The ODP Corporation

Good morning and welcome to the ODP Corporation's second 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 second 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 second quarter, including our improved operational performance, and the progress we are making on all of our initiatives to drive shareholder value. David Bleich will then provide commentary regarding the previously disclosed proposal made by USR, an entity controlled by Sycamore Partners, the owner of Staples, to acquire the consumer business of the ODP Corporation. After David's commentary, 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 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 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 hope all of our listeners and their families continue to remain safe and healthy. I'm happy to be here with you today to discuss the results and accomplishments for the second quarter. Our success this quarter reflects the strong commitment from our entire team in delivering improved results while remaining true to the core tenets that drive our business. During the quarter, we drove strong overall performance and made significant progress on all of our key strategic initiatives. As I've mentioned on previous calls, our strong performance and strategic actions are supported by the key tenets of our business as outlined on slide four in our presentation. These tenets form our foundation as we address market dynamics, pursue growth, and position our business to unlock value for shareholders in the future. This foundation is centered on driving a low-cost model, expanding our value proposition to our customers, and moving into higher-value businesses through the addition of new growth engines. As reflected in our results, we've been executing along these priorities improving the flexibility of our business model and structure, and using our unique ecosystem to meet the growing needs of our customers. At the center of our approach is our winning 5C culture. One of the key components of our culture is commitment. Our entire team is committed, committed to driving value for our stakeholders and not only doing things right, but also doing the right things for our business, shareholders, employees, and for the communities where we serve. I am very proud of the culture we have created at ODP and the foundation it provides as we support our community, attract new talent, and continue to execute on strategic priorities. I think a true testament to our five-seat culture is the strong team we have built over the past several years. We have attracted some of the best and brightest talent across a broad range of industries, including technology, business commerce, supply chain, and finance. In the quarter, we delivered improved operating results, advanced our digital platform business, and made progress in all of our initiatives to unlock future shareholder value. The highlights of these accomplishments for the quarter are shown on slide five. First, as I've stated on previous calls, maintaining a safe environment continues to be a top priority. We're continuing to monitor state and national health guidelines, and we are continuing to implement safety measures as necessary to help protect our associates and customers. Turning to the highlights, we delivered improved overall performance as the broader economy began to recover from the pandemic, and the flexibility of our ecosystem allowed us to continue serving customers in all environments. Demand grew as more businesses and schools began to return to work and to in-class learning, driving strong results in our retail division and improving performance in our business solution division, or BSD. Coupled with our low-cost model approach, we delivered strong adjusted operating results and began preparing for the upcoming back-to-school season. Next, supporting our key tenet of building new growth engines in higher-value markets, we continued to advance our digital platform business, adding key talent to our team and continue to make progress on building out the capabilities of our new platform. We remain in an excellent position to drive value in the large and growing business commerce market in the future. Also, as we announced last quarter, we're executing upon our plans to separate ODP into two independent publicly traded companies. We are making meaningful progress in all separation activities, including on the various commercial agreements between the future companies. Additionally, as we announced in our earnings press release this morning, recognizing the flexibility afforded by the holding company reorganization we implemented last year, we modified our plan for separation. Under the modified plan, we intend to accomplish this transformation by spinning off our consumer business as opposed to our B2B business as previously announced. With this change, the B2B businesses will continue to be owned by the ODP Corporation and anticipated timing related to separation remains the same. We will highlight more details on this shortly. Finally, we're happy to report that we've been executing upon our share repurchase program, buying back nearly $70 million of our stock through the end of July. Now turning to more details regarding our operating results as shown on slide six. Our performance in the second quarter was highlighted by stronger revenue growth and continued solid operating results. A steady recovery of the broader economy, along with our value proposition, low-cost model, and flexibility in serving customers in multiple environments contributed to this performance. As the economy has begun to recover, businesses and schools have started to return to the office and to in-class learning, driving increased demand for several product categories, including core supplies. Continued strong support for work-from-anywhere customers, small businesses, and education customers also helped drive growth. All these factors contributed to improved performance in our business solutions division and continued impressive performance in our retail division, resulting in a consolidated 6% increase in revenue over last year. Coupling stronger growth with our continued low-cost model approach, we more than tripled our adjusted operating income versus the prior year. The standout among our operational performers was once again our retail division as shown on slide seven. Our retail division again drove impressive overall performance with sales on par with last year despite significantly fewer stores and service. We're continuing to fire on all cylinders capturing the continued elevated demand driven by home office support needs and school reopenings while leveraging our new labor model to drive stronger bottom line results. We saw increasing demand from education customers and signs of recovery in small businesses, driving greater demand for core supplies and copy and print services. Store traffic trends for stores in service were up significantly and conversion rates improved. We also continue to see strength in our buy online, pick up in store, or BOPUS offering. Although sales through the service option was lower versus last year's peak at the start of the pandemic. But to put into perspective, sales through Bopas are up over 70% when compared to the same period in 2019, highlighting the importance and convenience of this service for our customers. We've also added a unique service approach that we expect will help further drive Bopas sales. We recently implemented our 30-minute guarantee for in-store and curbside pickup. We are one of the few companies in retail to offer such a guarantee which has been well received by our customers. We expect this will help drive sales and higher customer satisfaction scores in the quarters to come. Putting our performance into perspective, our retail team delivered total sales in line with last year despite 169 fewer stores in service. Although we are not specifically reporting it due to differences in store hours and other factors, this performance points to a significant increase in same store sales. From an operating perspective, we drove a two and a half times increase in our operating income, driven by the impact of our labor and store operating model, improved mix of our products and services, and improved lease terms. Overall, our retail division reigns in an excellent position to continue serving as the home office headquarters for remote and hybrid workers, while continuing to be the essential school supply source for education customers, including schools, teachers, and students. In fact, we remain very excited about the upcoming back to school season and the new service commitments we are making to customers, as well as our continued support of communities and schools as shown on slide eight. It should be no surprise that we're expecting a stronger back to school season than what the industry had experienced in 2020 during the height of the pandemic. Over a long absence, pent up demand for school supplies and accessories, arts and crafts, and technology creates a significant opportunity for ODP as we head into the third quarter. We have worked through many of the industry challenges regarding sourcing the supply chain and are prepared with a broad assortment of products for upcoming demand. We're encouraged by the activity we've already experienced since quarter end and remain well positioned as we continue to witness a strong emotional connection to the Office Depot brand among teachers and students. We're also inspired by the feedback we're receiving from customers regarding the 30-minute service guarantee that I mentioned earlier. To date, this has been very well received by our customers. We're also proud to be giving back to our schools and communities through our Start Proud program. Our Start Proud program, now in its fourth year, continues to support schools and low-income communities nationwide and provide students, parents, and teachers with the supplies they need to start the school year confident and prepared. Also, Through our 5% Give Back School program, which gives 5% back to schools on qualifying purchases, we've raised nearly $40 million in funding to support schools and communities. Additionally, our Elevate Together program, launched this year, is already providing strong support in our community for minority-owned businesses throughout the country. I'm proud of all these efforts and the support they are providing for communities nationwide. Now, turning to our business solutions division as shown on slide nine, as we anticipated, we drove improved performance in our BSD division as the economy continued to recover and overall business activity increased. Our stronger performance was led by the education sector, mainly K through 12, as well as the public sector, driving demand for a wide spectrum of products, including core product categories, which have begun to enter back into the mix. In addition to core products, we continue to drive strong volume in our adjacency categories, led by furniture and technology, resulting in adjacency categories driving 44% of overall BSD revenues. Larger enterprises, which are only beginning to bring employees and staff back to the office, have gone on a slower pace of recovery. However, we expect demand from this sector to grow throughout the balance of the year. That said, These positive trends help drive a strong double-digit increase in revenue in our contract channel, which is partially offset by lower sales in our e-commerce channel as post-pandemic traffic trends and online traffic have begun to decline. In total, BSD delivered an impressive 12% increase in total revenue relative to last year. Combined with our low-cost model and improved product mix, we drove nearly a 2.5 times increase in operating income. On the new business front, we are winning and building share. Our pipeline of new business continues to grow, and our close rates are near historical highs. When combining this success with our mid-90% retention rate, we are driving net new customer wins and expect that we are gaining share in the large enterprise marketplace. As we head to the second half of the year, we are in an excellent position to continue to drive growth as we expect stronger traction from higher education customers and as large corporations begin their return to the office. Our value proposition remains strong, and along with our flexible supply chain, we continue to work with our partners and suppliers to address the recent industry-wide constraints. One of our core differentiators is the use of our large private fleet and our network of diverse third-party logistics partners. When coupled with our global sourcing presence, these assets create a competitive advantage for ODP as we manage through and address the challenges head on for the balance of the year. Now briefly turning to performance in our CompuCom division as shown on slide 10. Our CompuCom division drove an increase in revenue driven largely by stronger product revenues and stabilizing service revenues. We believe the malware incident is largely behind the company with business operations functioning back to normal. Over the past few months, we have strengthened our systems and enhanced our security measures. Customers continue to rely on CompuCom for the services they provide and our retention rate remains strong. Our pipeline of new business is growing and we are again focused on scaling the business. Also, our process of exploring a value-maximizing sale of our CompuCom division continues to move forward. Now turning to the progress we're making in our digital platform business as shown on slide 11. Over the past several months, we've continued to advance our digital platform business and made progress in developing the technology driving our digital transformation. We integrated BuyerQuest into our digital platform business and remain on track with our collaboration with Microsoft. Through this collaboration, we're bringing in our capabilities led by BuyerQuest an industry-leading digital e-procurement technology platform to Microsoft's Dynamic 365 business central customers in the future. We're also continuing to attract industry-leading talent to our team. Most notably, we've added Ann Rung, who has joined us to lead public sector for our digital platform business. She joins other notable hires over the past year to help drive our growth in the digital B2B platform business. We've also made progress on our brand alignment and will continue to generate strong interest from the supplier community as it recognizes the expansive reaching capabilities of our new platform. We believe these developments place us on the right path with the right team and the right technology platform to pursue growth in this very large and growing business commerce market. Before I turn the call over to David Bleich for an update on the Sycamore proposal, I wanted to spend a few moments to highlight our progress on our separation initiatives as shown on slide 12. Our plans to separate ODP into two independent, publicly traded companies continue to move forward through the second quarter. We've established our internal teams and identified the resources necessary to move forward with the work required to execute upon this initiative. We're making solid progress in all areas of the separation, including operating mechanics, supply chain dynamics, IT support, as well as the market-based commercial agreements between the companies. Additionally, as we announced in our press release this morning, we modified our plan for separation. We now intend to structure the separation as a tax-free spinoff of our consumer business as opposed to the previously announced spin of our B2B businesses. Recognizing the flexibility afforded by the holding company reorganization implemented last year, as well as our expected management and support structure, we believe that completing the separation through a distribution of our consumer business will be more efficient. The timing for completion by the first half of 2022 remains the same. An updated description of the anticipated post-spend companies and the related assets is shown on slide 13. Through our modified approach, we will spin off to ODP shareholders, Office Depot, a leading provider of retail consumer and small business products and services distributed through more than 1,000 Office Depot OfficeMax retail locations, as well as through our award-winning e-commerce site, OfficeDepot.com. The remaining company will continue to be the existing holding company, the ODP Corporation, which will consist of our Business Solutions Division's contract business, our Canadian business, Grand & Toy, as well as our independent regional office supply businesses. ODP will also include our newly formed BDP digital platform business, including buyer requests as well as our sourcing, supply chain, and logistics assets. As I stated in our last call, 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. We remain on track with our plans and expect to provide additional details, including management leadership appointments for both post-spend companies and more detailed financial information in the third quarter. With that, I will now turn the call over to David Bleich, our Executive Vice President, Chief Legal and Administrative Officer, who will provide commentary on the previously disclosed proposal made by Sycamore Partners, the owner of Staples, to acquire the consumer assets of the ODP Corporation.