The ODP Corporation

Good morning, and welcome to the ODP Corporation's second quarter 2023 earnings conference call. All lines will be on a listen-only mode for today's call, after which instructions will be given in order to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim 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 second quarter 2023 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 the second quarter of 2023, 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 details of the company's second quarter results, including highlights of our divisional performance. Following Anthony's comments, we will open up the line for your questions. Before we begin, I'd 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 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 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, everyone. We really appreciate you joining our call today, and we're excited to be here with you this morning to discuss our second quarter 2023 results. As you can see in the release that we issued this morning, we continue to drive solid operating results in an increasingly mixed demand environment as we continue to leverage our new four business unit structure and execute upon our capital allocation plan. As highlighted on slide four of our presentation, we remain committed to operational excellence and our low-cost model approach, two anchor tenets of our discipline strategy. For our team, operational excellence is not just a catchphrase, it's a cultural mindset that is ingrained into the fabric in how we run our business and how we create shareholder value. Using this approach, along with the strength and flexibility of our four business unit model, we again delivered strong operating results against an increasingly challenging macroeconomic backdrop and somewhat sluggish consumer activity. We delivered these results and continued our capital allocation program, making progress towards our long-term goal of returning $1 billion of shareholder capital. We also maintained a strong liquidity position and balance sheet And I would like to thank our entire team for remaining focused on delivering these solid results, which is a true testament to our team's unwavering commitment to operational excellence and dedication to driving shareholder value. Therefore, before I cover the highlights of our Q2 results, I wanted to reemphasize our realigned forward business unit model and our strategy to unlock its potential. This is shown on slide five. It's only been about nine months since we launched our realigned four business unit structure, and we're really excited and encouraged about the more dynamic and capable company it has helped us create. Our new structure allows us to more fully utilize our assets, provide greater transparency into the value of each of our businesses, and positions us to pursue new avenues for growth. This structure has truly created a new ODP, and our B2B and B2C businesses place us on a path to unlock our potential and create even more value for shareholders over time. One early shining example of how this structure is helping us unlock our growth potential can be found at VAER. VAER is our supply chain and logistics business that we have developed over the past three decades that was previously embedded as a primary support cost function for our business. We have separated VAER as its own operating segment to pursue future growth by leveraging its world-class capabilities to bring its strong value proposition to continue to serve its internal customers, ODP Business Solutions and Office Depot, as well as serving its existing and new external third-party customers. VAERS' strong and competitive value proposition includes nationwide coverage capabilities, next-day delivery capability to about 98.5% of the zip codes in the US, including desktop delivery, and can provide services such as just-in-time logistics, as well as leverage its proprietary analytic tools to provide greater insight to drive efficiencies for both internal and external customers. The investments we have made over many years has enabled us to create a network that we feel few supply chain operators possess today. Currently, Vera is utilizing existing capacity and capabilities to deliver a variety of services to third parties, including leveraging 9 million square feet of distribution center space, over a network of 55 distribution centers through a large private fleet, enabling us to deliver tailored solutions and full end-to-end supply chain services. In its first year of operating as its own segment, Vera is also executing along a modernization roadmap, developing proprietary capabilities, and leveraging technologies that are often Gardner Magic Quadrant leaders to improve capabilities in warehouse management, transportation, and inventory routing, and visibility and planning tools. From a cost center to a profit center, with significant runway to generate long-term profitable growth, VEHR is off to a great start, a well on its way of delivering meaningful incremental enterprise EBITDA. Also, off to a great start under our new structure is ODP Business Solutions. ODP Business Solutions is a large and growing B2B distribution business with over $4 billion in annual revenue, servicing enterprise-level companies as well as medium and small businesses. It serves over half the Fortune 100 and provides customers with a highly curated procurement solution, delivering core business products along with growing categories and adjacency products such as Jansan, cleaning and break room, tech, workspaces and furniture, and copy and print products and services. As I stated on our last call, our Jansan and cleaning and break room businesses alone generates about $700 million on an annual basis, making us one of the larger distributors of Janssen and Break Room-related products in the US. With a clear objective to grow net new customers and broaden its value proposition through expanding its set of products and service offerings, ODP Business Solutions is focused on growing its business while expanding its margin profile objectives over the long term. Next up is Office Depot, a brand name remarkably familiar to consumers, into now a true omni-channel consumer business with a profitable retail footprint and award-winning e-commerce platform. Office Depot continues to be a key cash generation engine for ODP. And with our focus on driving risk-adjusted positive contribution margin, we've generated strong, consistent EBITDA and cash flow while also improving the customer experience, including through our industry-leading 20-minute pickup guarantee and expanded assortment offering resulting in one of the highest NPS scores in the industry. And finally, Verus. Verus is an early-stage, transformative B2B procurement platform business that just launched late last year. Verus is a category creator and focused on transforming the complete procurement ecosystem for buying organizations and the suppliers who serve them, aligned for a more modern, frictionless, consumer-like experience for B2B buyers and suppliers. The market opportunity for Varus is very large, with over $4 trillion in gross indirect transaction volume within our target market. While we are still in the early stages, and as with all new startups refining this approach, Varus continues to make progress, enhancing its capabilities and adding customers to its platform. Our new operating structure is creating opportunities for our business as we execute upon what I have termed as ODP's three horizon strategy. This strategy puts into perspective how we will drive our business units in order to unlock the underlying fundamentals, pursue long-term sustainable growth, and maximize shareholder value. Briefly highlight our approach. Our first horizon focuses on continuing to drive Office Depot's performance, excellent customer service, and net promoter scores, and most importantly, our relentless focus on maximizing EBITDA and cash conversions. Office Depot is a cash generation engine, and this horizon continues that focus, getting the most out of this engine. Next, our second horizon is focused on continuing to drive ODP business solutions, delivering growth, margin expansion, and cash flow. As you can see in our release this morning, we are moving well along the margin expansion path we set. We believe that as we execute our plan, the market will begin to recognize the value of of what we believe is a higher multiple business, and this should be reflected in ODP's overall value. Our third horizon is building value and pursuing higher long-term growth opportunities through VER and VERUS. Both of these businesses represent significant long-term growth and multiple expansion opportunities for ODP. VER as a world-class logistics and supply chain business with growing services to third-party customers and VERUS is a high-growth, transformative digital procurement platform business in a very large target market. 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-term and long-term growth and hire multiple businesses, which we believe will create significant value for our shareholders. This is all anchored by our operational excellence and our focus on our low-cost business model while prudently managing our balance sheet and deploying capital to the benefit of our shareholders, and of course, continuing to live our 5C culture. Now, turning to the highlights of our key accomplishments for the second quarter, as shown in slides 6 through 11. First, on a consolidated basis, we drove strong overall operating performance in the second quarter, despite a more challenging macroeconomic environment. While overall revenue was down due to fewer stores in service and sluggish consumer demand, Our disciplined approach helped drive adjusted operating income and EBITDA results that were consistent with last year. And with combining our solid performance with our share repurchase activity, we do have a 25% increase in adjusted earnings per share versus last year, a meaningful accomplishment. Our cash flow results were also impressive as we significantly reduced cash flow usage relative to last year, even as we built inventory for the upcoming back-to-school season. Our continued commitment to operational excellence and our low-cost model approach, combined with a balanced go-to-market strategies, helped drive these strong results against the ongoing challenging macroeconomic backdrop hampered by high inflation and slowing consumer activity. I can't say enough about our team's continued focus and discipline in achieving these strong results in the quarter. Thank you, team. Anthony will provide more of the details on the drivers in his prepared remarks later on the call. Next, we continue to execute upon our $1 billion share repurchase authorization that our Board of Directors put in place in November of last year. We believe that buying back our stock at these levels is one of the best investments we can make to create additional shareholder value. During the quarter, we repurchased approximately 725,000 shares for about $31 million. And since the beginning of the authorization, we have repurchased approximately 8.3 million shares in total for approximately $385 million. Putting this activity into context, since November of last year, we've bought back over 20% of the market value of the company. Moving forward, we will continue to be disciplined, monitoring market economic conditions, and continue to prioritize capital allocation while prudently managing our four business unit model. Now moving on to our business unit performance in the quarter, starting with ODP Business Solutions. ODP Business Solutions, our large and growing B2B distribution business, delivered strong operating performance in the quarter, generating nearly a 30% increase in adjusted operating income on a consistent revenue result year over year. This is impressive given some of the macroeconomic headwinds that some of our customers are facing that are resulting in corporate layoffs and reductions in force. Evening margins increased significantly and are rapidly approaching pre-pandemic levels and our long-term goals. Adjacency penetration remained at 44% of the total division revenue, and overall revenue retention rate remained near its historic highs. We're continuing to win net new business with key new customer wins that we expect to be onboarded later in the year, and our pipeline of new business has never been higher. Our team's performance was impressive given some of our corporate customers are enacting reductions in force and other activities given broader macroeconomic conditions that impacts our core business. This is another reason why our assortment strategy and reorganized routes to market are so key to our long-term success. As we head into the second half of the year and beyond, our foundation remains strong to continue to drive profitable growth. While we expect to continue facing some of the macroeconomic headwinds, we're continuing to raise the bar, evaluating new ways to serve customers and pursue growth. As a strategic initiative over the last few quarters, Dave Central and the team have been analyzing the marketplace and taking time to listen to customers and gather feedback, as well as reevaluating the market segment landscape and new approaches to meet customers' needs. Based on this work, we've improved upon how we segment our customer base and we've enhanced our go-to-market strategy. Aligning with this approach, we have redeployed our sales resources to better address our customer-specific requirements, providing tailored solutions and continue to deliver a superior customer experience. We're excited about what this realignment means for our go-to-market strategy and our ability to further enhance customer experience and drive future growth. Next up is Office Depot, our omnichannel consumer business, which includes a profitable retail footprint and award-winning e-commerce platform, providing a strong value proposition to education, home office, and small business customers. the division continues to provide a positive shopping experience for its customers, leading to continued strong net promoter scores above 70% among the best in the industry. Office Depot had a more challenging quarter and experienced weaker top-line performance, largely driven by fewer stores in service compared to last year, related to planned store closures, as well as from lower in-store and online traffic demand. Categories previously in strong demand last year, primarily home office furniture and technology, saw significantly lower demand in the quarter. Additionally, as I mentioned in our previous calls, and as we've seen in the press nearly every day, the weaker economic environment is having a negative flow-through effect market-wide on consumer-related activity, resulting in lower demand across many industry segments. We believe the lack of stimulus and the overall weaker macro environment contributed to lower demand in our consumer business in the quarter, as traffic trends and same-story comps were lower than anticipated. The good news is we are seeing improving trends over the past few weeks to start the quarter. Operationally, while our team continues to drive a low-cost model, revenue headwinds had a flow-through effect resulting in lower margins during the quarter. That said, we are well-positioned to address these challenges in the second half with a strong operating model as we head into the higher demand back-to-school season upcoming in the third quarter. Additionally, we are selectively adding new category assortments, including our dorm room offering targeted at college students, as well as celebrations and party assortment categories. Although early, the customer feedback has been positive. We're also realigning our digital marketing efforts designed to drive greater traffic and conversion, including adding a highly experienced member to lead our e-commerce efforts. In all, while it was a challenging quarter for our consumer business, we're cautiously optimistic about the second half of the year, and we're managing prudently and believe we are well-positioned to improve our performance. Next up is VAER. VAR is a 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. VAR made continued significant progress in the quarter, adding new external customer logos to its slate of business and continued to drive EBITDA from third-party customers. In fact, third-party EBITDA in the quarter doubled relative to last year, and VAER remains slightly ahead of plan to double EBITDA from external customers this year. VAER profit from backhaul is up over 40% versus last year and nearly 30% year to date. Also, vendor additions to its vendor consolidation program, providing supply chain service to its vendor partners, is already greater than all of 2022. It is becoming clear that VAER's compelling value proposition is beginning to resonate with customers. Veris continue to improve upon its service level metrics while driving efficiencies throughout its network, utilizing route management tools to optimize the network, driving more capacity to our own private fleet and balancing capacity among our 3PL carrier partners. We also continue to make progress on our tech stack deployment and capabilities, improving our position to serve external third-party customers and improve internal operations. Now, turning to Veris. Veris is still in the early innings of its platform launch. the company has continued to track and onboard new customers, gather customer feedback, and work to ramp new customers on its recently launched platform. While Varus is making good progress, the team is taking the time to prove the onboarding process and other capabilities of the platform for the benefit of its customers. While customer feedback adoption has been positive, with many testimonials on the value proposition that the platform delivers, We need to manage through some additional technical capabilities to truly enable us to scale. We have redirected and reprioritized resources to address this. And while I'm not satisfied with where things stand financially, I could not be more excited about the growth potential of this platform and its value proposition in the market. Anthony will provide further information on the financial expectations for the balance of the year. As I wrap up my comments, I want to say just how proud I am of our entire team. for all of these accomplishments in the first half of the year. When I look at our performance in Q2, through the lens of navigating the economic challenges, it points to the balanced nature and resilience of our business model, as well as the culture of excellence that we have created at ODP. And through our operational excellence approach and disciplined capital allocation focus, we delivered strong performance in the quarter, driving EBITDA, strong free cash flow, and a significant increase in earnings per share. Looking forward, I'll expect to continue facing ongoing macroeconomic headwinds. We remain cautiously optimistic for all of our routes to market as we move into the second half of 2023. We will remain acutely focused on our formula of success, driving our operational excellence approach, building our winning 5C culture, and staying committed to our capital allocation focus, driving shareholder value. With that, I will turn it over to Anthony for his remarks regarding the specifics of our financial results.