The ODP Corporation

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.

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?

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.