The ODP Corporation

Good morning, and welcome to the ODP Corporation's fourth quarter and four-year 2023 earnings conference call. All lines will be on a list-only mode for today's call, after which instructions will be given in order to ask the questions. 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 and Treasurer. Mr. Peratt, you may begin.

Good morning and thank you for joining us for the ODP Corporation's fourth quarter and full year 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 2023 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 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. During this 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 over the call to Jerry Smith. Jerry?

Thank you, Tim, and good morning to everyone joining our call today. I'm excited to be here with you to discuss the results and accomplishments for 2023, as well as to provide insight into Project Core, our new business optimization initiative to continue to drive the low-cost model and our strategy to drive shareholder value as we move forward. First, before I discuss our accomplishments for the year, I want to thank all of you for the kind words of support during my medical leave. I'm glad to be back, and I am more energized than ever to lead our business and execute our plans to drive shareholder value. I would like to thank our chairman, Joe Vasaluzzo, for all of his efforts in helping us finish the year strong and providing leadership while I was out. Thank you, Joe. Also, I would like to thank my senior leadership team as well as the entire team at ODP for remaining focused and committed to driving operational excellence and shareholder value. I'm very fortunate to have such a strong team, a strong 5C culture with world-class capabilities that continue to deliver every day. Now, I would like to highlight our accomplishments for 2023. 2023 was a remarkable year for ODP. as we remain true to our 5C culture and driving operational excellence across our business. During the year, we successfully implemented and reported under our new four business unit structure, driving our B2B and B2C operations. We have remained committed in our dedication to operational excellence and our unwavering focus to enhancing shareholder returns. Despite the ongoing challenges posed by a difficult macroeconomic environment, Our first year operating under the new structure yielded impressive results with strong EBITDA and earnings per share performance. These results underscore the resilience of our low-cost business model and the execution of our capital allocation strategy. Furthermore, our unwavering commitment to our operational excellence enabled us to exceed our guidance for free cash flow, supporting our capital allocation plans, including returning nearly $300 million to shareholders through our share repurchase program in 2023. I couldn't be prouder of our team, despite the obstacles presented by a tough macroeconomic environment, including high inflation and interest rates, supply chain volatility, and a slowdown in consumer and business activity. We really stepped up and delivered exceptional performance. Our results and achievements for the year truly exemplify our team's unwavering dedication to our low-cost business model and prudent approach to capital allocation, all aimed at creating maximum long-term value for our shareholders. It is a testament to our hard work and commitment. Now, turning to the specifics of our major accomplishments in 2023, as shown on slide five. First, we drove strong operating performance, achieving our revised guidance for the year, despite a weaker top line impacted by the industry-wide macroeconomic challenges and fewer stores and services. Our team delivered adjusted operating income and adjusted EBITDA results that were in line with our guidance and consistent with the prior year. We leveraged our multiple routes to market, global supply chain and logistics presence, flexible service infrastructure, and kept our customers' needs at the forefront of everything we do. Combining this performance with our disciplined capital allocation strategy, we drove an impressive 27% increase in adjusted earnings per share year over year. Our strong performance in the year reflects our steadfast commitment to operational excellence and disciplined capital allocation, the two primary elements of our shareholder value creation formula. Underpinning this impressive operational performance, we made excellent progress across our business units. We expanded margins and our new business pipeline at ODP Business Solutions. We drove strong external EBITDA growth at VEHR, exceeding our goals. We expanded our product and service offerings at Office Depot, and we continue to work with customers at Barris while also launching a strategic review of that business in Q4. Enterprise-wide, the progress we are making continues to enhance the foundation of our company and positions us to drive long-term profitable growth and strong free cash flow conversion. Next, with our strong balance sheet and liquidity position, we continue to execute on our shareholder-focused capital allocation plan repurchasing a significant number of shares during the year. Supported by strong free cash flow generation that exceeded our guidance, we returned nearly $300 million to shareholders through our share repurchase program during 2023. Since we initiated our $1 billion share repurchase authorization about 16 months ago in November of 2022, we've bought back about $470 million of our stock, roughly 10 million shares as of the present date. This is a tremendous accomplishment and reflects our management and board's commitment to our capital allocation strategy. Lastly, as a key accomplishment in 2023, we began operations and reported results under our new four business unit structure. This was the culmination of years of effort and analysis. This was our first year of operation under our new structure, driving distinct B2B and B2C businesses, as well as starting at VAER, our supply chain logistics business, that has a nationwide coverage and global sourcing presence. Our new structure helps to unlock ODP's potential, leveraging multiple routes to market and providing greater transparency and visibility into the valuable components of our business. And we've learned a lot during our first year of operating under our new structure, some which has led us to Project Core, our business optimization program designed to drive further efficiencies in our business and enhance our core focus. I'll provide more on the elements of Project Core later in my discussion. Now moving on to highlights of our business unit performance starting with ODP Business Solutions. ODP Business Solutions, our B2B distribution business, which as a reminder serves large enterprises including over 50% of the Fortune 100, as well as medium and small business, delivered strong bottom line operating results in the year. Business Solutions expanded its margins and generated meaningful increase in operating income despite a slightly softer top line that was influenced by macroeconomic factors that cause more cautious enterprise spending, as well as a flattening of return to office trends. Notwithstanding the more restrained level of business spending, we continue to win new accounts and believe our revenue backlog opportunity is positioned to outpace other market participants, resulting in share gains. Additionally, as we mentioned on our last call, we are still working on the final stages of onboarding some of our more recent large enterprise wins that have taken longer to implement, but we expect to have them up and running in the first half of this year. Also of note, our Federation companies, our regional tuck-in M&A entities, continue to be resilient, and we've been successful growing this business, which now generates well over $600 million in revenue on an annual basis. This market continues to be highly fragmented, and our disciplined M&A approach gives us a tremendous runway to keep growing our platform strategically over time. Our adjacency category penetration remained at 44% of the total division revenues. Adjacency categories include cleaning and break room products, as well as furniture, technology products, and copy and print services. As a notable KPI for ODP Business Solutions, our adjacency category penetration may fluctuate from quarter to quarter, but our long-term objective is to consistently grow these categories both on an absolute dollar and percentage basis as we expand our value proposition and continue to leverage our strengths and core categories. ODP business remains competitively strong with its customer-first approach, including a net promoter score rating above 70%, retaining and winning new business with a continued 98% renewal win rate, helping drive net new business wins. While we see continued near-term top-line challenges in the first half, I couldn't be more excited about our long-term prospects and our strong commitment to driving value for our customers across both core and adjacency categories. 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 small business, education, and home office customers. This division continued to provide a positive shopping experience for its customers throughout the year, maintaining strong NPS exceeding 70% among the best in the industry. Office Depot drove strong operating income and free cash flow results, despite the continued challenging macroeconomic environment impacting the top line. The revenue decline was driven by a combination of fewer stores and services compared to last year, related both to planned store closures as well as from lower in-store and online traffic and demand. Much of the weaker demand was driven by the slowing economy and higher inflation moderating the pace of consumer spending and impacting overall demand both in-store and online. Stronger sales of copy and print services were more than offset by lower tech and workspaces sales as well as lower sales in other core categories. When eliminating the favorable impact of sales from the 53rd week included in last year's results, comparable store sales were down approximately 5% for the year as lower retail and online traffic outweighed higher conversion. From an operating standpoint, margins were flat with last year as the team worked to offset some of the top-line challenges. We remained disciplined with pricing scenarios and our gross margins went up as we worked to maximize the profitability of every interaction. Moving forward, we expect to continue optimizing our store footprint as we work to achieve flat comps over the next couple of years. We're also putting in place several initiatives to drive sales, including launching our Education 365 initiative. This initiative, which includes both our B2B and our omnichannel business, is an integrated year-round approach to improve our reach and better serve our education customers, including teachers, students, parents, and school systems. We are already seeing some good reception from local districts here in Florida on our ability to do more with them every single day versus only during the peak back-to-school season. We're also remaining committed to expanding our offerings to all customers, including our expansion to new categories and continuing to roll out our in-demand TSA signup service to more stores throughout the year, which we expect will help drive additional store traffic during the year and beyond. We remain encouraged by the potential these efforts have on the future. And finally, over the past two months and under our board's direction, we re-evaluated the merits of fully separating our B2C business as a way to increase shareholder value. As part of this process, we retained a top three strategic consulting firm as well as the support of an investment bank to review the merits of a separation. While we believe there is a significant value creation in our unique routes to market, at the present time, we do not see a full separation of our B2C business as a material avenue for additional shareholder value creation given certain disenergies and costs associated with the separation. Now turning to our progress at VAER. As a reminder, VAER is our world-class supply chain services and logistics provider, with core competencies in distribution, fulfillment, transportation, and global sourcing and purchasing. Their assets and capabilities include 8 million square feet of infrastructure through our nationwide network of distribution centers, crosstalk, and other facilities throughout the United States and Canada, a global sourcing presence in Asia, a large private fleet of vehicles, and next-day business through delivery to 98.5% of the U.S. population. They serve the needs of their primary internal customers, Office Depot and ODP Business Solutions, equally as well as four other third parties through our procurement and supply chain expertise. As I pointed out in previous calls, a key area of focus to assess VAERS success and value creation is by looking at our progress with external third-party customers. In its first year of operating as a standalone business, Bayer is making tremendous progress and has exceeded expectations, efficiently providing service to its internal customers while continuing rapidly growing its business with third-party customers. Throughout the year and quarter, Bayer continued to add new external customer logos to its slated business, providing service for some of the nation's most renowned brands, which continue to drive revenue EBITDA growth from third-party customers. In fact, third-party revenue from external customers was up 25% over last year. Most importantly, we exceeded our EBITDA goals as EBITDA from third-party customers more than doubled up 120% versus last year. Bayer also made tremendous progress on its modernization roadmap through the year as they built additional capabilities in information systems that run the business. Bayer is partnering with world-class tech companies and deploying a Gardner Magic Quadrant-level tech stack that positions us to manage our business, improve service levels, and provide the flexibility necessary to deliver services to external third parties more effectively. As one example, VAERS successfully developed and is deploying an in-house flow path technology that we call VAER Kinetic that provides critical cost intelligence to optimize our operations and service levels for our customers. VAERS also deploy new warehouse management systems that support our operations and automate tasks, improving our ability to provide services to third party customers. We are very encouraged by Veris' strong progress and how this positions ODP to drive profitable growth in this higher multiple business. Now turning to Veris on slide nine. Veris, our digitally native B2B procurement platform launched about a year ago, continues to enhance its platform with new features and functionality and continues to deliver values to its customer. While Veris' revenue ramp has been slower than we originally anticipated at this point in its journey, we remain encouraged by the value proposition it provides to both customers and suppliers. While Varus continues to be strategically positioned to capture more of the procurement and supply chain ecosystem, we've begun a process through Project Core to evaluate the business further, including its run rate costs. Now moving on to Project Core. As we continue to evolve, and consistent with our low-cost model approach, today we announced an initiative called Project Core, our business optimization program. We are launching this initiative after gaining insights from our first year of operations under our new four business unit structure. Project Core is a comprehensive initiative aimed at further streamlining our operations, sharpening our focus on our core business, while increasing shareholder returns for a new $1 billion share repurchase authorization. This broad-based plan includes cost efficiency actions across the entire enterprise and optimizing our organizational structure to support the future growth of the business. This initiative also includes cost-reduction actions at Varus as we further work through the strategic options from that business. I would add that we expect to provide a full update of our Varus review, including cost actions, by our first quarter earnings call in early May of this year. We are excited about our continued evolution of what Project Core will deliver to the company and its shareholders as we focus on continuous improvement across the business to drive EBITDA and free cash flow growth, while delivering value to shareholders through additional share repurchases. We anticipate this comprehensive plan will generate annualized savings in the range of $50 million to $60 million when fully implemented. These savings will be achieved through cost efficiency measures across the entire enterprise, including organizational, supply chain, and COGS efficiencies, as well as further realignment of incentive plans to drive additional operating performance. In connection with Project Core, We're excited to announce that our Board of Directors approved a new fresh $1 billion share repurchase authorization valid over the next three years. This new authorization replaces the previous one, which had approximately $530 million left on the authorization. We are excited about enhancing our share repurchase program and the expected increased pace of the share buybacks in the near term. With that, I will turn the call over to Anthony Scaglione for a more detailed review of our financial results.