The ODP Corporation

Good morning and welcome to the ODP Corporation's fourth quarter and full year 2022 earnings conference call. All lines will be on 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 Peratt, Vice President, Investor Relations and Treasurer. Mr. Peratt, you may now begin.

Good morning, and thank you for joining us for the ODP Corporation's fourth quarter 2022 earnings conference call. This is Tim Peratt, and I'm here with Jerry Smith, our CEO, and Anthony Scaglione, our Executive Vice President and CFO. During today's call, Jerry will provide an update on the business, focusing much of his commentary on our accomplishments for 2022, including our operational performance and the progress we're making on all of our initiatives to drive shareholder value. After Jerry's commentary, Anthony will then review the company's fourth quarter and full year 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 would like 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 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. and good morning for everyone joining our call today. Thanks for joining us this morning, and we hope that all of our stakeholders and their families continue to remain safe and healthy. I'm so excited to be here with you today to discuss our results and accomplishments for 2022, as well as our strong finish in the fourth quarter. Our performance reflects our team's continued operational and financial focus against an increasingly challenging macroeconomic backdrop. As I begin, I'd like to recognize our entire team for remaining focused and driving these strong results while addressing all the strategic initiatives we face throughout the year, including the launch of our new four business unit structure. This required tremendous effort and I couldn't be more proud of all of our team members who go out every day and demonstrate what makes our company so remarkable. Our success this year is a true testament to all of our teams across our businesses as we continue to demonstrate operational excellence, which allows us to hit the commitments we made at our investor day meeting. It is no secret that throughout the year, the entire market experienced challenges related to the macroeconomic environment, burdened with high inflation, supply chain challenges, and the onset of slower GDP growth and consumer spend. As shown on slide four, inflation rose to a 40-year high. increasing the input costs in our business, impacting supply chain conditions by ocean freight constraints and higher transportation costs with diesel fuel prices up an average of roughly 50% versus last year. This was a challenge, not only for ODP, but for companies in almost all industries. And many of these challenges we continue to face today and expect to face in the year ahead. While 2022 presented these challenges, I'm so proud of our team for once again, rising up to address them head on. We utilized our supply chain operations, diverse routes to market, pricing flexibility, and balance sheet flexibility to help drive our low-cost business model and offset many of the hurdles we faced. Overall, we successfully navigated through a very complicated year, delivering full-year results consistent with our guidance despite this difficult backdrop. A key component of our success is remaining true to the core tenants that drive our business, helping us reach our goals for the year and establishing our foundation for the future, and setting us up to execute upon our Three Horizons strategy, which I will discuss in more detail in a few minutes. Perhaps most important of our core tenants is our continued focus on our low-cost business model and operational excellence. Our low-cost business model focus is one of the areas I'm most proud of and remains a cornerstone of our operating strategy. I learned this approach after 30 years in tech hardware where managing unit cost was so important and every penny counted. After spending years driving operational excellence and a low-cost mindset, we embedded this focus into the fabric at ODP, and that's helped us specifically lower our operating cost base, helping us to move from a highly fixed-cost business to a more variable operating structure. And as I shared on Investor Day, over the past five years, we have eliminated over $500 million in operating costs, helping us thrive through challenging economic cycles and finding new and better ways to serve our customers. And we are not stopping there. We're continuing to look for more and better ways to efficiently operate our business, including the use of automation, machine learning, and AI tools to help us lower the cost to serve and improve our customer service. In 2023, we will also continue to develop our analytic capabilities in VAERS, leveraging the investments we made in our proprietary technology, which is FlowPath, providing greater insight into the economics of our supply chain to further improve efficiency. And we will also leverage the investment that we have made in our digital platform business, Varus, positioning this business for future growth and allowing for even more efficient means in which to serve customers. And of course, we expect to continue to execute upon our $1 billion share repurchase program. All these actions support our low-cost business model focus and enhance returns for shareholders. And we will continue to drive our operational excellence in a low-cost model, which is part of our 5C culture and a competitive differentiator. And it's not just what we accomplish, it's also how we reach our goals as shown in slide five. At the center of our approach is our winning 5C culture. The 5Cs stand for customer, commitment, creativity, change, and caring. These are not just words on paper, but rather our 5C culture is our North Star and the engine of how we work and live in our communities every day. I'm very proud of the culture we have created and the foundation it provides as we support our community, attract new talent, and continue to execute upon 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've continued to set the highest standards for corporate responsibility, investing in and giving back to our communities throughout the year. For example, we doubled the impact of Elevate Together, a signature initiative in its second year of operation, helping to reduce historic barriers of bringing racial equity to small business owners and entrepreneurs. Through our Start Proud initiative, we continued our strong support of teachers and students with our program, supporting low-income elementary schools across the nation, providing fully-filled backpacks filled with supplies, gift cards, and awards for teachers. For the fifth straight year, we adopted 35 of the most economically distressed elementary schools across the U.S., providing 18,000 fully stocked backpacks, over $350,000 in Office Depot gift cards and teacher supplies. Nearly 1,000 of our associates assembled and distributed these resources at school-based events. Our award-winning Depot Difference Program continues to provide strong support of our national partnership with the Boys and Girls Clubs of America. And this year, our Depot Difference team partnered with a newly established ODP Business Solutions team on working with school districts and relief agencies to provide support to the region devastated by Hurricane Ian. I am 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. Now, before we get into the specifics of our major accomplishments in 2022, I'd like to spend a few moments discussing the way we're thinking about our business and driving long-term value through what I call our three horizons strategy. This is shown on slide six. Over the past several years, we've been transforming our business to lower our costs, position our assets with the right routes to market, and innovate to create a more valuable company. The core tenets I mentioned earlier served as guideposts to establish the new ODP Corporation, repositioning and recognizing the power of the assets in our control. And all that work and effort culminated in a realigned four business unit structure that we highlighted during our investor day meeting. Our new operating structure is creating opportunities for our businesses to create value as they execute upon this strategy. This strategy puts into perspective how we will drive our business units in order to unlock the underlying fundamentals of our business, build long-term sustainable growth, expand our multiple, and maximize shareholder value. And with our four business unit model, we are in an excellent position to drive our business and unleash greater value. Let me highlight this approach. Our first horizon focused on continue to drive Office Depot's strong performance, excellent customer service, and net promoter scores, and most importantly, continue to drive strong EBITDA and cash conversion. Office Depot is a cash generation engine, and this horizon continues that focus, getting the most out of this engine As we laid out at Investor Day, we will continue to optimize and nurture this business, adding new product assortments aligned with customer needs, while continuing to provide excellent service to its targeted customer base, including small businesses, education, and home office customers. And we measure our service with NPS, or Net Promoter Scores, and our team has delivered outstanding results. Next, our second horizon is focused on continuing to drive ODP business solutions our B2B distribution business, delivering growth, margin expansion, and cash flow. This is a higher multiple B2B distribution business with a solid runway ahead for profitable growth. As you see in our release this morning, we are moving well along the path we set. Our business solutions team is executing upon this horizon, continuing to gain traction with customers and driving profitable growth. We will continue to execute its core strategy of expanding its customer base, expanding the products and services it offers to customers, and continuing its focus on margin expansion aligned with our long-term targets. We believe that as we execute our plan, the market will begin to recognize the value of this higher multiple business, and this will be reflected in ODP's overall value. Our third horizon is building value and pursuing higher long-term growth opportunities through Avera, our supply chain and procurement business, and Enveris, our innovative B2B digital platform business. Both of these businesses represent significant long-term growth and multiple expansion opportunities for ODP. VAER is a world-class supply chain business with valuable assets and capabilities that include next-day service to nearly 99% of the U.S. zip codes, a large private fleet, over 9 million square feet of distribution center space, and through our global sourcing office, strong international procurement expertise. We stood up VAER this year, moving them from a cost center focus to now a key business unit driving its own focus go-to-market strategy and serving customers. Bayer is focused on continuing to provide excellent service and being a low-cost provider, supporting the success of its two internal customers, ODP Business Solutions and Office Depot, while also using existing capacity to serve external third-party customers. Bayer is already serving several third-party customers, including some of our vendor partners, and is well on its way to reach long-term goals we set during Investor Day, which included generating at least $30 million in EBITDA for third-party customers utilizing existing capacity. And lastly, Veris is a key high-growth component to this long-term horizon. Veris represents perhaps the largest addressable market opportunity for ODP through providing a modern, consumer-like digital B2B procurement platform experience that contractually connects procurement organizations with suppliers and vice versa. This is a high multiple growth opportunity with a very large target market and a scalable business model that also improves the efficiency in which we serve our customers. Over the last two years, we've made significant progress. We have built a world-class team led by Prentice Wilson that has embarked on developing and refining the tech stack and capabilities. And as we announced during our investor day meeting, we launched the network more broadly this past November. It is still early days. However, we're adding new customers and suppliers to the platform and continue to refine its capabilities. We're excited about the path that Veris is on and the multiple opportunities to pursue growth that it represents. And we accomplished all of this while maintaining CapEx investment levels within historical ranges. So overall, our Three Horizons strategy will help us continue to drive our near-term cash flow engines while allowing us to continue to pursue both mid- and long-term growth and hire multiple businesses, which we believe will create significant value for our shareholders. This is all anchored on our low-cost business model focus to EBITDA and EPS growth, while prudently managing our balance sheet and deploying capital to the benefit of our shareholders and, of course, continuing to live our 5C culture. Lastly, we will continue to demonstrate our operational excellence, which is fundamental to our success. Now turning to the highlights of our major accomplishments for 2022 as shown in slide 7. First, we drove solid operating performance for the year and delivered results consistent with our guidance. We drove these strong results despite the industry-wide challenges mentioned earlier. Revenue was up year over year and our operational excellence and low-cost model approach combined with flexible pricing and distribution strategies helped to drive solid operating results and cash flow against the more challenging backdrop to the year. Our year-on-year growth included the positive impact of the 53rd week being present this year. This adjustment happens every four or five years for companies who report on a 4-4-5 calendar. Anthony will provide more color on the impact to our 2022 results and comparisons for 2023 later on in his remarks. Next, we addressed the strategic initiatives that were before us earlier in the year, and we completed the realignment to our operating structure that supports the launch of our realigned four business unit model. This structure more fully reflects the power of our businesses and unlocks shareholder value. and we feel this is a catalyst for expanding our multiple over time, as each business unit demonstrates our individual growth and earnings power, which we feel was not previously reflected in the combined ODP multiple. And as a component of our new structure, we stood up VAR, our supply chain and logistics business, and VARIS, our B2B digital platform business. As I mentioned earlier, These new businesses represent attractive new long-term growth opportunities for ODP. And last, but certainly not least, we expanded our commitment to enhancing shareholder value by announcing our $1 billion share repurchase program. Let me spend a few moments on our activity under this effort. As we announced during our investor day meeting, our board of directors approved a $1 billion share repurchase program. We are excited about what this means for our stakeholders and how this program is supported by our strong balance sheet and operational excellence plan as expected to generate significant cash flow over the next several years. We've been aggressively executing under this plan during the quarter. We purchased a significant number of shares since we launched it in early November, in addition to the shares we repurchased earlier in the year. In total, for 2022, we have repurchased about 6.4 million shares for about $266 million, with the majority purchased under the new authorization. We've also continued our repurchases into the new year. As we move throughout the balance of the year, We will continue to be disciplined in our approach to overall capital deployment as we consider evolving market conditions and opportunities within our business, but expect with support from our board to continue repurchasing throughout the year. On slide nine, our overall performance in 2022 reflects the positive attributes of our team's commitment to operational excellence and the value of past investments we made in our infrastructure and the flexibility of our business model. As I mentioned, the industry backdrop and macroeconomic environment proved to be increasingly challenging throughout the year. Because of the investments we had previously made in our supply chain infrastructure, the flexibility of our distribution network and pricing scenarios, as well as our low-cost model approach, ODP has been able to navigate better than most companies through these challenges. We've addressed the challenging supply chain environment by leveraging our large presence in Asia for our global sourcing office, as well as the investments we have made in our private fleet and the flexibility of our distribution network, which includes our long-term relationships with our distribution partners and suppliers. We also utilized pricing flexibility to help mitigate some of the inflationary increases, allowing us to pass through certain price increases to help alleviate cost pressures. Our revenue results were driven by strong performance at ODP Business Solutions as more businesses returned to the office post-COVID. This was somewhat offset by lower revenue Office Depot related to both a reduction in the store footprint and lower e-commerce traffic, as individual consumers have been less active compared to last year. In all, our value proposition continued to resonate with customers, and when combined with our low-cost business model approach, we drove close to $300 million in adjusted operating income in the year and solid EBITDA results. Now turning to highlights of our divisional performance on slide 10, starting with ODP Business Solutions. ODP Business Solutions delivered strong results throughout 2022. Over the past several years, we built a strong customer base with over 140,000 enterprise customers, including about 60% of the Fortune 100. This business exhibited strong growth and is clearly on a path to expand its margins back to and beyond pre-COVID levels, a long-term KPI that we identified during our investor day meeting. Revenue growth was strong in the year, up 11%, as continued back-to-office trends continued to gain traction as we drove our market-based pricing model and maintained high revenue retention levels. Back-to-office trends have been a nice tailwind for the business, with external tracking reports now estimating that 50% of workers are back in the office. This has helped us offset some of the effects from the well-publicized corporate layoffs we have seen in the news over the past year. Our adjacency categories continue to grow and comprise 44% of total ODP business solution sales. A standout among our adjacency categories is our Janssen in cleaning and break room category, which to date has grown to about $700 million per year in revenue, which, if taken on an independent basis, makes us one of the larger Janssen supply businesses in the U.S. We also drove margins higher and nearly doubled our operating income relative to last year, capturing higher top-line growth and utilizing our disciplined approach to operational excellence and continued focus on customer profitability reviews. Moving forward, we are well on the path to reach our long-term goals, expanding margins and continuing to focus on maintaining our leadership position in the traditional business supplies categories while growing in our adjacency categories, continuing our success in the federation, and focusing on customer growth in the areas we have the right to win. Next on slide 11, Office Depot continued to be a strong cash generation engine for ODP. Again, drove solid margin performance and cash flow in the year, 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 team for continuing to derive a positive shopping experience, leading to continued strong net promoter scores above 70% among the best in any industry. Revenues were 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-store and online post-COVID, which were partially offset by stronger sales per shopper and stronger omnichannel sales supported by our 20-minute pickup guarantee. From a product perspective, as some of the effects of COVID receded during the year, we saw an increase in demand for traditional copy and print services, paper, school, and break room supplies. This was offset by lower sales of cleaning and PPE products, supplies, and technology products, all categories in higher demand during the pandemic. As it relates to tech, Kevin and the team are keenly focused on the product assortment and sales flow-through given some of the more acute challenges affecting technology categories overall. Moving forward, given the weaker macroeconomic environment, we will continue to monitor any changes in the consumer activity, which we noted weakening in the back half of last year. We will also continue to optimize our store footprint and fine-tune our product set to address the evolving needs of our customers. On slide 12, we highlight VAER, a key growth engine for our future and a component of our third horizon. VAER is our world-class supply chain services and sourcing provider with core competencies in distribution, fulfillment, transportation, global sourcing, and purchasing which also includes our global sourcing operations in Asia. As mentioned earlier, we've separated VAR into its own business and reporting unit moving forward. VAR is focused on delivering best-in-class service to ODP's internal customers at a low cost while leveraging its existing capacity to provide services to third-party customers. We stood up VAR as its own business unit in the back half of last year as its own focused profit center to capture the full value of its unique assets, and to help drive a new narrative for our shareholders in valuing this business. Bayer is making progress, not only serving our internal customers with efficient and low-cost services, benefiting both internal and external customers, but also growing their influence with third-party customers and building the pipeline of future business. While external revenue was steady for the year, internal revenue was lower, related to less demand in our consumer business. That said, we believe that VAR has come out of the gate strong. It's on the path that we set during our investor day meeting to reach at least $30 million in EBITDA from external sources by 2025. Vera represents a great opportunity to generate organic EBITDA from our existing infrastructure and the investments we are making to be more efficient, and over time, it will build upon its world-class capabilities to provide full 3PL services, supply chain and procurement services to third parties in the future. Turning to slide 13, Vera has continued to make solid progress throughout the quarter and the year. As we announced during our investor day meeting, It is still early days as we launched the platform during the fourth quarter and continue to refine its capabilities, work with our partners, and add new customers and suppliers to the platform. We are running hard, attracting new customers, driving volume through the platform, adding new bookings, and converting revenue. While Veris did incur considerable expenses during the year as we prepared for launch, As we mentioned during our Investor Day meeting, we expect that 2022 was the peak year of investment. We're also continuing to evaluate future funding alternatives to help us accelerate our plans for growth and scale the business. 2022 was a transformative year for ODP. Our team accomplished so much, driving strong results, meeting our commitments, and establishing our foundation for the future. As we move forward in 2023, We remain cautiously optimistic about the year ahead as we continue to navigate the increasingly challenging macroeconomic environment and its effect across all industries. That said, we remain in a position of strength with a strong balance sheet, diverse routes to market, a continued low-cost business model mindset, and our operational excellence we have demonstrated. We will continue to be disciplined, focusing on operational excellence and driving our low-cost business model focus across all of our businesses. We will be relentlessly focused on cash generation and navigating through what we expect will be another challenging year for the macroeconomic environment. We will focus on unleashing the power of our core business unit model and driving value and multiple expansion through our Three Horizons strategy. We will continue to drive our cash generation machine Office Depot, and work to improve traffic trends and expand our adjacencies to capture new opportunities. At ODP Business Solutions, we will focus on continuing to grow our top line and remain disciplined in expanding our margins along the path we set on Investor Day. There, we'll focus on and continue to provide excellent service levels, remain a low-cost provider for our internal customers, while pursuing new third-party business using existing capacity. And Barris is all about adding bookings, converting bookings to revenue, and working to drive scale on the platform. And finally, we will continue to live our 5C culture. With that, I'll turn the call over to Anthony Scaglione, our CFO.