The ODP Corporation

Good morning and welcome to the ODP Corporation's second quarter 2022 earnings conference call. All lines will be in a listen-only mode for today's call, after which instructions will be given in order to ask a question. At the request of ODP Corporation, today's call is being recorded. I would now like to introduce Tim Peratt, Vice President, Investor Relations. Mr. Peratt, you may now begin.

Good morning and thank you for joining us for the ODP Corporation's Second Quarter 2022 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. We will begin today's call with Jerry, who 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 continue driving shareholder value. After Jerry's commentary, Anthony will then review the company's financial results, including the highlights of our divisional performance. Following Anthony's comments, we'll 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 US Securities and Exchange Commission. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as the earnings press release, presentation slides that accompany today's comments and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investor.theodpcorp.com. Today's call and slide presentation is being simulcast on our website and will be archived there for at least one year. I will now turn the call over to Jerry Smith. Jerry?

Thank you, Tim. 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 second quarter. We've continued our strong operational focus from the beginning of the year and our performance in the quarter reflects our ongoing commitment to our low cost model and to the core tenants that drive our business. We delivered solid results, despite the numerous market-wide challenges, while making progress on our initiatives to complete the foundation of the new ODP and our four distinct business unit structure. Additionally, as we announced in July, we took action to enhance returns for our shareholders, putting in place a new share repurchase authorization and commencing a Dutch auction cash tender offer. Overall, I'm extremely enthusiastic about the opportunities ahead for our business and how our better together strategy and business unit realignment has us positioned to drive growth and value for shareholders in the future. Turning to slide four of the presentation, our team continues to rise to the challenges posed by the macroeconomic environment. We have witnessed the highest inflation in over 40 years, as well as sourcing and supply chain conditions that continue to be impacted by higher fuel costs, supply chain constraints, and higher labor costs, while the lingering effects of COVID continue to have an impact on the nature of how people work. All these conditions have created significant challenges, not only for our business, but for many companies across many industries. While these conditions are having an impact to our business, I'm very proud of our team for once again remaining focused in delivering solid performance, consistent with our pre-announcement of preliminary results, while also advancing the foundation of our new business unit structure. We accomplished this performance by remaining true to the core tenets that drive our business, driving a low-cost model, expanding our value proposition, and moving into higher-value businesses to pursue new avenues of growth. As reflected in our results, we're executing along these priorities, 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, providing compelling value for our customers and helping us generate solid operating results. We're also remaining flexible to serve customers in new ways, whether at home or in the office, and expanding our value proposition by continuing to provide a broader set of products and services. We're also continuing to invest in our digital platform capabilities through our VAERS business unit, as well as our supply chain and distribution business, VAER, to support the near-term and future state of the business. Under new leadership in ODP business solutions, we're enhancing our disciplined focus on profitable growth, driving improved results as more business customers return to the office. And lastly, our B2C business continues to meet our customer needs as a home and small business office superstore, and we are making great progress in positioning this business for continued success. We believe all these actions are enhancing our foundation to derive increased long-term value for shareholders. Now turning to the highlights of our major accomplishments for the second quarter, as shown on slide five. Consistent with our pre-announcement, we delivered solid operating performance in the quarter despite the industry-wide challenges related to inflation and supply chain constraints. Our top-line revenue performance remained healthy and our low-cost model approach combined with flexible pricing and distribution strategies hope to drive solid operating results despite the more challenging backdrop in the quarter. Next, we made significant progress in the quarter on our strategic initiatives. As we announced in June, After reviewing alternatives for our consumer business and considering current market conditions, our board of directors unanimously determined it is in the best interest of the company and its shareholders not to divest the consumer business nor pursue a public company separation at this time. That said, we've made progress in aligning our operating businesses into our B2C business and three distinct B2B businesses. This enables our dedicated teams to focus on meeting the respective customer needs and and implement channel-specific go-to-market strategies. There is still work to be completed to fully operationalize the realignment, but soon these changes will enable us to provide greater visibility into these operating businesses and their performance on a go-forward basis. With the realignment, we will be able to provide clarity on economic performance at each business unit and give our investors the opportunity to understand our value drivers more directly, which should lead to greater shareholder value over time. Additionally, we are better together by enabling the full capabilities of our business utilizing our holding company structure and through better alignment of resources to their long-term growth opportunities. Next, we continue to make progress on our efforts to pursue new avenues of growth, supporting one of our key tenets of driving new avenues of growth in the higher value markets. We're advancing our digital platform business, Verus. receiving positive feedback from our private preview launch on the Microsoft platform, and making progress on adding new customers and suppliers to the ecosystem. We're also making progress on solidifying the foundation for VAER, our logistics and supply chain business, enhancing our supply chain capabilities, and aligning our assets to support our captive B2C and B2B businesses today, and leverage existing and new customers to drive accelerated growth in the future. This year will mark an important milestone for VERA as we move closer to launching the business, 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 return for our shareholders, we completed our accelerated share buyback plan during the quarter. Through the ASR that we put in place in November of last year, we retired over 3.5 million shares in the program. Additionally, our board of directors approved a new $600 million share repurchase authorization and issued a $300 million Dutch auction cash tender offer, which is ongoing at the present time. As evidenced by these actions, we're reinvesting the business while also returning capital, highlighting our team's commitment to creating shareholder value. We're excited about our position as we deploy capital to pursue profitable growth and generate strong returns for our shareholders. Now turning to more specifics of our performance for the quarter, as shown on slide six. Our performance in the second quarter reflects our team's continued commitment to operational excellence and to the value of the investment we've made in our infrastructure and partnership relationships. The macroeconomic backdrop remains challenging, and global supply chain constraints and high inflation have created the recent industry-wide sourcing and cost challenges. Total landed cost of products, which includes the cost of goods plus transportation, has risen market-wide. While ODP is not immune to these impacts and we are experiencing increased cost pressure, the investments we've made in our supply chain infrastructure and partner relationships place us in a better position than most companies to navigate through these challenges. The investments we've made in our private fleet, The flexibility of our distribution network, which includes our long-term relationships with our distribution partners and suppliers, and our global sourcing office all remain key differentiators. Additionally, pricing flexibility is helping us balance revenue and cost of goods, helping us to maintain or improve margins. Overall, our top-line results were down slightly over last year, partially related to fewer retail locations of service versus a year ago due to planned store reductions. The reduced store footprint and lower traffic resulted in lower sales year over year in our retail division, which was offset by stronger sales in our business solutions division as we continue to see improving back-to-office trends in the quarter. In all, our compelling customer value proposition combined with our team's strong execution helped us drive approximately $54 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 seven. Our BSD segment, currently consisting of both our contract and our e-commerce channels, provides a strong value proposition 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 consumers through our digital presence. BSD's revenue performance improved in the quarter, up 6% year-over-year, driven by stronger traction in our contract channel as businesses continued to return to the office. 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 core supply categories, copy and print services, workspaces, and technology showed strong performance, partially offset by lower sales of cleaning and breakthrough products relative to last year. Adjacency categories, including workspaces, technology, cleaning and break room, as well as copy and print, remained at 44% of total BSD sales in the quarter. From an operating perspective, our operating income versus last year was up about 45% as we executed upon our low-cost model approach and flexed our distribution assets. This approach, coupled with enterprise customer analysis 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 very strong, near historic levels, 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 their ecosystem to support them in a hybrid setting or in the office. A true testament to this can be seen in our recent results. Our weekly sales trends indicate that we're continuing to make progress towards recapturing volumes as return to office trends continue and as we continue to work with our customers in a work from anywhere environment. We're also announcing new president, David Cintrella, a company veteran to lead the new ODP business solutions and are excited by the positive impacts he's already had on the business and team members. As we look forward, Dave and his team will continue to make progress on executing upon initiatives to further drive customer profitability and growth. Now, turning to our performance in our retail division, as shown on slide eight. Our retail division again drove solid margin performance in the quarter as our team 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 continuing to drive a positive shopping experience leading to continued strong net promoter scores above 70% among the best in the industry. Our revenue performance in the quarter was lower versus last year, partially driven by fewer stores in service as a result of planned store closures, as well as lower traffic trends in the quarter, which were partially offset by stronger sales per shopper, as well as strong omni-channel sales in the quarter, supported by our 20-minute pickup guarantee. From a product perspective, an increase in demand for copy and print services was offset by lower sales of cleaning and PPE products, supplies, as well as technology and PC products, which were negatively impacted by supply chain and sourcing challenges. The number of out-of-stocks in the quarter continue to run significantly higher than pre-pandemic levels, most notably for our 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 and improve our inventory levels, but we expect these challenges persist in the near term. Operationally, our teams' continued focus on our low-cost models helps to offset some of these challenges. We delivered a 5% increase in operating income driven by lower SG&A expenses, product mix, and lower operating lease costs. Turning to slide nine, in the quarter, we continue to make progress on our strategic initiative of further aligning our assets to support our B2B and consumer businesses, forming the foundation of our four business unit strategy. As I mentioned last quarter, early on we recognized a powerful combination of the numerous assets supporting our business. Accordingly, We've invested in and enhanced our unique supply chain and distribution network, 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. 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, which we will share more at Investor Day. And during the quarter, we continue to separate the operational components of our business from that are necessary as we build unique routes to market to support business customers and consumers. This challenging mission involved hundreds of process reviews and assessments, uncoupling process and flows, some which have existed for decades. And while we still have some work to complete on this path in the coming year, we have mostly completed our strategic realignment, which has resulted in forming four highly focused operating businesses, re-energizing our teams, all under our holding company structure. Highlighting these, I would turn first to ODP Business Solutions, a leading B2B solutions provider serving small, medium, and enterprise-level companies. This includes the contract sales channel of our BSE division, including our Federation entities, comprised of the regional office supply companies we acquired over the past few years, targeting underserved geographic areas, as well as Grant & Toy, serving commercial contract customers in Canada. Next up is VAR, created 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 need for other third parties in the future. 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 VERUS. 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 And moving forward, we're focused on leveraging these assets to drive future profitable growth. Now, I'd like to provide insight into our progress in our digital platform business, Veris, as shown on slide 10. As a reminder, Veris is a technology company that's focused on reducing the complexity and friction in B2B procurement and distribution. Those with any experience in the 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, more and more B2B transactions are moving online, and the expectations for a workforce that continues to be digitally enabled has propelled the need to engage suppliers in a more seamless and frictionless way, while driving the economics toward contract compliance and purchasing leverage. And from a consumer perspective, we've benefited from new and innovative solutions. However, there's a very wide gap when it comes to solutions tailored to the unique needs of businesses. And it is this 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. Verus Our digital platform is being developed with a flexibility so organizations can focus on what makes them prosper, helping them grow their strategic partnerships and their business. Our focus is on enabling both buyers and suppliers to win through our seamless end-to-end solution. In the quarter, we continue to make strong progress towards various development and platform launch in 2022. We're receiving good feedback from the private preview launch on the Microsoft Dynamics 365 Business Central platform, and we're incorporating feedback we are receiving. We're continuing to attract new customers to the platform, both buyers and suppliers, and we are super excited by having Prentice and team give an update at our upcoming Investor Day. Wrapping up my comments, and before I turn the call over to Anthony, I want to thank all of our team members for performing at such a high level while navigating all the macroeconomic uncertainty and as the company undertook their strategic view of our B2C business. The progress we have made to establish our four business unit strategy places us in a position of strength as we pursue the large and growing market opportunity ahead of us. And we're excited to highlight our business unit strategy and opportunities set for profitable growth during the investor day meeting we are planning for later this year. With that, I will turn the call over to Anthony for a more detailed review of our financial results.