital structure to create value at each company. And finally, creating two focused companies will allow us to attract and retain talent that is motivated by the specific mission of each entity and will provide our employees expanded opportunities. Having a more aligned strategy and goals will help to empower the respective teams of each company and prove the mix of talent and capabilities. Therefore, from all perspectives, we believe this initiative creates significant value for all stakeholders. We will be better positioned to maximize the strategic focus and financial flexibility of each entity, aligning go-to-market strategies and capital investments to meet customer demand, while positioning the respective growth trajectories and return profiles to be recognized by shareholders to drive value. Now turning to slide 15 for additional process information and comments about timing. As I mentioned, we fully expect this spinoff to be tax-free to ODP investors. Shareholders will own 100% of the equity of both companies post-spin. The official name and brand of NUCO along with the appointment of respective directors and management teams of both companies will be determined at a later date. As a component of the process, ODP and NUCO will enter into commercial agreements in areas that will benefit both companies and continue to leverage scale benefits in the sourcing, supply chain, and IT arenas. Additionally, ODP today is continuing to work on driving further cost efficiencies in its business to help offset certain duplicate and one-time costs associated with the separation. We have a lot of work ahead as we pursue this important step to unlock shareholder value, and we commit to providing you more information as we make progress. We expect to complete our separation during the first half of 2022. As I mentioned at the onset, this is an exciting day for ODP. We are fortunate to be undertaking this process from a position of strength. with financial, operational, and organizational readiness, and with significant liquidity, providing us flexibility in determining how to allocate capital between the separate entities for the respective continued success. With the flexibility created by our holding company reorganization last year, we are now ready to take this step in our evolution. In support of our strategy and our positive view of the future, we are also happy to announce today that our board of directors has authorized a new $300 million share repurchase plan. With that, I will hand the call over to Anthony for review of our financial results.
spk06: Thank you, Jerry, and good morning, everyone. I'm happy to be here today to discuss our financial results for the first quarter of 2021. As I begin, I'd like to say how proud I am of our entire team for remaining focused on driving our low cost model, one of our key tenants, helping us offset some of the challenges related to the COVID environment over the past year. Our low cost model is not just a one or two quarter exercise. It's a discipline that is being instilled in the fabric of our operational approach, improving our competitive position and supporting our strategic initiatives. including our announcement today, to further unlock shareholder value. Now turning to the highlights of our financial results as shown on slide 17. Consistent with previous quarters, we have provided our results on both a GAAP and adjusted basis. Our financial results in the first quarter continue to be affected by the COVID-19 pandemic, as many businesses and schools have remained closed or continued to operate in a hybrid environment. Additionally, severe weather conditions in the Southwest impacted certain areas of our operations. We typically do not mention weather impacts, but since this was an exceptional occurrence that impacted a region of the country where we have a significant presence, we believe it was notable. Despite these challenges, our team's continued focus on driving our low-cost model and leveraging our broad portfolio of offerings positioned us to deliver strong operating results and free cash flow. even slightly ahead of our internal plan. Turning to our quarterly results, total revenue of $2.4 billion in the first quarter was down 13% over the very strong results we delivered in Q1 of last year, the last quarter prior to the pandemic. The aforementioned effects of COVID-19 and adverse weather conditions, along with 149 fewer retail stores in service relative to last year, resulted in lower sales versus last year. Partially offsetting these impacts was our balanced channel approach and broad product assortment, both helping us address the evolving needs of our customers during this period. This flexibility resulted in continued strong demand for work and learn-from-home products and increases in our e-commerce and omnichannel sales versus last year. GAAP operating income in the quarter was $55 million, down from $80 million last year. Included in operating income was $14 million in merger, restructuring, and other operating charges, primarily associated with our maximized B2B restructuring plan. $12 million of non-cash impairment charges, mostly related to our operating lease right-of-use assets associated with retail store locations. And $10 million of expenses related to the malware incident that impacted CompuCom. I would like to highlight that the additional SG&A expenses related to the malware incident were included at the ODP corporate level expense line and excluded from the CompuCom divisional results. Excluding these and other items, our adjusted operating income for the first quarter was $91 million compared to $108 million we generated last year. Unallocated corporate expenses were $35 million in the quarter, up from the prior year, primarily related to the aforementioned expenses incurred from the malware incident at CompuCom. As we reflected in our 8K on this topic, we expect to incur approximately $20 million in total expenses in the year related to the malware incident, of which we accrued $10 million in the first quarter. We carry insurance, including cyber insurance, which we believe to be commensurate with our size and the nature of our operations, and we are seeking coverage for certain costs incurred due to the incident. Adjusted EBITDA was $138 million for the quarter, compared to $157 million in last year's largely pre-COVID first quarter. This includes adjusted depreciation and amortization expense of $44 million and $49 million in the first quarter of 2021 and 2020, respectively. Excluding the after-tax impact for the items mentioned earlier, adjusted net income for the first quarter was $68 million, or $1.21 per diluted share. Despite the continued challenging conditions, we generated solid free cash flow in Q1. Cash generated from operating activities was $86 million, which included less than $1 million of integration costs and about $6 million of restructuring costs. This compared to cash provided by operating activities of $188 million in the first quarter of the prior year. The reduction was largely driven by the prior year's strong operating cash flow related to the significant consumption of goods at the beginning of the pandemic, which was not replicated again in Q1 of 2021. Capital expenditures in the quarter were $13 million compared to $25 million in the prior year period, reflecting the COVID environment and lower investment in consumer operations. while continuing our early investments in our digital transformation and e-commerce capability. We expect to increase our capital investments in future quarters as we move past COVID and continue to make progress on our B2B and digital transformation initiatives. Adjusting for cash charges of $6 million associated with the company's restructuring plans, adjusted free cash flow in the quarter was $79 million. Now I'd like to cover our business unit performance starting with retail on slide 18. Our retail division continued to deliver very strong performance in the first quarter. Our retail presence continues to play an important role in supporting customers for their essential needs, be it work and learn from home setups, technology, or personal protection equipment, and through convenient channels, such as our BOPIS offering. Additionally, cost efficiency improvements and our efforts to optimize our retail footprint are continuing to deliver strong cash flow and bottom line results. Reported sales in the quarter for our retail division was approximately $1 billion, which was down 10% from the same period last year. This decrease was primarily driven by 149 fewer stores in service as compared to last year, which included eight store closures during the first quarter of 2021. Offsetting lower store traffic was higher sales per shopper and stronger demand through our omnichannel offerings. The lift in sales per shopper was primarily driven by increased demand for work and learn-from-home products, supporting consumers and small businesses, and personal protective equipment. The combination of our curbside pickup option and BOPUS offering remained popular, with BOPUS demand up 35% in the quarter as consumers continue to choose the convenience of this option. Ship-from-store and same-day deliveries were also up, highlighting the flexibility of our delivery offerings. Operating performance in our retail division was terrific. We generated operating income of $100 million in the quarter, up 15% compared to the same period last year, representing a 210 basis point improvement in margins. This strong performance was driven by improvements we have made to our labor operating model, driving cost efficiencies while enhancing customer service, as evidenced by higher net promoter scores, as well as from our maximized B2B plan, driving lower operating and lease costs. And we are looking forward to the upcoming back to school season, as we expect more school systems will be open for in-class learning and expect consumers and school districts to replenish supplies for the upcoming school year. Now turning to slide 19, performance in our Business Solutions Division, or BSD, continue to be impacted from conditions related to the pandemic. As a reminder, BSD consists of our contract channel, serving large, medium, and small enterprises, and our direct or e-commerce channel. As we anticipated, the impact of the pandemic has largely continued into Q1, and many of our business and education customers have yet to return to a more regular cadence to their operations. This impacted our performance in the quarter. Reported sales in the quarter for BSD were $1.1 billion, down about 16% relative to last year's first quarter. Sales in our contract channel were lower related to the conditions due to COVID, which was partially offset by channel mix and product breadth. Sales were higher in our e-commerce channel and demand increased for products supporting work and learn from home, with solid increases in technology and furniture. In the quarter, adjacency categories remained in strong demand and comprised approximately 44% 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 the first half of the year, we were encouraged with the increasing pace of business and school reopenings, which resulted in month-to-month increases in our sales pipeline, which has continued into the second quarter. This gives us confidence in our thesis of our BSD segment returning to growth in the second half of 2021. Operating income was $17 million in the quarter, compared to $40 million in the prior year period. The decrease in operating income versus last year was related to the impact of COVID on sales and product mix, partially offset by SG&A cost improvements related to efficiency programs and the contribution of our e-commerce channel, which continues to perform well. Looking at slide 20, we highlight the performance of the CompuCom division. Sales in the first quarter were $196 million, down 17% over last year, primarily driven by conditions related to the COVID pandemic and other factors which impacted service volumes. Additionally, while CompuCom quickly responded to the malware incident, certain customer services were temporarily unavailable, and as a result, we had a $3 million impact to revenue in the quarter. CompuCom reported an operating loss of $1 million, driven by the flow-through effect of lower revenues in the quarter. As Jerry mentioned, CompuCom has made significant progress in restoring service to its customers. As part of the restoration efforts, CompuCom has taken actions to strengthen its systems and enhance security measures. And as we stated in RAK, we expect to incur total expenses of approximately $20 million in relation to the restoration efforts, cost to address the incidents and remediate systems, and for enhanced cyber protection. As I stated earlier, we have accrued $10 million of these costs in the first quarter reflected in SG&A at the ODP corporate level and unallocated corporate expenses. And as I also mentioned, we do carry insurance, including cyber insurance, and are seeking coverage for certain costs associated with addressing the incident. CompuCom's customer base and pipeline of new business remain strong, and the company is focused on driving future growth. Additionally, the value-maximizing sale process for CompuCom continues, and we expect to provide an update on this process during Q2. Now, briefly turning to our balance sheet highlights as shown on slide 21. We ended the quarter with total liquidity of over $1.7 billion, consisting of $753 million in cash and cash equivalents, and $946 million of availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $367 million, comprised of our long-term IRB bonds. Our balance sheet remains a source of strength and provides us flexibility as we pursue growth and execute our strategy, including our decision to pursue a separation of our B2C and B2B businesses. As a final comment before I turn it over for questions, I would emphasize that we are enthusiastic about our future. We're excited about the progress we are making along the key tenets that Jerry outlined earlier. Our low-cost model has positioned us to invest in growth opportunities and we're expanding our value proposition through the progress we are making on our B2B pivot and digital transformation, positioning us to pursue growth in high-value markets. While we are experiencing better overall trends and reported strong results in Q1, we continue to suspend guidance at this time until we have more clarity around market conditions for the balance of the year. That being said, Trends have improved since our year-end update in February, which is extremely exciting. By further focusing our strategies to leverage the B2C and the B2B end markets, I am confident that our separation will create significant additional value for all of our stakeholders. We are fortunate to be pursuing this initiative from a position of financial and operational strength, with significant liquidity that provides us flexibility in determining how to allocate capital between the separated entities. Also, in support of our strategy, we're happy to announce that our board authorized a new $300 million share buyback plan. With that, I will turn it over to your questions. Thank you.
spk00: At this time, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. Again, that is star one. Our first question comes from the line of Chris McGinnis. Please state your company name, then proceed with your question.
spk08: Yeah, morning. Sedoti and Company, good morning. Thanks for taking my questions and nice results, and congrats on the announcement this morning.
spk04: Thank you, Chris.
spk08: I guess just to start off around the separation announcement, I think one of the key strengths you've highlighted is just the supply chain of the company. Can you just talk about in the changing kind of environment, how do you keep the strength of the supply chain and the economies of scale going forward? And when you think about that hybrid business model, how does that impact kind of the two divisions? Thanks.
spk04: Yeah, thank you, Chris. And thanks for joining the call today. I think what we said in the script is very important for everyone to understand. We're going to keep the leverage of having the NUCO have the supply chain. There'll be commercial agreements between both companies, but we'll not lose our scale advantages for both companies. And we have a supply chain that delivers 99% of the zip codes the next day, even to the desktop. And so we want to make sure we leverage that capability across. So there'll be commercial agreements in place. We'll get more details about obviously the cost structures and things around that as we proceed throughout the year, as we go through the split. But we think it's a very important move. We also mentioned sourcing as well. So I think it's important to mention that we're going to not lose our scale advantages from sourcing also. So I'm real happy with the management team's model we built as well as our board support to move forward on this.
spk08: Great. Thank you. And then I guess just thinking about BSD, the economies are starting to open up. Can you just comment maybe a little bit more on the trends you saw, one throughout the quarter, and then maybe if you can shed any light into April trends, and just as that vaccine rolls out, kind of progresses, how are you preparing for the rebound?
spk04: Yeah, I'll take the first part and let Anthony get specific. So obviously, as we said in the script, we definitely see momentum on a monthly basis. And so we definitely saw, you know, March was much stronger than February or January. Obviously, the week eight where we had the snow issues in Texas and the surrounding states did have an impact, but we saw a lot of recovery. We do see a lot of net new winds, and we're seeing, bluntly, a ton of momentum in BSD for the first time since pre-COVID. I'll let Anthony give any more specifics around that.
spk06: Thanks, Jerry. Yeah, so, you know, as we said from last year at BSD, you know, we expected it to be a back half story, Chris, you know, tied to both the reopenings in both generally in higher ed and K-12 as well as business reopenings. And as Jerry mentioned, you know, we're excited to say that we are starting to see that progress and the real positives both from a pipeline perspective as well as an outlook for the second half. So as we continue to proceed through the year, we're starting to see the momentum build in the BSD and contract, which is a real benefit.
spk08: Okay, thanks. And then I guess just last question, just on the progress of the digital transformation, can you just maybe share how far along you are in the procurement market and then maybe any possible metrics you can share around that business? Thanks.
spk04: Too early from a metrics perspective, but we continue to make great integration progress with BuyerQuest. Numerous opportunities, only with the size of our Salesforce and the different relationships we already have. And so the BuyerQuest business is extremely well-received and apprentice. Terry, Daniel, and team are all building the platform and we're super excited. We did have Daniel Smith was on stage at the Microsoft Dynamics 365 Worldwide Conference as one of the few keynote speakers. And so we're super excited by the Buy Request, Procure to Pay piece being part of one of the best tech companies in the world's ERP package. And so I think that's a great validation that this isn't just vaporware, this is real. And more progress on a weekly, quarterly basis as we have more wins. Super excited. Again, it's a 2022, 2023 type of product. We're going to be MVP in this in the last half of the year.
spk06: And the only other thing I would add, Chris, is as we proceed and execute in 2021, to Jerry's point, this is an investment year. We'll be building out the metrics. We'll be building out the right cadence of those metrics as we exit 21 so that we can start to provide both our investor and analyst community with the right set of ways to gauge the progress we're making on this initiative.
spk08: Great. Thanks for taking my question. Good luck with you, too, and I'll jump back in the queue.
spk01: Thank you, Chris.
spk00: Your next question comes from the line of Michael Lasser. Please state your company name, then ask your question.
spk01: Good morning. It's Michael Lasser from UBS. Thank you so much for taking my question. Number one, it seems like what you're suggesting is we should not expect a positive sales inflection in the BSEs.
spk02: segment until the second half of the year, despite the fact that this is a really easy comparison this quarter, there's going to be many more children who are in school during the second quarter of this year versus last year. So does that give you any pause about the longer-term trajectory of the BSD business?
spk04: Yeah, Michael, I don't know how you concluded that because that's not what we said. But we believe there is momentum in the second half of the year. We think it's building strongly. And obviously, Tim can work with you offline on more specifics. But I'm very optimistic and very excited with what Stephen's seeing from a pipeline perspective. We're seeing more and more companies go back to work. We're seeing hybrid model. But there's no question in our mind that we're going to do have a strong second half on the business and its building. I hope we didn't – I'm sorry that wasn't clear to everyone, but I want to be clear to everyone that we're seeing a momentum building on a monthly basis on BSD, and we're super excited with what Anthony said, the second half recovery across that business.
spk06: And, Mike, we're seeing sequential and year-on-year improvement. So just to be clear, the improvements we're seeing from this point forward are going to be sequential and year-on-year, but obviously the second half with the reopening from a school perspective and business gives us a lot of confidence that that business is starting to show signs of strength.
spk02: And just to parse the semantics, sequential and year-on-year, meaning you're expecting the dollars, the sales dollars for VSD to be higher in the second quarter of this year than they were in the second quarter of last year? That's correct. Okay, thank you. The second question I had was on the dis-synergies and incremental costs as a result of separating the businesses. How much will that be in total, and where should we allocate those between the segments so we can have a better understanding of what the independent pieces are going to look like on a standalone basis?
spk06: Yeah, so Mike, it's early days. Obviously, further information regarding the expected cost of the separation will be provided in due course. But thinking about it from a path to separation, there will be one-time implementation costs, dis-synergies as we set up redundant systems and processes, and most importantly, synergies as we pursue the independent path for growth and expected rationalizations that we expect from the two entities as we become a more pure-play independent B2B and B2C system. So it's a little too early to go through those details at this stage, but we plan to provide that in due course.
spk04: I will add in one of the reasons why we have the commercial agreements and we have the supply chain and procurement and global sourcing type of arrangements is to minimize some of those disenergies across the two companies as well.
spk02: Okay. Gary, this is long being talked about. Many of your predecessors in the that in the seat you're sitting in have thought about this why is now the right time to do it and how much is it of that of the decision to do it now is being influenced by some of the actions that staple has taken and stick it more with i'm going to answer in reverse fashion it had nothing to do with the staple transaction at all it has to do with about we think we're in a great position to strength we're in a very strong liquidity position we've pivoted
spk04: Our model from a cost perspective has been, maybe in history, I'm not sure on that, but dramatically improved from an SGA perspective. We have obviously strong liquidity, so we can provide proper liquidity for both companies. I'm super excited by Prentice and his addition to the team and the whole team we're building around BCOM. So it's the perfect time to really look at both businesses from a B2B and B2C perspective. allow the shareholders to have a stake in both, and they can stay in both if they want, or they can choose the direction they want to go in the future. But we think we're very well positioned now. It's the perfect time. And again, unanimous approval from the board. We want to thank the board for their support. Anthony, why don't you add any color?
spk06: Yeah, just to add to that is the separation is also attracting the right investor and sell-side analyst base more aligned with the B2B and B2C end markets that we're pursuing, and then the investment thesis that each company will have. So Really want to make the focuses here. Both end markets we see as opportunities for investors, and as we further align, there's opportunities for shareholder creation.
spk02: Thank you very much. Good luck. Thank you.
spk00: Your next question comes from the line of Chris Horbers. Please state your company, then ask your question.
spk07: Thanks. Good morning. Chris Horbers, J.P. Morgan. A few questions. As you think about the retail business, I appreciate I think about 14% of your stores are in Texas, and those stores probably had a big impact. But at the same time, you had the double benefit of stimulus in both January and the back half of March when we went shelter in place And you saw a big ticket strength, right? You saw technology and furniture strength. So, you know, how much do you think that that was sort of a contributory factor? And do you think that more than offset the headwinds from the weather in the Southwest?
spk04: Well, I think, you know, a couple of things have happened. Thanks again, Chris, for joining us this morning. I think, number one, we've had the retail business through this whole pandemic as well as it continues. has really sort of become the home office headquarters for, you know, small and medium business and people working from a hybrid perspective. We are starting to see some sequential, you know, obviously in-person learning, which is helping as well. So I'm, you know, Kevin and his team have done a tremendous job of putting the right cost model in place, huge focus on our net promoter score and our customer experience and getting that conversion, you know, that share of wallet and higher sales per shopper as well. So a lot of the initiatives we're driving to operate the business effectively are Him and his team have done a brilliant job doing that. So I'm continually optimistic. Again, we see tailwinds in the business. We see, you know, they continue to this day, and we're excited that all the structural initiatives we put in place continue. And I think, yes, there's been some initiatives, but I really do believe structurally there's been a recognition that the home office headquarters, we can provide tech, we can provide furniture, we can provide core supplies, you know, plus more in the future as well. Anthony, why don't you add some color?
spk06: Yeah, and the only thing I would add, Chris, is we continue to see the strength in our retail chain, both from an omnichannel perspective, to Jerry's point, that home office needs. We wanted to call out the weather because we thought it was an important aspect to be able to communicate around what we had to hurdle in terms of a challenge, but very pleased with retail and continue to see momentum there as we execute through Q2.
spk07: Got it. That makes sense. Very consistent. And then in the BSD division, you know, looking back in 2015, I have in my notes that public sector was about 24% of sales in 2015. But, you know, there's been some large aggregated accounts that have exchanged hands. And then obviously the broader contract business has some puts and takes over that timeframe. So maybe you can talk about how big is a public sector And within BSD and then, you know, explicitly from a, you know, clearly municipalities probably facing headwinds too. And then explicitly, how much would you say is our school districts relative to the total sales base?
spk06: Yeah, so schools, you know, we mentioned this on the last call, you know, comprise and it's broad, you know, K-12 through higher ed comprise, you know, roughly 20% of the overall BSD business on a normalized basis. Public sector, I'll have to break that out. You're dating my time and probably a lot of people in this room's time in 2015. So we'll look at that. But it continues to be an important channel for us. And we're seeing progress on both those ends, both on the K through 12 and higher ed, to Jerry's point, around the reopening and back to school. Those are all going to be positive tailwinds for us as we look at the second half and as we look at the most important back to school season, which for us will be, you know, the August through October timeframe, Q3, Q4, seeing that as a potential opportunity for us to lean in heavier than we did last year.
spk04: I mean, if you really look at it at a high level, most of the higher ed that we've had strong relationships with in the past, most of them were virtual throughout the whole year. We have yet a lot of K through 12 that, you know, recently about, I think some of the data we saw from other sources, about 58 to 60% are in the back to, you know, in-person learning, but, you know, higher ed isn't. So I think there's Anthony's position so well, I mean, it's in the August through end of year timeframe, we're going to see a lot of that momentum. Again, Tim will give you more specifics from a model perspective, but yeah, that's why we're so excited with that. We're getting momentum now. We don't even have that opportunity of, of the in-person of the higher ed coming back until, until the fall or late summer. Plus I'm hoping, and no political comments here that we'll continue the, Progressive in-person learning and obviously from our retail and online businesses and BSD businesses who can support the K-12 as well.
spk06: Yeah, and I would just, the last thing I would add, Chris, is let's not lose sight of the commercial side. You know, we're starting to see businesses be very much more vocal around the reopenings. You see New York City, which was my former hometown reopening. Those are all very positive indicators of the back to business that we've been all waiting for and something that we're looking forward to.
spk07: Yeah, I just put some Office Depot paper in my J.P. Morgan printer, and Jamie clearly wants us to come back. And I like to print in color, but don't tell anybody. And so I guess two transaction-related questions. So first, as you think about the cash on the balance sheet, $753 million, how would you attribute that? How would that split? in the spin-out, and then you're posturing this as a tax-free spin-out to the shareholders. You know, to the extent that, let's say, after the fact that the – after the spin-out that the retail company, ODP, is bought out, does that create a sort of a tax event for the shareholders if it occurred after the spin-out?
spk06: Yeah, so to your earlier question on the capital allocation, again, early days we'll be providing that as we proceed with the separation. As you look at the balance sheet today and the announcement of the buyback, that was all in consideration of the liquidity position, supporting our stock through a year transition, and then through adequate analysis from our external advisors. and that we also had support, obviously, from the board. So that's where we are from a today capital, and we'll continue to update as we proceed with the separation. As we look forward in terms of the separation and any potential speculation there, it's probably too early for us to determine the tax treatment on a subsequent purchase if that should occur. But obviously, we'll, again, continue to provide updates along the way, Chris.
spk04: Any other questions, Chris?
spk00: And that will conclude our Q&A session for today. I'll now turn the call back over to Office Depot CEO Jerry Smith for any closing remarks.
spk04: All right. Again, thank you, everyone, for joining us today. We're excited with the opportunity for value creation for our shareholders, our customers, as well as our associates. And we look forward to our next calls. We'll stay communicative through the process of all the different milestones and points. And again, we're very focused on continuing to operate and serving our customers' needs and performing well throughout the rest of the year. So thank you for joining us. We're excited with this important day in Office Depot's history. And again, we think it's a great opportunity for value creation for our shareholders. Have a great day.
spk00: Thank you for your participation. This concludes today's call. You may now disconnect.
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