The ODP Corporation

Good morning and welcome to the ODP Corporation's fourth quarter and full year 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 fourth quarter 2021 earnings conference call. This is Tim Perotte, 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. We will begin today's call with David, who will provide commentary regarding our decision to pause separation activities as we evaluate a potential sale of the consumer business. After David's commentary, Jerry will provide an update on the business, focusing much of his commentary on our accomplishments in the year, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value. After Jerry's comments, Anthony will then review the company's financial results, including highlights of our divisional performance. And 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. Security and Exchange Commission. Also 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 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 David Bleich, our Executive Vice President and Chief Legal and Administrative Officer.

David? Thank you, Tim, and good morning. As a reminder, on June 4, 2021, USR Parent, the owner of Staples, a Sycamore partner subsidiary, made a public proposal to acquire the ODP Corporation's consumer business, including the Office Depot and OfficeMax retail stores business, the company's direct channel business, OfficeDepot.com, and the Office Depot and OfficeMax intellectual property, including all brand names, for $1 billion. In December 2021, the company's board of directors received a non-binding proposal from another third party to acquire the company's consumer business, the terms of which are confidential. On January 14, 2022, the company announced that its board of directors was delaying the previously announced plan to separate the company into two independent publicly traded companies so that it could carefully review the proposals with the assistance of its financial and legal advisors to determine the course of action that it believes is in the best interest of the company and its shareholders. The company remains in conversations with interested parties as it further evaluates the potential value of the proposed transactions. I'll now turn the call over to our Chief Executive Officer, Jerry Smith.

Thank you, David, and good morning to everyone joining our call today. We appreciate you joining us this morning and hope that all of our listeners and their families continue to remain safe and healthy. I'm excited to be here with you today to discuss our results and accomplishments for 2021, as well as our strong finish in the fourth quarter. Our performance reflects our team's continued commitment to our low-cost model and to the core tenants that drive our business, positioning us to deliver strong results while making significant progress on our strategic initiatives to further unlock shareholder value. I've never been more excited about the opportunities ahead for our business, and I'm extremely proud of our team's efforts in delivering these results against a much more demanding macroeconomic and market backdrop. And to follow on to David's comments, we're also excited to be working with the interested parties on the potential sale of the consumer business and hope to have an update in the next few months on where we stand in the negotiations. Now turning to slide five of the presentation, the challenges posed by the pandemic and the macroeconomic environment over the past year were significant. The resurgence of COVID delayed the back to the office plans for many of our customers and impacted the timing of school reopenings. Furthermore, supply chain and sourcing constraints Labor shortages and inflationary pressures created additional challenges for us, as well as for most companies in many industries. I am proud that our team once again rose to meet these challenges, delivering strong performance while also advancing our strategic initiatives to drive shareholder value, a key outcome of which is helping us to align our assets to support the go-to-market strategies across our business units. We remain true to the core tenets that drive our business addressing the market dynamics, pursuing new avenues for growth, and positioning our business to unlock future value for all of our stakeholders. As I've mentioned on previous calls, these tenets form the foundation of our strategy and are rooted in driving a low-cost model, expanding our value proposition, 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 utilizing the strength of our business model and the flexibility of our infrastructure to address the market demands. We continue to drive our low-cost model, enabling us to provide compelling value for our customers and helping us generate strong operating results. We're also continuing to evolve our platform to serve customers in new ways, whether at home, on the road, or in the office, expanding our value proposition and providing a broader set of products and services. We're also investing and evolving into higher-value business markets, including the launch of our digital platform business, Verus, and leveraging our supply chain and distribution capabilities to support our future businesses. And it's not just what we accomplished. It's also how we drove our performance, as shown on slide six. At the heart of our approach is our winning 5C culture. I'm 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 upon our strategic priorities. I think a true testament to our 5C culture is the strong team we have built over the past few years, attracting the best and brightest talent across a broad range of industries, including technology, business commerce, supply chain, and finance. I can't express enough gratitude to our team in living up to our 5C culture, serving customers, and supporting our communities. We continue to set the highest standards for corporate responsibility, investing in and giving back to our communities throughout the year. We launched Elevate Together, a signature initiative to reduce historic barriers in bringing racial equity to small business owners and entrepreneurs. This effort raised nearly $3 million and through our partnership with the National Urban League and U.S. Hispanic Chamber of Commerce, provided direct cash grants to minority entrepreneurs. We expanded our award-winning Depot Difference program, solidifying a national partnership with the Boys and Girls Clubs of America. To kick off the relationship, the club served as the partner for our annual Depot Days of Service as we supported the revitalization of several community centers in the Southeast. We continued our strong support of teachers and students with our Start Proud program, supporting low-income elementary schools across the nation providing fully filled backpacks with supplies, gift cards, and awards for teachers. We remained a strong steward of the environment, continuing with initiatives to reduce greenhouse gas emissions. I'm so proud to be the leader of a company with such a strong commitment to our communities, the environment, and a culture that truly makes a difference that helps to elevate us all. Now turning to highlights of our major accomplishments for 2021 as shown on slide seven. First, as I've stated on previous calls, maintaining a safe environment for our associates and our customers continue to be our top priority. We continue to monitor state and national health guidelines, and we're maintaining safety measures as necessary to help protect our associates and customers. Now for the highlights. We delivered strong operating performance in the year, despite the challenges related to a slower pace of back-to-office trends, as well as industry-wide challenges related to supply chain constraints and inflationary pressures. The powerful combination of our low-cost model approach, along with our flexible supply chain and pricing strategies, helped to drive strong operating results against this more challenging backdrop for both the year and the quarter. Next, we made significant progress throughout the year on all of our strategic initiatives focused on unlocking shareholder value in the future. Using the flexibility afforded by our holding company restructuring, we began the separation for many of the operational components of our business and improved alignment of the assets that support our routes to market across our B2B and B2C businesses. We also enhanced our focus on our core capabilities, including the sale of CompuCom as we continue to invest in our B2B digital platform and supply chain. Supporting one of our key tenets of driving new avenues of growth in higher value markets we continue to make progress in advancing our digital platform business, Verus. Over the past 12 months, we've built a team of world-class B2B industry veterans led by Prentice Wilson and established a leading magic quadrant enterprise procure-to-pay platform with the acquisition of BuyerQuest. During the year, we established a collaboration with Microsoft that will bring Verus digital procurement platform to Microsoft's Dynamic 365 business central customers this year and continue to add customers, suppliers, and partners to the platform. The progress we are making places us in an excellent position to drive value in the large and growing digital business commerce market in the future. Finally, as part of our effort to enhance returns for shareholders, we committed to return over $300 million in the form of share buybacks in 2021. Putting our efforts in this area into more perspective, over the past five years during my tenure as CEO and the support of our board, We returned approximately $650 million to shareholders, largely through share buybacks. Now turning to more specifics of our performance for the year as shown on slide eight. Our overall performance in 2021 reflects the positive attributes of our team's commitment to operational excellence and the value of the investments we made in our infrastructure as we addressed an increasingly challenging market backdrop throughout the year. This backdrop includes the spread of two COVID variants delaying the return to office plans for many of our enterprise customers, as well as the global supply chain constraints and inflation that have created the recent industry-wide sourcing and cost challenges. As I discussed in our last call, because of the investments we had previously made in our supply chain infrastructure and longstanding relationships, ODP has been able to navigate a bit better than most companies through these challenges. A key differentiator is we continue to leverage our large presence in Asia through our global sourcing office, as well as the investments we have made in our private fleet and the flexibility of our distribution network that includes our long-term relationships with our distribution partners and suppliers. We also utilize pricing flexibility to help mitigate some of the inflationary increases, allowing us to pass through certain price increases to help alleviate cost pressures. While our top line did see pressure primarily from a planned reduction in our store footprint and lower demand for certain pandemic-related products, particularly in PPE, our team's continued focus on driving a low-cost model while leveraging the flexibility of our supply chain assets allowed us to deliver solid operating results. In all, our compelling customer value proposition combined with our team's strong execution offset many of the challenges and helped us drive over $300 million in adjusted operating income in the year and strong EBITDA. Now turning to our divisional performance, starting with our business solution division, or BSD, as highlighted on slide nine. Our BSD segment, consisting of both contract and our e-commerce channels, provides a strong value proposition for our customers with a broad product and service assortment backed by flexible sourcing and trusted supply chain operation. This segment of our business serves nearly half of the Fortune 500 companies, as well as medium and smaller enterprises and consumers through our digital presence. BSD's revenue performance was highlighted by an increase in sales in our contract channel, driven by slightly stronger demand in core categories from private and public enterprises, offset by lower sales through our e-commerce channel, as compared to the very strong demand we experienced in this channel in 2020 during the pandemic. Overall, revenue was down about 2% for the year. Let me provide more details. The overall business climate continued to face challenges throughout the year related to the ongoing effects of the pandemic and the recent impacts related to global sourcing and supply chain environment. As the business environment began to stabilize throughout the year, enterprise customers began to return to the office. a positive trend, however, at a pace much slower than we anticipated due to the continuing effects of COVID. Despite the challenge, we drove increases in sales in our contract channel, led by solid demand from enterprise customers for our core supply products, including paper and supplies, as well as stronger demand for furniture, technology, and print services. This was offset by lower sales through our e-commerce channel as the pandemic effects receded largely driven by lower sales of cleaning and break room and PPE. We continue to maintain our strong presence across our adjacency categories, including cleaning and break room, furniture, tech, and copy and print. Revenues generated in these categories remain flat with last year as a percentage of total BSD sales. From an operating perspective, we maintained our focus on our low-cost model approach, flexing our assets and utilizing pricing strategies throughout the year to partially offset the increased costs we are experiencing related to supply chain operations and other inflationary impacts. For the year and the quarter, we continue to do an excellent job in both retention and winning new business. Our retention rate remains near its all-time highest level, above 95%, and we're earning new business. We are continuing to work with our customers to better understand their needs in the new normal environment Flexing our ecosystem supports them in any environment. Additionally, we remain encouraged by the indication of the positive impacts to our business as customers return to the office. In general, our data shows that we do experience a lift in sales, primarily in course-applied categories, as more employees return to the office. This high correlation with return to the office will drive higher consumption for our breadth of products. And while the return to office has been slower to materialize throughout the year, we are confident that we are well positioned to capture the demand as activity increases. Now, turning to our performance in our retail division as shown on slide 10. The performance of our retail division in 2021 was simply terrific. Despite the challenges, our team drove strong top and bottom line results as we executed upon our low-cost model approach and delivered a value proposition that continued to resonate with our customers. I'm extremely proud of our retail team for driving these impressive results and providing a positive shopping experience for our customers, leading to continued strong net promoter scores. Throughout the year, we continue to execute upon our plans to optimize our store footprint, hoping to improve profitability and lower lease liabilities, and our omnichannel presence remains a popular choice among our customers. Our 2021 revenue performance was lower versus last year, driven by 116 fewer stores in service as a result of the planned store closures. Although we are not reporting the specifics, when eliminating the impact of store closures, we estimate that sales for open stores were up in the low single digits percentage over last year as traffic trends were stable and sales for shopper and conversion rates increased. Other dynamics throughout the year included a stronger back to school season as more students and teachers came back to the classroom as well as strong demand in categories related to home and remote office and small businesses. Core supplies, workspaces, and copy and print services all exhibited strong demand. These pauses helped to offset some of the impacts from lower sales and product categories that were previously in very high demand last year. For example, our cleaning and break room category, including PPE, exhibited lower sales compared to the very strong demand we experienced last year during the height of the pandemic. Additionally, we did face increasing challenges throughout the year related to supply chain and sourcing availability for a number of SKUs we sell. The number of out-of-stocks in the second half of the year ran significantly higher than pre-pandemic levels, most notably for technology products and PCs, driven by the continued chip shortages as well as overall challenges for components, including certain ink and toner. We are continuing to work with our vendors and partners to efficiently source these products and improve our inventory levels, but we expect these challenges to persist in the near term. Operationally, our team's continued focus on our low-cost model helped to offset some of these challenges. Through strong cost controls, the benefits of our maximized B2B plan, and the new labor model we implemented last year, our team drove an increase in operating margins this year versus last year's results, as well as quarter over quarter. Overall, we're encouraged by our continued strong performance. Our store footprint continues to become more profitable, and our omnichannel presence continues to be a popular choice among our customers. Demand through our BOPUS offering, while slightly lower on a comparable basis relative to last year, is up over 60% from pre-pandemic levels. Our recently launched 20-minute guarantee for in-store and curbside pickup remained popular and saw strong demand. We are the only company in retail that we know of to offer such a guarantee which has been well received by our customers. This innovative service, along with the growth of independent delivery channels, will help drive sales and continue to generate good customer satisfaction scores in the quarters to come. Now, as shown on slide 11, I'd like to take a moment to discuss the progress we made on our strategic initiatives and our path to unlock additional shareholder value in the future. As I look back on our journey, we've recognized early on the powerful combination of the assets supporting our business and the market presence we've created at ODP. Over the years, we've invested in and created a large unique supply chain and distribution network, developed flexible channels to market, a strong digital presence, and we expanded our influence among businesses of all sizes in the B2B market. As we continue to analyze our position and the assets that support our business, We've taken deliberate actions over the past few years to create the flexibility to align these assets to support our business for the future and unlock value for shareholders. It was less than two years ago when we were still organized as a single operating company, Office Depot, that we took a major step. As you may recall, in early 2020, we reorganized into a holding company structure in order to provide more flexibility to our business model and to better align our assets with our operating channels. Since that time, we also execute upon our maximized B2B plan aimed at optimizing our retail footprint and generating additional resources to invest in our future growth. In 2021, our evolution continued. Early in the year, we embarked on a plan to separate our business, and we shifted our transformation of a digital business platform into high gear. Through the process of strategically analyzing assets, our business controls and how to leverage these capabilities We've now positioned these assets as part of go-to-market strategies aligned with our B2C, B2B, digital platform, and distribution businesses. We have developed a clear line of sight of each of these businesses and the strategy behind driving future profitable growth. And through this process, we've separated many of the operational components of our business necessary for split or sale of our consumer business, and we enhanced our focus and our core capabilities including through the sale of CompuCom. Along the way, we continued to hone our low-cost model approach. So today, we have mostly completed our realignment, which has resulted in highly focused operating businesses under our holding company structure. Highlighting these, I would turn first to ODP Business Solutions, a leading BDB solutions provider serving small, medium, and enterprise-level companies, including the contract sales channel of ODP's prior Office Depot Business Solutions Division. Next up is Office Depot, a leading provider of retail consumer and small business products and services distributed via over 1,000 Office Depot and Office Max retail locations and an award-winning e-commerce presence through OfficeDepot.com. Next is Verus, which as many of you know is our B2B digital platform technology business focus on transforming digital commerce between buying organizations and suppliers. Our Federation entities include more than a dozen regional office supply distribution businesses we've acquired as part of our transformation to expand our reach and distribution network into geographic areas that were previously underserved. These businesses are wholly owned by ODP and managed through ODP Business Solutions, but continue to operate under their own brand names. And finally, VEHR, which may be a new name you're not familiar with yet, but you will be. VEHR is being created through activities related to our separation and is our world-class supply chain, distribution, procurement, and global sourcing operations, supporting both our B2B and B2C businesses, as well as logistics needs for other third parties. Our progress over the past year has been terrific and moving forward we are focused on leveraging these assets to drive future growth and profitability. We're committed to unlocking the value of our consumer business and driving growth in our B2B distribution and digital platform businesses and leveraging our supply chain assets to support our current and future business. We remain focused on regaining momentum in our enterprise channel as more companies return to the office and as we work to mitigate the ongoing supply chain and inflation challenges. I'd like to provide more insight into Veris for the year ahead, as shown on slide 12. Veris is a technology company that's focused on reducing the complexity and friction in business-to-business procurement and distribution. Anyone in the business procurement or BDB distribution space will tell you that buyers and suppliers have been dealing with legacy systems and processes for decades, and those systems create friction and drive up costs for both. Building Veris within ODP provides great synergy and acceleration as we've developed a deep understanding of the supplier side pain points. Through our network and business development efforts, we have great partners to work with, and we see tremendous opportunity to leverage technology to help businesses grow and operate more efficiently. And let's face it, expectations from a digital workforce continually increase around how they engage suppliers, and how they expect to get the goods and services they need. Recently, all around the globe, we've seen the economic pressure from things like supply chain issues and workforce turnover. And while we've all benefited from new and innovative solutions, as consumers, there's a huge gap when it comes to solutions tailored to the unique needs of businesses. And that is a gap that Verus is working to address. The reality is that neither procurement organizations nor suppliers are in a position to invest in technology and user experiences that are holistic for their employees or customers. Through Verus, our digital platform is purpose-built for them, so they can focus on growing their strategic partnerships and their business. Our focus is enabling both buyers and suppliers to win through a seamless end-to-end solution. Since we announced Verus last year, we've been partnering with customers on both the buyer's side and supplier's side to drive innovative technology that removes unnecessary friction and costs while driving savings for both. We've made tremendous progress in 2021, enabling and attracting a world-class team, building out the capabilities and technology, forging important partnerships, and scaling our plans. We are receiving great feedback from customers who are using the Procure2Pay platform by request, and we are incorporating new ideas on how to best serve them on the overall end-to-end platform. When they see the immediate benefits of putting their employees into a single purchasing experience with existing vendors, along with the workforce efficiencies and end user satisfaction gains, they ask us to add additional suppliers, creating a natural flywheel for growth. Both buying organizations and suppliers consistently see contract utilization increase. And when they put our solution in place, the cost to operate decreases and compliance rates increase quickly. Building out the full suite will ultimately provide a high-quality, end-to-end digital B2B solution, helping buyers and suppliers manage and grow their business. We expect 2022 to be a transformative year for Veris as we continue to invest in its capabilities, grow customer and supplier relationships, build volume and expand the platform with key partners, all positioning us to drive future value in the large and growing business commerce market. We're also working to expand our supply chain capabilities that we view as an integral component of our platform. As we finalize some of the strategic initiatives related to our B2C process that I outlined earlier, we're planning to provide more information around our entire B2B business platform, including ODP Business Solutions, Veris, and Ver. With that, I will turn the call over to Anthony for a review of our financial results.

Thank you, Jerry, and good morning, everyone. I'm happy to be here today to discuss our financial results for the fourth quarter and full year 2021 and the progress we are making on our strategic initiatives. As I begin, I'd like to say how proud I am of our entire team for remaining focused against what was an increasingly difficult macroeconomic and industry backdrop this year. Our team lived up to our 5C culture and delivered on all the key priorities I outlined when I joined as CFO. Before I cover the results for the quarter, I thought I would take a few moments to discuss in more detail some of the costs and inflationary impacts we faced, primarily relating to COGS, supply chain, and labor, as well as the strategies we've been employing to address these headwinds. Much of the recent, well-publicized global supply chain challenges began with the onset of the pandemic, as labor resources were constrained, factory hours were limited, and a demand shift from services to products added additional stress to the system. These factors continue to put strain on global supply chain assets. Raw materials used in everyday manufacturing have become scarce and more expensive to ship, causing suppliers to increase costs to their customers, creating a downstream inflationary effect. Spot market transportation costs have also skyrocketed, and labor scarcity and costs have continued to rise. All of these factors have made it more challenging for all industries to source, import, distribute, and deliver goods, and to do so at a reasonable cost. Our operations were not immune to these challenges. That said, because of the investments we have previously made in our supply chain infrastructure and our longstanding relationships, ODP is in a better position than most companies to navigate through these challenges. Let me begin with product inflation. With inflation reaching a 40-year high and energy prices climbing sharply, the overall cost of product from our suppliers has also been on the rise throughout the year, impacting the cost of many of our SKUs, including paper, furniture, tech, and other essential office categories. In total, for the fourth quarter, we have seen a mid-single-digit percent rise on average in our overall cost of goods sold via our product baskets. Next, supply chain costs related to transportation, distribution, and labor. were also up in the quarter and throughout the year. Market demand overall is up, fuel prices are higher, and capacity is constrained. Accordingly, our supply chain cost to serve was up nearly 100 basis points in the quarter compared to last year due to higher transportation and third-party logistics rates and labor. And breaking out labor costs, wages for logistics workers and general wage labor across our retail operations combined were up about 7% across the business. and has been the case for some time, we've experienced sourcing challenges in our technology product categories, including PCs, printers, and ink, causing our overall out of stocks to be higher than normal. These costs and sourcing challenges have had an increasing impact throughout the year. That said, we are in a strong position to mitigate many of these impacts. And as I stated on our last call, we have been taking actions early and aggressively to address. These actions include leveraging our private fleet and third-party relationships to help mitigate some of the cost increases in transportation and ensure reliable services to customers. This extends from ocean carrier contract arrangements to domestic small parcel carrier relationships, as well as long-haul providers. For product invoice increases in both our retail and BSD channels, we've been managing price actions and passing through cost increases to customers where possible. while remaining competitive with the market. Additionally, our vast assortment of SKUs and our ability to pivot to an assortment breadth to help meet our customers' needs at varying price points is a competitive advantage, helping us manage the price elasticity of demand. In terms of labor costs, we're working to address wage inflation while dampening the long-term effects. In our BSD and supply chain areas, we're using more short-term incentives rather than long-term wage locks. For our retail segment, Our labor model and efficiencies we have gained have helped mitigate some of the increased costs for our operations. Our ability to execute upon all of these actions is a testament to the investments we have made over the years and a core strength in our operational excellence. However, I would point out that the environment continues to remain challenging, and while we see some signs that certain constraints are abating, we expect that these conditions will persist in the near term. That said, We are in a strong position to continue to mitigate some of these challenges and manage accordingly. Now turning to the highlights of our financial results for our continuing operations as shown on slide 14. Consistent with previous quarters, we have provided our results on both a GAAP and adjusted basis. Turning to the specifics of our quarterly results, we generated total revenue of $2 billion in the fourth quarter, down 2% versus Q4 of last year. This was driven primarily by 116 fewer stores in service compared to last year, coupled with lower comparable sales for products previously in higher demand during the early stages of the pandemic. We continue to drive our strong value proposition, helping drive sales and increases in core supply categories, workspaces, and copy and print services. This was offset primarily by lower demand for PPE and cleaning products as conditions related to pandemic began to subside. Technology and Inc. categories continue to be negatively impacted by the sourcing challenges I described earlier. Despite the lower recovery of customers returning to the office in the quarter, we drove an increase in sales in our enterprise contract channel on a sequential and year-over-year basis. And our retail channel continued to see strong demand from hybrid workers and small business customers. GAAP operating income in the quarter was $31 million, up from $20 million last year. Included in operating income was $16 million of charges, including $2 million of non-cash asset impairment charges, primarily related with the right-of-use assets associated with our store locations. The remaining $14 million in net merger, restructuring, and other costs was primarily associated with our separation efforts, and we expect our overall costs to remain in line with previous expectations as we pursue a sale. Excluding these and other items, our adjusted operating income for Q4 was $47 million, up from $40 million last year. Unallocated corporate expenses were $25 million. Adjusted EBIT of $87 million for the quarter was up compared to $78 million in last year's fourth quarter. This includes adjusted depreciation and an amortization expense of $35 million and $37 million in the fourth quarters of 2021 and 2020, respectively. Excluding the after-tax impact from the items mentioned earlier, adjusted net income for the fourth quarter was $37 million, or 71 cents per diluted share, compared to adjusted net income of $23 million, or 43 cents per diluted share in the prior year period. Turning to cash flow, we generated operating cash flow of $88 million, which included $7 million of restructuring costs. This compared to operating cash flow of $15 million last year. The increase year-over-year was largely due to the timing of working capital. Capital expenditures in the quarter were $26 million compared to $9 million in the year-ago period, reflected targeted growth investments in our digital transformation, distribution network, and e-commerce capabilities, offset by lower CapEx in our retail division. In future quarters, we expect to increase our capital investments allocated to our digital platform initiative as we continue to make progress on VAERS. Adjusting for cash charges of approximately $7 million associated with the company's restructuring plans, adjusted free cash flow in the quarter was $80 million. Turning to slide 15, I've highlighted some key performance measures for the full year 2021. We delivered impressive results throughout the year against a much more demanding macroeconomic backdrop, leveraging our low-cost model and driving strong operating and free cash flow results. Total company sales for the year totaled $8.5 billion, a 5% decrease compared to the prior year. The decrease is primarily due to fewer retail stores in service relative to last year related to our maximized B2B plan. In our BSD division, we drove better traction in our contract channel, which was offset by lower demand relative to last year for certain product categories in our e-commerce channel. Overall, we drove an increase in core supplies as some of our B2B customers slowly began to return to the office, as well as increases in our retail channel for products supporting hybrid and remote workers and good growth in our copy and print services. As reflected on a full year gap basis, we recorded operating income of $234 million compared to operating income of $6 million last year. Primary drivers of the year-over-year increase in operating income are improved operating results, a $162 million decrease in non-cash asset impairment charges, and a $51 million decrease in net merger, restructuring, and other operating costs. For the full year, adjusted operating income was $305 million, up from $290 million last year, and our adjusted EBITDA of $465 million was up about 4% relative to last year. Impressive results given the challenging business conditions. Excluding the after-tax impact from the items mentioned earlier, 2021 adjusted net income from continuing operations was $234 million, or $4.28 per share, compared to $184 million, or $3.40 per share in the prior year. Finally for the year, we drove solid cash flow results, with cash provided by operating activities of $344 million, which included $57 million in cash costs associated with our restructuring programs and activities related to strategic initiatives. The decrease in operating cash flows relative to last year are primarily related to working capital and increase in our contract channel business, which has longer DSO cycles compared to our B2C channel. We generated adjusted free cash flow of $328 million in 2021, with CapEx of $73 million, primarily directed toward our continued investment in our B2B platform. Now I'd like to cover our business unit performance, starting with our BSD division on slide 16. As a reminder, BSD consists of our contract channel serving large, medium, and small enterprises, as well as our e-commerce channel, both backed by a flexible and reliable supply chain and distribution network. As you heard from Jerry, while the return to work trends are beginning to materialize, the pace has been much slower than we anticipated in the quarter due to the spread of the COVID Omicron variant. That said, total revenue in our BSD division was $1.2 billion, in Q4 up 2% in the quarter relative to the same period last year, driven by an increase in sales in our contract channel as businesses slowly returned to the office. This was partially offset by lower sales velocity in our e-commerce channel, which we expected relative to the strong demand experienced last year during the height of the pandemic. Overall, we saw an increase in demand for core supplies and stronger sales of furniture and managed print services. Specifically, in our contract channel, Demand for core supply categories were up in the high single digits, highlighting the correlation between return to office activity and core supplies growing in our mix. Offsetting some of these positives were lower sales of technology-related products, including PCs and ink, both of which were impacted by the sourcing supply challenges I mentioned earlier. Additionally, sales of PPE, technology, and furniture, all products in very strong demand at the height of the pandemic, were lower in our digital channel. That said, our e-commerce channel continues to be a key component of our omni-channel presence, providing our customers with the convenience and ease of shopping online, and fuels our strong and growing BOPIS offering with those sales reflected in our retail business. Overall, adjacency categories were 44% of total BSD sales, essentially flat with last year. BSD's operating performance was up over last year despite the challenges related to an increase in supply chain and distribution costs. Operating income was $30 million in the quarter versus $18 million in the prior year period. This represented a 100 basis point increase as a percentage of sales. A mixed shift into core supplies, lower SG&A, and continued cost efficiencies helped to mitigate the increase in distribution costs. We continue to aggressively execute strategies to pursue profitable growth in this channel, and we look forward to sharing more as we progress throughout the year. Now turning to our retail division results as shown on slide 17. Our retail division again drove terrific results in the fourth quarter with strong comparable store sales and strong margins. While reported revenue in the quarter was down 7% to $885 million, this was primarily driven by 116 fewer retail stores in service this year versus last year. We ended the quarter with 1,038 stores in service. When eliminating the impact of store closures, we estimate sales for open stores were up slightly in the quarter versus last year. As our value proposition continued to resonate with customers, and we continue to be seen as the home office and small business destination for customers. On a full year basis, we generated revenues of $3.8 billion, down 8% on the year. However, from a comparable open store basis, we anticipate we were up about 2% in sales from open stores throughout the year. Same-store sales traffic was lower in the quarter. However, this was significantly offset with higher conversion rates and average order volumes, leading to an increase in sales per shopper. We saw a strong resurgence in demand for our copy and print services, up over 10%, and continued healthy demand in our core supply categories. Additionally, our omni-channel presence continue to be recognized by the market. While our BOPUS sales were down versus the previous period last year during the height of the pandemic, BOPUS sales are up over 60% from pre-pandemic levels, highlighting the continued strong value proposition we are providing to our customers. Supporting the success is our recently launched 20-minute pickup guarantee, which continues to drive strong customer demand and satisfaction. Also for the year, omni sales reached a new high, with BOPUS comps up over 4%. We also hit a milestone with over 1 million curbside pickup orders. Balancing this progress, we saw lower demand in categories relating to the pandemic compared to the very strong performance last year. These included PPE and cleaning products, furniture, and certain technology. I would add that out of stocks also added to lower sales of technology products like PCs as well as ink during the quarter. From an operating perspective, we delivered strong operating margin performance in the quarter despite the higher cost challenges. We generated operating income of $54 million in the quarter, up 7% from the same period last year, representing an 80 basis points improvement. Improvements in SG&A and lease costs and continued cost efficiencies drove this result. Now briefly turning to our balance sheet highlights as shown on slide 18. We ended the quarter with total liquidity of approximately $1.4 billion, consisting of $514 million in cash and cash equivalents and $877 million in availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $248 million. I also would point out that subsequent to the quarter end, we sold CompuCom on December 31st, which had the effect of increasing cash and reducing the borrowing base on the ABL facility. I would highlight some of the drivers and actions we took during the quarter as part of our overall capital structure and to support our efforts to enhance shareholder returns. First, we repaid $100 million of nearer-term maturity industrial revenue bonds in the period. This early retirement will save us about $10 million in interest costs over the remaining life of those bonds. We are also looking at additional bonds as part of our overall capital structure and expect to address them in the coming quarters after we make additional progress with the B2C sale. Next, we continued to execute on our existing share buyback authorization and put in place a $150 million accelerated share repurchase plan in the quarter. In Q4, before we put in place the ASR, we repurchased about 850,000 shares for approximately $36 million. Under the ASR, we delivered $150 million and received approximately 2.8 million shares in the quarter. representing about 75% of the program's estimated shares from the initial transaction. As the program moves forward, we expect the balance of the shares to be delivered and accounted for upon the settlement of the program, which runs through June of 2022 but could terminate as early as mid-March. In total for the quarter, We committed to about $185 million for share repurchase activity and retired approximately 3.7 million shares, with additional shares to be delivered under the settlement of the ASR. In total for 2021, we have committed to return over $300 million in capital to investors from share buybacks, reflecting the confidence that our board has in our B2B business and digital B2B platform strategy and our capability to deliver shareholder value through disciplined capital allocation. Our balance sheet continues to remain a source of strength and provides us flexibility as we pursue growth and execute our strategy. In summary, we've executed well across our strategic initiatives and drove strong results in 2021. Our entire team remains committed to unlocking future value by driving our digital transformation, continuing to execute our strategic initiatives, and building upon our B2B platform for the benefit of all of our stakeholders. Before moving to Q&A, I wanted to touch briefly on capital allocation and provide some commentary on the year ahead. We expect 2022 to be a transformative year for ODP as we continue to execute upon the strategic path for our consumer business, complete the build-out and gain momentum in VAERS, and enhance our supply chain capabilities supporting our B2B and B2C business through VAER. Operationally, we will continue to work with our customers to gain greater momentum in our contract channel as more businesses return to the office and continue to leverage and optimize our store footprint for their benefit. In terms of capital deployment, we'll continue to take a balanced approach, continuing our strategic investments in our platform to pursue higher growth opportunities while working with our board on returning capital to shareholders. As you heard earlier, our B2B digital platform business, Veris, continues to make significant progress, and is building a strong base of suppliers and customers. In 2022, we expect an increase in this base, launch the private preview with Microsoft Dynamics Business Central, increase the platform's gross volume, and build the components of the revenue flywheel as we exit this year. In support of these efforts in 2022, we expect to continue to make investments in Veris in the range of $30 to $40 million in capital expenditures, and expect to incur $40 to $50 million in operating expenses. It is also important to note that the CapEx investments that we are making in our digital transformation are consistent with our historical CapEx amounts allocated to our growth initiatives and fit within the framework of our traditional total company CapEx investment. This reprioritizing of our capital expenditures will help us build out our digital platform, Veris, and also help strengthen our core e-commerce and supply chain platform. So we look forward to providing more information on VAERS in the upcoming quarters. Regarding guidance, considering our previously disclosed strategic initiatives that are currently underway, as well as the pace of macroeconomic activity related to the pandemic and continued supply chain dynamics, we are not providing specific guidance for 2022 at this time. That said, for 2022, We do anticipate annual revenue, operating, and cash flow results to be in a range consistent with the results of the prior year. And we'll hope to refine our views of specific guidance elements as we conclude the strategic considerations and as the year progresses. With that, operator, we will turn it over for questions.

To ask a question, simply press star 1 on your telephone keypad. Again, that is star 1. Our first question comes from the line of Chris McGinnis. Please state your company name, then proceed with your question.

Yeah, good morning. From Sedodian Company. First, thanks for taking my questions. Anthony, can you just maybe expand a little bit on capital allocation for 22 and the expectations maybe around CapEx and maybe return of shareholders?

Thanks, Chris. Good to hear from you. I think if you look at 2021, we've exhibited, as I mentioned, a good balance. You know, we drove organic investments to support our business. We executed on M&A to further align to our core strategy and clearly had a great return from a capital standpoint to shareholders, as well as cleaning up some near-term debt. So as we look at 2022 and beyond, you know, we'll work with our board on an approach that continues to maximize shareholder value as we exhibited in 2021.

Our next question will come from the line of Michael Lasser. Please state your company name, then proceed with your question.

Hi, this is Mike Schwartz. I'm from Michael Lasser from UBS. Thanks for taking our question. Can you size the top-line impact from price inflation in the fourth quarter, and what are you expecting the contribution from inflation to be in 2022?

Well, we're not providing guidance at this time in 2022, but we're seeing pressures coming across a number of areas, as we mentioned in our prepared remarks. You know, I think inventory had a three to four percent impact on top line. We saw pricing actions across a broad portfolio in the mid to high single digits across the portfolio. But you can't really look at it at one's lens because obviously the shift in the portfolio mix will have an impact as it relates to pricing. So as we think about, you know, the future state, you know, we continue to look at inventory challenges and the key categories that we've mentioned. We continue to look at pricing as a key lever for us working with our customers. And as you can imagine, pricing is elastic in some of our channels, a little bit more challenging in our BSD channel, just given the contractual nature. But we have very strong processes in place to continue to drive pricing through our channels and continue to capture share through that process.

And I'll add that I'm proud of the team. We've had pricing pressures through all 2021, and I think our operating results would indicate our ability and the business management system to pass those costs through appropriately. And again, position our low-cost model as the foundation around that.

Thanks. And just as a quick follow-up, how much was the sales drag from lower technology and PC sales in the fourth quarter, and how did that compare to lower sales at PPE?

Yeah, PPE was definitely a category that year over year had a significant impact. If you think about the impact from the height of the pandemic, Like many retailers, I think we've disclosed this, we had excess inventory coming into 2021, specifically in hand sanitizers. We've been very aggressive at moving that inventory, much of that at below cost. So as you look at the results and you look at the performance with that process, again, to Jerry's point, really proud of the team to take other actions and take other pricing actions across the portfolio to address Some of the challenges we saw, specifically in the PPE category, exiting 2020 with a lot of momentum in 2021, having probably around the $200 million overall, when I say overall, overall impact on PPE year over year in just the reduction in top line.

Again, that is star one for any questions. Your next question comes from the line in William Kafoury. Please go ahead.

Hi, guys. This is Wilka Foer here from Colliers. My question is on the commentary on 2022 operations being in a similar range to or a range consistent with 2021. Can you provide any color around the individual segment outlook for BSD and retail that's embedded in this commentary, at least directionally? I think it'd be helpful given that all the moving pieces including the margin improvement that we've seen in retail over the past year. Thanks.

And we'll welcome the call. I'm glad you're joining us and following us now. Appreciate it. I'll start at a high level. We're going to go through the same mechanics of addressing cost as well as addressing the headwinds across 2022. We're confident that with the culture of the team, the low-cost model we have, The focus on our 2020 guarantee and retail, the great low-cost model of Kevin's leadership team, as well as we're starting to see some positive trends from a last two or three weeks post-Omicron from a contract perspective as well. That's why we're basically saying we're sort of 22 to 21, we're going to be relatively in the same range. Anthony, I'll let you give some more color on the segment piece.

Yeah, I think to Jerry's point, if you put aside the strategic review of B2C, we continue to see significant strength in retail as the consumers continue to leverage our omni-channel presence for their home office and small business needs. We've said from last year, BSD, our contract business specifically, was a recovery story tied to reopenings. So as we see the pace of reopenings, and this is primarily large enterprises, reopenings. We expect continued progress on the contract side. We're seeing good progress on higher ed and K-12 as those begin to return to normalcy. Small and medium businesses continue to have a pace consistent with pre-pandemic. So as we continue to see the reopening pace, we're going to continue to see benefits, and that's what gives us confidence in the prepared remarks.

Great. Thank you.

Thank you.

Our next question comes from the line of Chris McGinnis. Chris, you may be on mute.

Hi. Thank you for taking my question. Just a follow-up around office trends as they return back. Have you seen an increase in pace of that? And I guess just talking to customers, the expectation of how that ramps in 22? Well, from a, you know,

As Omicron hit, we saw a flatness, not a decline, sort of from where it was. We'd built back up to sort of a – we saw progress throughout the year. It went flat during Omicron. In the last two or three weeks, we're starting to see some positiveness. Now, nothing, Chris, that's exceptional yet, but encouraged with the last two or three weeks from an overall demand perspective. And I think that, again, we've done a good job of – expanding adjacencies across that business, and then we'll continue to try to look for new opportunities across that.

Anthony? Yeah, I would just add, you know, the whole strategy around return to office, you know, we're monitoring it, we're working with our customers. To Jerry's point, we're seeing some progress as customers begin to define that future state in a more meaningful way, whether it's hybrid, more fully return to office. Those are all trends that should provide a tailwind for us as we continue to progress through 2022. Great.

And then just a question just around there in Varus. Can you just maybe talk about the relationship and what are the things we should look for in 22 around Varus? And when does that officially launch? Thanks.

So from a Varus perspective, 21 was sort of the year of recruiting and building the team and starting the development of the platform. 22 is really continuing the development of the platform but launching. We're having a pilot with Microsoft here in the very near future. Super excited by that opportunity to be part of Dynamics 365 and their large SMB customer base. And obviously throughout the rest of the year, we're going to continue to add buyers and sellers throughout the program and continue to work with some of those buyers and sellers and really building momentum as we exit the year. From a VAR perspective, real important, I'm glad that you called that out, and Anthony highlighted it, VEHR provides supply chain services sourcing procurement services for both the B2C and the B2B businesses. And so I've always talked about the value of our supply chain, but we're formalizing that more and locking that value more, and I think it's an exciting business opportunity for us, especially in the future, especially potentially depending on the – after the analysis from our board and our financial advisors and legal advisors of the B2C business. business and how we unlock the value there. So really excited with the future positioning, having Veris for the digital platform, having Ver for supply chain procurement and sourcing services, and having our B2B contract business, which obviously we feel that we're in a good position as that recovers. Great.

Thanks for taking my questions, and good luck in Q1. Thank you so much. Thanks, Chris.

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

Thank you, everyone, for joining the call. Please stay safe and healthy and look forward to talking to you again at our Q1 results. Have a great day.

Thank you for your participation. This concludes today's call. You may now disconnect.