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spk00: Good morning, and welcome to the ODP Corporation's first quarter 2022 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 now like to introduce Tim Peratt, Vice President, Investor Relations. Mr. Peratt, you may begin now.
spk02: Good morning, and thank you for joining us for the ODP Corporation's first quarter 2022 earnings conference call. This is Tim Perrott, 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 activities related to the potential disposition of our consumer businesses. After David's commentary, Jerry will provide an update on the business, focusing much of his commentary on our accomplishments in the quarter, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value. After Jerry'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. 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.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'll now turn the call over to David Bleich, who will provide an update on the evaluation of a potential disposition of our consumer business. David's anticipated date of departure from the company has been extended to May 31st. David? Thank you, Tim.
spk05: As a reminder, the ODP Corporation has received both public and private non-binding proposals to acquire the company's consumer business, including the Office Depot and OfficeMax retail stores business and the company's direct channel business, OfficeDepot.com. 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 interests of the company and its shareholders. The company anticipates that its board of directors will complete its review of the alternatives in the near term. I will now turn the call over to our Chief Executive Officer, Jerry Smith.
spk06: Thank you, David. 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 the first quarter. We are off to a great start to the year, and our performance in the quarter reflects our continued commitment to our low-cost model and to the core tenets that drive our business. We delivered strong results. despite the numerous market-wide challenges, while making significant progress on our strategic initiatives to unlock shareholder value. I have never been more enthusiastic about the opportunities ahead for our business, and I'm extremely proud of our team's efforts to start the year. And to follow on to David's comments, we're also excited about the progress we are making on our strategic initiatives, including maximizing the value of our consumer business, and we're aiming to bring this process to a conclusion in the near term and will provide more information at that time. Now turning to slide five of the presentation, our team continues to rise to the challenge, delivering strong performance in a turbulent environment. As I have discussed in the previous quarter, the challenges posed by the macroeconomic environment continues to be significant. The U.S. economy has experienced the highest inflation over 40 years, and the sourcing and supply chain conditions continue to be impacted by higher fuel costs, labor constraints, shipping and material shortages. Additionally, the lingering effects of COVID impacting the supply chain dynamics and the nature of how people work has added to this challenge. All of these conditions have created hurdles not only for our business, but for many companies across many industries. I'm very proud of our team for once again rising up to meet these challenges, delivering strong results while also advancing our strategic initiatives. We did so by remaining true to the core tenets that drive our business, pursuing new avenues for growth and positioning our business to unlock future value for all of our stakeholders. These tenets from the foundation of our strategy 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 consistently leveraging 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 remaining nimble in digitizing our platform to serve customers in new ways, whether at home or in the office, expanding our value proposition and providing a broader set of products and services. We're also continuing to invest in our digital platform business, Verus, and our supply chain and distribution business, Vare, to support the near-term and future state of our business. In addition, our B2C business continues to meet our customer needs as a home and small business office superstore, and we're making great progress on positioning this business for continued success. We believe all of these actions are enhancing our foundation to drive increased long-term value for shareholders. At the center of our approach to operational excellence is our winning 5C culture, as shown on slide 6. 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 upon strategic priorities The strongest testament to our five-seat culture is the world-class team we have built over the past several years, attracting the best and brightest talents across a broad range of industries, including technology, business commerce, supply chain, and finance. Combined with the support for our communities, we also remain a strong steward of the environment, continuing with initiatives to reduce greenhouse gas emissions and future commitments to reduce the use of plastics in our business. I am so proud to be leader of a company with such a strong commitment to our communities, to the environment, and the culture that truly makes a difference. Recently, leaders across our organization took part in the Depot Day of Service, a company-wide philanthropic initiative supporting local Boys and Girls Clubs of America, helping kids and teens across the country. This volunteer initiative is one of the many throughout the year that our associates look forward to participating in to give back to the communities where they live and do business. This commitment not only helps the organizations we are supporting, but also creates long-lasting community engagement for our leadership and executive teams. Now turning to the highlights of our major accomplishments for the first quarter as shown on slide seven. We delivered strong operating performance in the quarter, despite the industry-wide challenges related to supply chain constraints and inflationary pressures. Our revenue performance remains healthy, and the powerful combination of our low-cost model approach and flexible supply chain and pricing strategies, along with customers recognizing the breadth of products to serve their business, education, and home office needs, helped to drive strong operating results against this more challenging backdrop in the quarter. Next, we made significant progress in the quarter on our strategic initiatives focused on unlocking shareholder value. Using the flexibility afforded by our holding company restructuring that we implemented in 2020, we have completed the separation of most of the operational components of the business and are aligning our assets to support our routes to market across our B2B and B2C businesses. We also continue to invest in the capabilities of our B2B digital platform and in our supply chain and sourcing assets. 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, Veris, and setting the foundation for Ver, our logistics and supply chain business. At Veris, in Q1, we initiated a private preview launch on the Microsoft platform and continued to expand our key supplier network. Most recently, we were the keynote speaker at a major Microsoft Business Central Integrators Conference, where Veris was prominently featured as the key procurement technology on Microsoft's Dynamics 365 platform. And at VAER, we're enhancing our supply chain capabilities and aligning our assets to support our B2C and our B2B businesses today and other third-party customers in the future. This year will mark an important milestone for VAER as the business is formally established and we continue to expand our data-driven platform to support our current and future routes to market. Finally, as part of our effort to enhance returns for our shareholders, Our accelerated share buyback plan continues to be executed upon by our partner banks, and we expect this to be completed in the second quarter with the delivery of an additional $30 million of shares at conclusion. I'm proud to say that over the past 12 months, with the support of our board, we have committed to return over $300 million in the form of share buybacks. Now turning to more specifics of our performance for the quarter as shown on slide eight. Our overall performance in the first quarter reflects our team's continued commitment to operational excellence and the value of the investments we made in our infrastructure, positioning us to address the challenging market backdrop during the quarter. This backdrop included global supply chain constraints and high inflation that created the recent industry-wide sourcing and cost challenges. As I discussed on previous calls, the investments we have made in our supply chain infrastructure and key partner relationships place us in a better position than most companies to navigate through these challenges. The investments we have made in our private fleet, the flexibility of our distribution network that includes our long-term relationships with our distribution partners and suppliers, and our global sourcing office remains a key differentiator. We also remain sharply focused on our revenue management, including additional pricing and funding the growth and other productivity initiatives. Overall, while the top line results were flat with last year, this is a significant accomplishment as we had fewer overall retail locations in service versus a year ago due to planned store reductions. The reduced store footprint resulted in lower sales year over year in our retail division. which was offset by stronger sales in our business solutions division as we begin to see improved back-to-office trends in the quarter. Stronger sales of core supplies and cleaning and break room products helped offset lower technology sales in the quarter, which was impacted by the sourcing and supply chain challenges in the period. In all, our compelling customer value proposition combined with our team's strong execution helped us drive over $88 million in adjusted operating income in the quarter and strong EBITDA results. Now turning to our divisional performance starting with our business solutions division or BSD as highlighted on slide nine. Our BSD segment consisting of both our contract and e-commerce channels provides a strong value proposition for our customers with a broad product and service assortment backed by a trusted supply chain operation. As a reminder, this segment of our business serves nearly half of the Fortune 500 companies, as well as medium and small enterprises and customers through our digital presence. BSD's revenue performance improved in the quarter, up 9% year over year, driven by stronger traction in our contract channel as more businesses began to return to the office and to in-class learning. This result was particularly impressive given the ongoing sourcing and supply chain challenges. We saw improved demand among private enterprises and education customers through our contract channel, partially offset by lower sales through our e-commerce channel related to lower demand for certain product categories previously in higher demand during the pandemic. Demand for our core supply categories increased significantly, partially offset by lower sales of technology and ink categories as these continue to be impacted by sourcing and supply chain challenges costing higher than normal out-of-stocks in these categories. In addition to core supplies, adjacency categories including select areas of cleaning and break room products, furniture, and copy and print services showed strong growth for the quarter. From an operating perspective, we nearly doubled operating income versus last year as we executed upon our low-cost model approach, flexed our distribution assets, and utilized both flow path data to analyze price and cost as served by skew, location, and routes to market. This approach, coupled with in-depth enterprise customer reviews and pricing escalation scenarios, helped to offset inflationary pressures and led to margin improvement in our contract business. We also continue to do an excellent job in both retention and winning new business. Our retention rate remains near its all-time highest levels, above 95%, and we're earning new business. We're continuing to work with our customers to better understand their needs in the new normal environment flexing our ecosystem to support them in a hybrid setting or in the office. A true testament to this can be seen in our recent results. While many external sources estimate that less than 50% of employees have returned to the office, our weekly sales trends indicate that we are continuing to make progress toward the levels we saw in 2019. And we remain excited by the positive impact to our business as a greater percentage of those customers return to the office. Working closely with our customers on the return to office strategy, our data shows that we experienced a lift in sales, primarily in core supply categories, but also in adjacencies as more employees return to the office. This trend allows us to be well-positioned to capture feature growth. Before I move on to our retail business, I would like to make a few comments around the press release we issued this morning regarding the appointment of a new leader for our ODP Business Solutions. Today, we announced that Steven Mohan, our current head of our BSD business, will be leaving the company. As part of this transition, and after reviewing several aspects of our business and the current and future opportunities to pursue profitable growth, we announced that David Centrella, currently Senior Vice President of Financial Planning and Analysis, will lead ODP business solutions moving forward. David, a 20-plus year veteran of ODP, brings a wealth of B2B experience and financial discipline. He was formerly a key member of the executive team leading BSD's contract business, led our print business, and acted as interim CFO prior to leading our FP&A and separation management office efforts over the past year. David was instrumental in helping shape our future state go-to-market strategy as we executed our holding company restructuring. We believe the combination of David's B2B expertise and financial discipline, along with his deep industry knowledge, will place ODP in the best possible position to pursue accelerated, profitable growth in ODP's business solution in the future. In fact, we believe our operational performance is headed in the right direction, and we're in position to further improve. Over the past several months, Anthony and I completed several deep dives in BSD, analyzing a large number of customer contracts, dissecting P&Ls, and reviewing the operational trajectory of this business. Based on these reviews, we believe that P&L for BSD is in position to further improve, and we're optimistic with the progress we're making. We're excited about the expertise that David will bring to our efforts. We also want to thank Stephen for his contributions to the business over the past three years and wish him well in his future endeavors. Now turning to our performance in our retail division as shown on slide 10. Our retail division again delivered solid performance in the quarter. On a comparable basis, our team drove solid top line 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, the best in the company. Our revenue performance in the quarter was lower versus last year, largely driven by fewer stores in service as a result of planned store closures. Although we are not reporting the specifics when eliminating the impact of planned store closures, we estimate that sales for open stores were relatively flat. We witnessed good trends in sales per shopper, along with core supplies and copy and print services exhibiting strong demand, and our omnichannel presence continues to resonate with our customers and grow. These positives helped offset some of the impacts of 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 outbreaks of the COVID variant. Additionally, we did face increasing challenges related to supply chain and source availability for a number of SKUs we sell. The number of out-of-stocks in the quarter continued to run significantly higher than pre-pandemic levels, more than double 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're continuing to work with our vendors and partners to efficiently source these products to improve our inventory levels, but we expect these challenges to persist in the near term. Operationally, our teams continue to focus on our low-cost model, help to offset some of these challenges. We drove lower SG&A expenses, lower operating lease costs, and showed improvement in our product margins. Offsetting these improvements was the flow-through impact of lower sales, primarily as a result of store closures, which resulted in lower operating income on a dollar basis. Operating income as a percentage of sales was 9%, despite lower volume on the quarters. Overall, we're encouraged by our strong performance. Our store footprint continues to become more profitable, and our omni-channel presence remains a popular choice among our customers. Demand through our focus offering, while slightly lower on a comparable basis relative to last year, is up approximately 30% from pre-pandemic levels. Our recently launched 20-minute guarantee for in-store and curbside pickup also 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, In the quarter, we continue to make progress on our strategic initiatives to unlock shareholder value by further aligning our assets to support our B2B and consumer businesses. Putting into context our journey over the past few years, early on we recognized the powerful combination of the various assets supporting our business. Accordingly, we've invested in and enhanced our unique supply chain and distribution networks developed a strong market and digital presence, and expanded our offerings in the B2B market. We also took deliberate actions to support our strategy and created the flexibility to align these assets to support our business for the future to further unlock shareholder value. For example, two years ago, we reorganized into a holding company structure in order to provide more flexibility to our business model and to align our assets with our operating channels. Since that time, we also executed upon our maximized B2B plan aimed at optimizing our retail footprint and generating additional resources to invest in our future growth. And last year, we embarked on a plan to separate our business, and we shifted our digital transformation into higher gear with the development of Verus. Through the process of analyzing the assets that control our business and how to leverage these capabilities, we've continued to make progress on aligning these assets to support our go-to-market strategies in our B2C, B2B, digital platform, and distribution businesses. These efforts have helped us develop a clear line of sight for each of these businesses and the strategy behind driving future profitable growth. And during the quarter, we continue to separate the operational components of our business that are necessary to support a split or sale of our consumer business. This was no easy task and involves hundreds of process reviews and assessments, uncoupling processes and flows, some which have existed for decades. This work continues. And while today we have mostly completed our realignment, which has resulted in highly focused operating businesses under a holding company structure, we are continuing to look at ways to further drive efficiencies in our low-cost model approach. Highlighting these, I would turn first to ODP Business Solutions, a leading B2B solutions provider serving small, medium, and enterprise-level companies including the contract sales channel of ODP's prior Office Depot's Business Solutions Division. This includes our federation entities, comprised of more than a dozen regional office supply distribution businesses we acquired to expand our distribution network into geographic areas previously underserved, which collectively produces a significant amount of revenue, and our grand and toy operation, which serves commercial contract customers in Canada. Next up is VAR, being stood up through our separation process 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. VAR provides a strong value proposition, which we plan to grow over the next few years as we continue to evolve the platform. Next is VARIS. which as many of you know is our B2B digital platform technology business, focused on transforming digital commerce between buying organizations and suppliers. And finally, Office Depot, a leading provider of retail consumer and small business products and services and what our brand is most recognized for. Our progress in the quarter has been terrific in preparing our foundation to support the go-to-market strategies for each of these highly focused businesses And moving forward, we're focused on leveraging these assets to drive future profitable growth. And as you heard from David, we've continued to make progress in the strategic evaluation of our consumer business and expect to bring this process to a conclusion in the near term and will provide a future update accordingly. Now, I'd like to provide insight into our progress in our digital platform business, Veris, as shown on slide 12. As a reminder, Veris is a technology company that's focused on reducing the complexity and friction in the B2B procurement and distribution. Those with experience in the B2B distribution or business procurement space know that buyers and suppliers have been using inefficient legacy systems and processes for decades. And those systems create inefficiencies and drive up costs for both. At the same time, Expectations from a workforce that continues to be digitally enabled has compounded the need to engage suppliers in a more seamless and frictionless way while driving economics towards contract compliance and purchasing leverage. As consumers, we've benefited from new and innovative solutions. However, there is a very wide gap when it comes to solutions tailored to the unique needs of businesses. And this is a gap that Verus is positioned 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 Veris, our digital platform is being developed with the flexibility so organizations can focus on what makes them great, helping them grow their strategic partnerships and their business. Our focus is on enabling both buyers and suppliers to win through a seamless end-to-end solution. In the quarter, we continue to make strong progress on various development and platform launch in 2022. We initiated a private preview launch on the Microsoft Dynamics 365 Business Central platform, and we're receiving very positive feedback from customers, and build partners alike. As I previously mentioned, we had a successful showing at a major Microsoft Business Central integrators conference in March, generating significant excitement around the various platform and the value for their customers. We're making progress and continue to attract new customers to the platform, both buyers and suppliers innovating on their behalf and expanding capabilities over the next several quarters. To wrap up my comment before I turn it over to Anthony, we're excited about our continued strong performance and encouraged by the progress we are making as we continue to strengthen our B2B platform business. The progress we are making across all our strategic pillars place us in a position of strength as we pursue the large and growing market opportunity ahead of us. Operationally, we'll keep our heads down and focused on continuing to drive strong execution while making progress on the strategic evaluation of our consumer business, working to bring that process to a close in the near term. With that, I'll turn the call over to Anthony for a review of our financial results.
spk03: Thank you, Jerry, and good morning, everyone. I'm happy to be here today to discuss our financial results for the first quarter of 2022 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 and driving strong results against a challenging industry backdrop. We maintained our focus on our low-cost model and on our infrastructure to help offset some of the supply chain and cost pressures that the market has been experiencing. We also continue to make progress on our digital transformation and building out our data-driven platform for the future. Collectively, our teams rose to meet the challenges of the quarter. As Jerry mentioned, the sourcing and supply environment remains challenging, and inflation is the highest it has been in over 40 years, creating additional cost pressure not only for us, but for nearly every company and consumer. Distribution and supply chain costs are up significantly as well. The raw materials used in everyday manufacturing have become scarce and more expensive. Spot market transportation costs have 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, and distribute, and to do so at a reasonable cost. These costs and sourcing challenges have continued into 2022, impacting COGS, supply chain, and labor. That said, we continue to be in a strong position to mitigate many of these impacts. And we've been taking actions to address these factors early on, as reflected in our most recent results. Record high inflation and energy prices have increased the overall cost of product from our suppliers, impacting the cost of many of our SKUs, including paper, furniture, tech, and other essential office categories. In total for the quarter, we have seen a high single-digit percent rise on average in our overall cost of goods sold via our product baskets. Given the breadth and depth of our product offerings, customer buying patterns and baskets can heavily influence the cost to serve. Next, supply chain costs related to transportation, distribution, and labor continue to be inflated. Market demand is up, fuel prices are higher, about 50% higher for diesel fuel, and capacity remains 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 specifically for labor costs, wages for logistics workers and general wage labor across our retail operations combined were up about 7% year-over-year across the business. And as has been the case for some time, we continue to experience sourcing challenges in certain technology product categories, including PCs, printers, and ink. causing our overall out-of-stocks to be relatively higher than normal. While these costs and sourcing challenges have persisted in the quarter, we have been taking actions for some time to address. These actions include leveraging our private fleet and third-party relationships to help mitigate some of the cost increase in transportation and ensure reliable service to our customers. This extends from ocean carrier contract arrangements to domestic small parcel carrier relationships as well as long-haul providers. We have also analyzed our proprietary developed Flowpath data tool, which has helped us optimize our supply chain operations to help reduce the cost to serve by route to market and product. 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 our assortment breadth to help meet our customers' needs at varying price points is a competitive advantage, helping us to manage some of the price elasticity of demand. For labor costs, we continue to look at ways to optimize incurred hours while driving productivity enhancements through process reengineering, as well as looking at incentive compensation structures to drive performance. Our team's ability to execute upon these actions is a reflection of the investments we have made over the years and is a core strength in our operational excellence. However, I will 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 the challenges and manage accordingly. Now turning to the highlights of our financial results as shown on slide 14. Consistent with the previous quarters, we have provided our results on both a gap and adjusted basis. We generated total revenue of $2.2 billion in the first quarter, flat when compared to last year's Q1. This was particularly impressive given that we had 114 fewer stores in service compared to the same period last year. We saw improving back-to-office trends in the quarter, helping us drive stronger performance in our enterprise contract channel, both year-over-year and sequentially. We generated strong sales in core supplies, cleaning and break room, and copy and print categories, partially offset by lower sales of technology products and ink categories related to the supply chain challenges I mentioned earlier. Our retail channel again drove solid performance, providing strong support for hybrid workers, education, and small business customers. GAAP operating income in the quarter was $76 million, up from $69 million last year. Included in operating income was $12 million of charges consisting primarily of $10 million in merger, restructuring, and other operating costs largely associated with the separation activities. The remaining $2 million is associated with non-cash asset impairment charges primarily related to the company's retail store locations. Excluding these and other items, our adjusted operating income for the quarter was $88 million compared to $93 million in Q1 last year. This included $34 million of unallocated and other expenses for the first quarter of 2022. Adjusted EBITDA of $125 million for the quarter compared to $133 million in last year's first quarter. This included adjusted depreciation and amortization expense of $34 million and $36 million in the first quarters of 2022 and 2021, respectively. Excluding the after-tax impact from the items mentioned earlier, adjusted net income for the first quarter was $64 million or $1.27 per diluted share, compared to adjusted net income of $68 million or $1.22 per diluted share in the prior year period. Turning to cash flow, We generated operating cash flow of $30 million, which included $7 million of restructuring costs. This compared to operating cash flow of $103 million last year. Lower operating cash flow in the quarter was related to timing of working capital items and was in line with our internal expectations. Capital expenditures in the quarter were $21 million, compared to $12 million in the prior year period, reflected targeted growth investments in our digital transformation, supply chain, and e-commerce capabilities. In future quarters, we expect to increase our capital investments allocated to these investments and capabilities as we continue to make progress on VAERS and VARE. Adjusted for cash charges of approximately $7 million associated with the company's separation and restructuring plans, adjusted free cash flow in the quarter was $16 million. Now I'd like to cover our business unit performance starting with our BSD division on slide 15. 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, return to the office and classroom trends improved in the quarter, helping to drive strong demand in our BSD division. Total revenue in BSD was $1.2 billion in Q1, up 9% in the quarter relative to the same period last year. driven by an increase in sales in our contract channel as businesses began to return 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 heightened conditions related to the pandemic. In total, we saw an increased demand for core supplies, cleaning and break room products, furniture, and managed print services. More 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 the mix. I would also point out that our cleaning and break room category included sales of COVID kits, helping to propel sales in this category. Overall, total adjacency category sales were 46% of total BSD revenue, up about 200 basis points compared to last year. Offsetting some of these positives were lower sales of technology-related products, including PCs and ink, both of which were impacted by the sourcing and supply chain challenges I mentioned earlier. Additionally, sales of PPE in certain supply product categories previously in strong demand during the height of the pandemic were lower in our e-commerce channel. That said, our e-commerce channel continues to be a key component of our omnichannel presence, providing our customers with the convenience and ease of shopping online, and fuels our strong and growing BOPIS offerings with those sales reflected in our retail business. BSD's operating performance improved significantly over last year, driven by stronger sales volume and lower SG&A. Operating income nearly doubled year over year to $33 million in the quarter versus $17 million in the prior year period. This represented a 120 basis point increase as a percentage of sales. A mixed shift into core supplies, lower SG&A, and pricing strategies helped to mitigate the increase in supply chain costs and other inflationary pressures we see. During the quarter, we continued to move aggressively on pricing. with Jerry, David Centrella, and I performing line-level customer reviews with the business to execute strategies to pursue profitable growth. This was enabled with our data-driven approach, utilizing the full cost to serve, helping to meet our customers' demands in the most efficient way. Now, turning to our retail division results as shown on slide 16. Our retail division again drove strong results in the first quarter. While reported revenue in the quarter was down 9% to $943 million, this was primarily driven by 114 fewer retail stores in service this year versus last year, related to our planned store closures. We closed six stores in the quarter, ending the quarter with 1,032 stores in service. When eliminating the impact of store closures, we estimate sales for open stores were approximately flat with last year. as our value proposition continued to resonate as we provided strong support for home office, education, and small business customers. Same-store traffic was lower in the quarter. However, this was largely offset with higher conversion rates and average order volumes, leading to a strong increase in sales per shopper. We saw continued strong demand for our copy and print services, up nearly 20%, and increased demand in our core supply categories on a comparable store basis. Additionally, our omnichannel presence continues to grow, with strong BOPIS sales in the quarter, leading to an increase in BOPIS sales as a percentage of total retail sales. On a comparable store basis, BOPIS sales were up 10% over Q1 of last year, and up approximately 60% from pre-pandemic levels, highlighting the continued strong value proposition we are providing to our customers. Supporting this success is our 20-minute pickup guarantee, which continues to drive strong customer demand and satisfaction. Balancing this progress, we saw lower demand for product categories related to the pandemic, including PPE and cleaning products, furniture, and certain technology. I would mention 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 approximately $89 million in the quarter, down from $100 million in Q1 of last year, largely related to fewer stores and service. Operating margins were slightly over 9% of revenue, nearly flat with last year, as improvements in SG&A, lease costs, and continued cost efficiencies helped to mitigate higher product and supply chain costs. Now, briefly turning to our balance sheet highlights as shown on slide 17. We ended the quarter with total liquidity of approximately $1.4 billion, consisting of $557 million in cash and cash equivalents and $874 million in availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $199 million. I would like to highlight some of the actions we took during the quarter as part of our overall capital structure and to support our efforts to enhance shareholder returns. In the quarter, we retired approximately $43 million of the final term loan facility under the existing credit agreement. This facility was drawn at the time we amended our ABL a few years ago and is relatively more expensive and had strict borrowing base requirements. As our borrowing base has changed after the sale of CompuCom and as we optimized the retail store footprint, we were able to retire $43 million of the filo which will save us approximately $2 million a year in interest costs, while the retirement had no impact to overall liquidity. Additionally, as part of our efforts to enhance shareholder returns, the ASR plan we put in place during Q4 of last year continues to be executed upon by our partner banks. We're expecting this plan to be completed in the second quarter, which will include the delivery of an additional $30 million of shares at the conclusion of the plan. Putting this into perspective, in conjunction with other share repurchases over the past 12 months, we have committed to return over $300 million in capital to investors, reflecting the confidence our board has in our business solutions and digital B2B platform strategy and our capability to deliver shareholder value through disciplined capital allocation. And as we move forward, while we have been excluded from buying back additional shares in the market as the ASR is being executed, I would point out that we have $342 million remaining available for additional repurchases under the current stock repurchase authorization as of quarter end. And we plan to work closely with our board on future capital allocation strategies. 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 the quarter. Our entire team remains committed to unlocking future value by driving our digital transformation, evolving our data-driven B2B platform, and continuing to execute our strategic initiatives for the benefit of all our stakeholders. As we move forward, we are focused on bringing the strategic evaluation of our consumer business to a conclusion in the near term. Operationally, our team will remain highly focused on executing across our business, utilizing our data-driven approach in our contract channel while delivering upon our retail plan. We're working to complete the build-out and gaining momentum in our B2B digital platform business, Verus. Verus continues to make significant progress, adding new supplier relationships and customers, and expects to add to its capabilities and launch the components of the revenue flywheel as we exit this year. And Ver remains focused on enhancing its supply chain and digital capabilities, supporting our B2B and B2C businesses, as well as positioning its value proposition for other third parties in the future. From a capital deployment perspective, we'll continue to take a balanced approach, continuing to work with our board on returning capital shareholders and making strategic investments to pursue higher growth opportunities for the firm. And regarding our outlook, while we are not providing specific guidance for 2022 at this time, we continue to anticipate annual revenue operating and cash flow results to be in a range consistent with the results of the prior year on a comparable basis. We hope to refine our reviews of specific guidance elements as we conclude the B2C process and as the year progresses. With that, operator, we will turn it over for questions.
spk00: Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, press star 1. Please stand by while we compile the Q&A roster. Our first question comes from Chris McGinnis with Sidoti and Company. Your line is open.
spk01: Yeah, good morning. Thanks for taking my questions in the next quarter. I think if we could just start just around the kind of terminology around near term related to the consumer business. I know you can't put a timeline on it, but can you just maybe dive into the expectations for the separation for this year and what you mean by the change in the terminology? Thank you. I'll take separation.
spk06: And good morning, Chris. I hope you and your family are well. So from a separation perspective, we spend a ton of time and effort. Dave Centrillo and the team does a fantastic job. We've made substantial progress making sure the company is separated and able to operate in the units that we described, the B2C unit, the B2B, they're endorsed. And so we made incredible progress to get ready for that. And so I would say that we're very, very close to having that ready. In regards to the transaction, I'll just say that, as David said and I've said, we made substantial progress. And we obviously think that we're going to be completing that in the near term. It can't be exact specific, but I think that says it all. Anthony, you want to give any color?
spk04: No, I think you're exactly right. All the work that we've done obviously has prepared us for separation, and given the process, Chris, and thanks for the comments, we expect sometime before this quarter end to provide an update. So, in the very near term.
spk01: Great. Maybe just the next question around the back to office trends. You know, Omicron was present in the beginning of the quarter. Can you just talk about maybe the progression of the return to office and how you see it exiting the quarter?
spk06: Yeah, I'll start and I'll let Anthony finish. So we've continued to see, as you saw from our B2B results, we're building momentum across both category as well as segments. And so though it's not at the pre-pandemic level, it's closing that gap pretty rapidly. I think in some segments, in fact, we'll back up to full pre-pandemic levels. So I'm very, very pleased with the progress from the growth on that. I think there's a lot of upside potential as well, but we've seen huge growth and continue to grow our adjacency categories. We're finding other ways to obviously grow the revenue of the businesses. I think we made a lot of progress. We mentioned it. I'm very, very proud, Chris, of what our team, how we've managed the cost, the impact of inflation across the entire business, not just the low-cost model isn't just vapor. It's real. It's daily operating focus. It's our flow path tool we've developed, which gives us flat-line chain costing, which we think is unique across many industries. We have the ability to price at the skew level. So we really have a better visibility of the P&L. We've really dug in. on a daily basis into driving costs and driving revenue opportunities across the B2B business. So it's not back completely, but substantial progress, substantial momentum building.
spk04: Yeah, I would just add, Chris, we look at a few key statistics, namely weekly sales trends across end markets. So think of it from an industry perspective, education to Jerry's point, closer to the pre-pandemic levels. And that's really K through 12 higher eds, a little bit behind that. at the higher end. Core office applies to think about tenants and multi-tenant commercial real estate still at the low end of the recovery. But the good thing is those weekly sell trends are improving across all our sectors. So we feel really encouraged that we're starting to see some true tailwinds as it relates to the back-to-office trends.
spk01: Thanks for that. Just on the inflation side of the business, obviously a host of host of pressures here and supply chain constraints. I don't know. Is there a way to, to, um, you know, just think, or maybe talk about, you know, how the consumer is taking this approach on, um, and in bulk, maybe on the retail side and then on the commercial side of the business, if you wouldn't mind, you know, just how they're dealing with the pricing and, um, you know, your, your position on the inventory as well would be helpful. Okay. Go ahead.
spk04: Yeah. Yeah. I'll start in, uh, pass it back to Jerry. So if you think about the inflation, you know, clearly this has been a pressure point, not only for ODP, but in the broader economy. I think to Jerry's earlier comments, you know, we're very proud of what we've been able to accomplish. You know, starting in Q2 or Q3, we started to see some supply chain disruptions as it related to ocean freight. Coupled with our data-driven approach, we've been taking pricing actions early. We've been working in each of our channels to see how much of the pricing actions we can offset from the cost increases while staying competitive. And that's the key element of our process. And as I mentioned in our prepared remarks, the fact that we have such a breadth and depth of products really allows us to price accordingly across multiple SKUs to really drive value to our customers. and helping our customers also navigate some of these cost pressures. So we'll continue to take action in pricing as well as continuing to drive the low cost model from an efficiency standpoint. And I think Q1 is a testament that we were able to navigate that pretty adeptly in the quarter.
spk01: Great. Thank you. And then in thinking about the guidance, you know, felt like Q1 was a little stronger than expected. Just to think about the cadence for kind of the rest of the year and your expectations for the business overall in relation to guidance.
spk04: Yeah, I think, Chris, as it relates to guidance, obviously the B2C transaction plays a big part in how we're looking at the full year and the timing related to that. To the prepared remarks, we expect trends to continue to improve across each of our channels as we're investing in our digital platform business and our supply chain business. So there's a lot of puts and takes, but the biggest variable is, you know, clearly the second half continuing momentum on the return to office, as well as the B2C transaction process, you know, really coming to conclusion there will give us a better insight into the full year that will provide the market.
spk01: And any more you can provide, you know, data or detail around Verisk, Just in terms of, you know, is there an expectation to put out maybe some numbers around the offering at some point throughout this year?
spk06: Yeah, I think two things. We had a very successful, I think this is super important, and I hope everyone recognizes that we had our beta, which is called private preview, which is really a beta from a product launch perspective. Excuse me, at the Microsoft conference here a couple weeks ago, and it was a huge success, a ton of people. Our super ton of partners are on Arisman platform. We're making progress on buyers and sellers. But 22 is really a year of launching the tech. 21 was a year of building the team. 22 is launching the tech. The beta was super important. We appreciate the support from Microsoft. And bluntly, the success of the conference made us even more optimistic. I would say, Chris, that as we move towards the near term from a sale from the B2C perspective or a direction one way or the other, Once we make that conclusion of what we're going to do, we're going to obviously come back with a full investor day type of approach of either here's the sale or spin or whatever we do. Plus, here's what's the remaining pieces we've talked about, the supply chain business, the various business, and then obviously the traditional B2B business as well. And so I would say once we get through a determination one way or the other, what happens from a B2C perspective, we'll come out in more details from a Averis perspective. But super pleased and happy with what we did from a Microsoft launch perspective. Terry Prentice and team did a great job. Daniel did a great job of getting the product ready and launching some pilot customers on it. So we're very pleased with that.
spk04: Yeah, I would just add, Chris, we are reviewing segment reporting in light of Jerry's comments around the whole process. So that's something that this process we undertook has afforded us the opportunity to take a look at our routes to market, and we're considering our segment reporting as a result of that process.
spk01: Great. Really appreciate it. Thanks for taking the time today, and good luck in Q2.
spk04: Thanks, Chris. Thank you. Appreciate it.
spk01: Thank you, Chris.
spk00: Thank you. And I am showing no further questions in the queue. I'd like to turn the call back to Jerry Smith for any closing remarks.
spk06: Thank you, everyone, for joining us on the call today. I want to personally thank my team and the whole organization for an outstanding quarter. Couldn't be more pleased with the economic conditions that are in the marketplace and some of the challenges other companies have had, how we rose up and beat expectations across earnings per share as well as revenue. We did a great job of driving our low-cost model Really going into detail and growing our B2B business again. Super pleased with that progress as well as the 5C culture of our business as well. And I think that's a testimony to the team and the leadership of across the country, a company in the support of our board. So we will continue to focus on the near term from a B2C perspective as well as continuing to build out the future high value areas of the business, whether it's Veris, and continue to expand our B2B systems as well. And thank you, team, and thank you, everyone, for joining the call today.
spk00: Thank you for your participation. This concludes today's call. You may now disconnect. Everyone, have a great day.
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