The ODP Corporation

Good morning and welcome to the ODP Corporation's third quarter 2024 earnings conference call. All lines will be in a listen-only mode for today's call, after which instructions will be given 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 Third Quarter 2024 Earnings Conference Call. This is Tim Peratt, and I'm here with Jerry Smith, our CEO. Also joining us on the call today is Max Hood, our Chief Accounting Officer and Co-Interim CFO, and Adam Haggard, our Senior Vice President of FP&A and Co-Interim CFO. During today's call, Jerry will provide an update on the business, focusing much of his commentary on our results and accomplishments for the third quarter of 2024, including the progress we are making on our B2B pivot and initiatives to drive shareholder value. After Jerry's commentary, Max will then review the company's third quarter financial results, including highlights of our divisional performance, followed by Adam, who will highlight our balance sheet and outlook. Following our comments, we will then 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. 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'll now turn the call over to Jerry Smith. Jerry?

Thank you, Tim, and good morning to everyone joining our call today. We appreciate you being here with us to discuss our results and accomplishments for the third quarter of 2024. This morning, I'll cover our recent performance along with our progress in our B2B pivot and the initiatives we're implementing to position the business for future growth. As you can see in our press release this morning, our results in the third quarter were below expectations, driven primarily by challenges in our retail division's performance. Weak macroeconomic conditions impacted demand in both our B2C and B2B channels during what proved to be a highly competitive back-to-school season. This was further compounded by major hurricanes negatively affecting customer activity and some of our operations in our largest service areas in the South. Despite these challenges, we're making significant progress on our strategic B2B pivot. By leveraging our core strengths, we're accelerating our pivot and gaining traction, securing key B2B contracts in our traditional business categories, while expanding our influence in adjacent high-value industry sectors where our expertise also resonates. Although it would take time for these efforts to be fully reflected in our results, our progress is helping us regain momentum and position ODP to pursue sustainable, high-growth market segments now and in the future. Let me provide more insight to our results and accomplishments for the third quarter, and then I will highlight a few key points about our strategy and focus as we move forward. As I mentioned, our overall performance in the quarter was impacted by ongoing challenging macroeconomic conditions impacting demand during a very competitive back-to-school season, and creating headwinds into our efforts to regain revenue traction. The largest impact was felt in our BDC division, Office Depot, where consumer traffic and demand were lower due to challenging factors I mentioned, along with changes in spending priority. This wasn't unique to us. Much of the retail industry faced similar challenges. Overall for the industry, back-to-school demand declined compared to last year, down about 5%, while consumers prioritized their budgets amidst rising energy and food costs. Additionally, the major hurricanes that hit our largest markets disrupted customer activities, caused temporary store closures, and affected surrounding communities. Fortunately, all of our employees are safe. However, the business impacts were still being felt as we entered the fourth quarter. Similar conditions affected our B2B segment, ODP Business Solutions. The challenging macroeconomic environment, including enterprise-level workforce reductions, continue to restrict spending during a highly competitive period. While we have yet to regain stronger revenue traction, we do believe that the top line trends have largely stabilized. Daily sales have shown more consistency over the past several weeks and throughout much of the quarter, giving us growing confidence that we've reached the bottom of the cycle. Furthermore, we're seeing a stronger pipeline of exciting opportunities, which we're successfully converting into new business wins. More to come on this in a few minutes. And in our supply chain business, VAER, we continue to see great progress as they execute across their growth strategy, attracting new third-party customers and driving healthy increases in external revenue up about 30% over last year. VAER is also executing on its tech modernization roadmap, investing in integrating key technologies supported by Gardner Magic Quadrant-level partners and significantly advancing its capabilities and service levels. And while the brand VAER is still relatively new, it leverages the long history of supply chain excellence we have built servicing both retail and B2B customers. VAER indeed represents a key B2B pivot for ODP, and its future is very bright. So overall, while it was a challenging quarter for the business, we are making strong progress on our B2B pivot and securing new business wins. Let me highlight some of this progress and key points regarding this strategy as we move forward. This is shown beginning on slide five. Recognizing the evolving consumer dynamics and the opportunities in the enterprise space, we are accelerating our pivot to B2B. Despite some perception of ODP as a retail-only business, our true strength lies in our robust B2B asset base built over the last 40 years. Unlike traditional retailers, we can leverage our nationwide supply chain, extensive B2B customer base, compelling value proposition, and strong balance sheet to drive sustainable EBITDA and cash flow growth. And we're making significant progress, capturing major new business wins and building momentum. In our business solutions division, our pipeline is expanding, and today we're thrilled to announce a key new business win representing one of our largest B2B contracts in company history. This new contract, worth up to $1.5 billion over a 10-year period, will allow our new partnership to utilize our comprehensive offerings, national distribution, and e-commerce platform to provide excellent service to customers. While we're not able to disclose the name of the new customer at this time, we will provide more specific details when appropriate in the future. We are very excited about this trajectory-changing win for ODP, and we've already begun the onboarding and transition process. Also, within ODP Business Solutions Division, and in alignment with our strategic growth objectives, we're actively pursuing opportunities in higher growth adjacent industry segments. Specifically, we're focused on building long-term distribution relationships in product and service categories that go beyond our traditional office supply offerings. And I'm happy to report that we're making significant strides in this area, forging new relationships in adjacent industry segments where our core competencies resonate. In fact, One of the areas that we are targeting and is showing great promise is the hospitality industry. The hospitality industry is a large and growing market segment, and our core strengths in supply, distribution, and service reliability are an excellent match to meet the needs and requirements of customers in the space. We are very excited about pursuing growth in this industry segment as it marks an important step in our B2B evolution and spotlights our distribution and supply chain proficiency, our ability to supply products beyond office supplies, and our commitment to service excellence. We're also continuing to execute our strategy at VEHR, growing our supply chain business and gaining momentum by attracting new third party B2B customers. We're already serving some of the most recognized internationally known brands, providing essential supply chain services that support their operations. Building on the success, VEHR recently won a major contract with one of the world's largest social media focused e-commerce companies to deliver warehouse and fulfillment services for their online sales. We've recently invested in additional resources and integrated their products into our distribution centers, onboarding this customer in record time. The feedback to date has been excellent, and we are poised to deliver exceptional service during upcoming holiday season. This relationship is not only significant in size, but also represents a pivotal moment for ODP, positioning us to pursue further growth in supply chain services for e-commerce companies. So overall, we're making significant strides in our B2B pivot, successfully capturing meaningful new business and positioning ODP to pursue growth in new, valuable industry segments. And as a component of this transformation, we've also streamlined operations by completing the sale of our various division. This action simplifies our business structure and removes future capital commitments to VAERS outside of the transaction, allowing us to retain a minority stake to benefit from any potential future growth. We're also encouraged by our ongoing comprehensive strategy review with the board, which includes the ongoing assessment of our B2C business to ensure we adopt the optimal operating model for the future. We have significant flexibility in a retail business with an average store lease life of just less than three years which affords us the opportunity to continue evaluating our store footprint strategy to optimize this business. So we're making excellent progress in our pivot, securing new business, developing relationships to expand into related industry segments where our core competencies excel, all positioning ODP to drive sustainable EBITDA and cash flow in the future. Next, we're accelerating our investment in core B2B resources to capture B2B these large opportunities and drive top-line growth. Our capital allocation strategy remains centered on investing in areas that offer the highest returns. And with that focus and the goal of building a stronger foundation for sustainable growth, we have an enormous opportunity to invest into our core business to improve our future trajectory. We're prioritizing investments in talent, operations, and technology at both VEHR and Business Solutions positioning our B2B businesses for growth. We're very excited to invest in these B2B growth initiatives as we believe this offers the best use of capital and generates the highest return on investment. Given our plans to reprioritize our capital allocation into our core to drive growth, we expect to substantially reduce the pace of our share repurchases. We believe this investment approach will maximize long-term value for shareholders. Additionally, As we accelerate investment in our core business against the backdrop of our year-to-date performance and challenging macroeconomic environment, we have decided to modify our operational guidance for 2024. In summary, despite the near-term challenges, we have an attractive path to the future, leveraging our core strengths and accelerating our B2B focus. While it is taking time to be reflected in our results, We are making meaningful progress to regain traction, and we're building a more sustainable foundation to drive future profitable growth. We're already seeing progress in prioritizing our investments for the future in our core B2B business to capture these opportunities. Our team is committed and focused, confident in our operational excellence to drive long-term success. With that, I will turn the call over to Max Hood.

Thank you, Jerry, and good morning to everyone on the call. I'm Max Hood, Chief Accounting Officer and Co-Interim CFO. I would like to cover the specifics of our results for the third quarter on slide seven. Please note that our results as presented are for continuing operations. We generated total revenue of $1.8 billion in the quarter, which was down about 11% compared to last year's third quarter. This was primarily driven by lower sales in Office Depot including the effect of 53 fewer stores in service compared to last year and lower volume in a highly competitive back-to-school season, as well as lower sales in ODP business solutions. GAAP operating income in the quarter was $102 million versus $108 million in the prior year period. Operating results in the third quarter of 2024 included $61 million of credits, primarily due to the company recognizing $70 million of income related to legal matter monetization, where the company is engaged in legal proceedings as a plaintiff. This was partially offset by $2 million in net merger and restructuring expenses and $7 million non-cash asset impairment related to the operating lease right of use assets associated with the company's retail store locations. Excluding these charges, our adjusted operating income for the third quarter was $41 million compared to $112 million in last year's third quarter. Unallocated corporate expenses were $19 million in Q3. Adjusted EBITDA was $62 million in the quarter compared to $138 million in last year's third quarter. This includes depreciation and amortization expense of $24 million in the third quarters of 2024 and 2023, respectively. Excluding the after-tax impact from the items mentioned earlier, adjusted net income from continuing operations for the third quarter was $24 million, or $0.71 per diluted share, compared to adjusted net income of $85 million, or $2.17 per diluted share in the prior year period. Turning to cash flow. Operating cash flow from continuing operations in the quarter was $81 million, which included about $10 million of restructuring spend. This was down compared to $120 million in the same period last year, primarily due to the flow-through impact of lower sales and timing related to working capital. Capital expenditures in the quarter were $22 million versus $20 million in the prior year period, reflecting growth investments in the company's core operations. Adjusted free cash flow in the quarter was $68 million compared to $102 million last year. Now turning to our results in our business units, starting with our B2B distribution division on slide 8. ODP business solutions performance was impacted by the continued weak macro environment and challenging business conditions, including the effects of well-publicized corporate layoffs These conditions led to continued tight budgets and constrained enterprise spending, all against a very intense competitive period for the business. Additionally, the hurricanes also impacted performance, shutting down distribution centers and disrupting business usage in our largest markets. While we have seen pressure throughout much of this year in our B2B division, as Jerry mentioned, it does not appear to be getting worse, and top line trends have largely stabilized. Our daily sales trends have remained generally consistent over the past several weeks, giving us greater confidence that we are at the bottom end of the cycle. Revenue was $916 million in the third quarter, which was down about 8% compared to last year, driven by the factors I mentioned. From a product standpoint, most categories were lower on a year-over-year basis, as were the sales of technology products, a factor that many other companies are experiencing industry-wide. Lower sales of larger ticket items in our furniture category also contributed to the softer top line. While we expect some enterprise softness to remain in the near term, we are encouraged by the early signs of traction resulting from the initiatives that we've put in place. We just signed one of the largest contracts in our company's history, and we're beginning to see better deal flow and larger opportunities building in our late stage pipeline. And as Jerry mentioned, we are well positioned to target additional growth opportunities in the large and growing non-traditional industry segments, namely in the hospitality arena. Breaking down our sales data further, our adjacency product categories as a percentage of total revenue, a primary KPI, was 44% in the quarter, generally consistent with last year and recent trends. From an operating perspective, the flow-through effect of lower revenues, pricing mix, and the related fixed cost deleveraging resulted in operating income of $28 million in the quarter, compared to $56 million in the prior year period. EBITDA margins were approximately 4% in the quarter, down year over year. While we are disappointed with our performance in the quarter and year-to-date results, we are encouraged by the traction we're gaining on our initiatives. leveraging our strong competitive position and value-added capabilities, winning new business, and positioning to target higher growth industry sectors in the future. Now, turning to our results in our consumer division, Office Depot, as shown on slide nine. In the third quarter, Office Depot's top line continued to be challenged as the weaker economy and the impact of inflation reduced the pace of spending during what turned out to be a highly competitive back-to-school season. Demand in certain back-to-school categories industry-wide were lower, compounded by consumers reprioritizing spend due to rising energy and food costs. Additionally, fewer stores in service versus last year, compounded by the hurricanes that hit our largest service territories, also negatively impacted sales. Reported revenue for the quarter stood at $861 million, a 15% decline. driven by 53 fewer retail stores in service versus last year, as well as lower traffic and transactions in both our retail and e-commerce channels. Demand was lower across most categories, including supplies, print, and furniture. On a comparable store basis, sales were down about 10% as lower traffic, fewer transactions, and lower average order volume outweighed strong conversion metrics. From an operating perspective, operating income was $23 million in the quarter, driven by the flow-through effect of lower sales, mix, and deleveraging in supply chain and occupancy costs. Moving forward, we will continue optimizing our store footprint and look to further expand our customer value proposition through a wider variety of products and services. We're also enhancing our value proposition through a multitude of partnerships, including with Telos for our TSA sign-up programs available in about 170 stores, and relationships with Dormify, Hallmark, and Dun & Bradstreet, among others. Also, we're taking the learnings from our recent performance in back-to-school category sales, and we're implementing strategies that focus on earlier execution of our capabilities, such as school supply lists and teacher wish lists for their classrooms. We also have refined our pricing and promotion strategy moving forward to maximize elasticity of demand. Now, turning to VAER's performance as shown on slide 10. VAER continued to drive strong momentum in the quarter, managing the lower volumes from its internal customers, ODP Business Solutions, and Office Depot, while continuing to build its momentum and driving revenue growth from third-party customers. On a consolidated basis, Veyr delivered sales of approximately $1.2 billion, derived predominantly from supporting our purchasing and supply chain operations, which are effectively eliminated upon a consolidation. Veyr continued to make strong progress with third-party customers, including winning a major contract with one of the world's largest social media-focused e-commerce companies, as Jerry mentioned earlier. Keeping in mind that some of Veyr's third-party profitability is accounted for as a contra expense instead of flowing through revenue, for Q3, Veyr delivered third-party revenue of over $14 million, or approximately a 30% increase over last year. Veyr drove third-party EBITDA of $3 million slightly down year over year as the company invested in resources to quickly onboard its slate of new customers in the quarter. Now turning to other recent accomplishments, In October, we completed the sale of our VERUS division while retaining a 19.9% stake in the company after the sale. As part of the agreement, we will fund up to $4 million of expenses that may be incurred by VERUS following the transaction date until the end of 2025. Beyond this, we have no other funding obligations to VERUS. Other terms of the transaction did not result in a materially different impact than we previously estimated in our Q2 financial statements. The completion of this sale unburdens our P&L and reduces cash flow demands while continuing an invested interest in future growth opportunities. Now, I'll turn it over to Adam to cover our balance sheet highlights and amended 2024 guidance.

Thank you, Max, and it's great to be here with everyone this morning. I'm Adam Haggard, Senior Vice President of FP&A and Co-Interim CFO. Turning to slide 12, our balance sheet liquidity position remains strong. ending the quarter with total liquidity of $728 million, consisting of $192 million in cash and cash equivalents, including $11 million that is presented in current assets held for sale related to the VAERS division, and $536 million of available credit under the fourth amended credit agreement. Total debt was $246 million. Moving on to capital allocation. We continue to execute our capital allocation strategy both investing in the future of our business while returning capital to shareholders under our buyback authorization. In the third quarter, we repurchased just over $100 million of our stock and a total of $295 million for the year to date. As Jerry mentioned, moving forward, we are redirecting investment into core B2B resources to capture the large growth opportunities that are before us at ODP Business Solutions and at VEHR. Considering the large amount of shares we already repurchased this year and our focus on reprioritizing investments into our core to drive growth, we expect to substantially reduce the pace of our share repurchases as we close out the year. We have a tremendous opportunity to invest in growth in our B2B businesses, and we believe this approach will drive the highest ROI and create long-term value for shareholders. Now turning to our guidance on slide 13. As you heard this morning, Our results here to date have clearly been pressured by the continued challenging macro and business environment, strong competition, and the impacts from the recent hurricanes. That said, we are making very meaningful progress on several initiatives to drive sustainable growth in the future. While it does take time to be reflected in our results, we are investing in these opportunities and are confident we are on the right path to create increased shareholder value. Considering our performance to date, current market dynamics, and our decision to fast-forward investments in future growth opportunities, we are amending our 2024 guidance as follows. We are maintaining our revenue guidance at approximately $7 billion for 2024. We're lowering our adjusted EBITDA outlook to a range of $260 to $300 million, and our adjusted operating income to a range of $160 to $200 million. We are also lowering our outlook for adjusted earnings per share to a range of 310 to 380 per share. And finally, we are suspending our guidance for adjusted free cash flow as we invest in the exciting growth opportunities that we previously mentioned. Overall, to reiterate, our revised guidance takes into consideration the near-term investment demands occurring before year-end and initiatives to capture new growth opportunities we described, including the pursuit of attractive new industry segments as discussed. With that, I will turn the call over to Jerry for his final remarks.

Thank you, Adam. Before I turn it over for Q&A, I would like to highlight four key points about our performance and strategy and the reason for our enthusiasm as we move forward. First, there's no question that our business has faced challenges this year, and our overall performance has been below expectations. While it has been difficult, we are working to navigate through the challenging macroeconomic environment, and we're making progress in positioning our business to gain better traction in the future. Second, underneath the surface, we're making significant progress in leveraging our core strengths to evolve our business to higher growth and more sustainable B2B market opportunities. Our core strengths are centered around our flexible nationwide supply chain, our large and growing B2B customer base, and our strong value proposition, all backed by a solid balance sheet. Third, we are gaining traction and building momentum for the future. We're leveraging these assets and winning meaningful new contracts in our traditional business, including winning one of the largest contracts in our company's history. We're also evolving our capabilities to pursue growth in new non-traditional industry segments. These new industry segments are relevant adjacencies to our core and offer tremendous opportunities for growth. And as I mentioned, one of the areas we are targeting and showing great promise is in the hospitality industry segment. And last, we are strategically investing to seize these opportunities. We believe that channeling capital into our core areas to drive growth will yield strong returns on investment and deliver the best long-term value for our shareholders. While it may take time for these efforts to reflect in our results, we have a clear and promising path ahead. Our team is focused on capturing these B2B opportunities, driving operational excellence, and delivering long-term value to our shareholders. With that, operator will turn it over for questions and answers.

Thank you. At this time, we will conduct the question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Lasser of UBS. Your line is now open.

Good morning.

Thank you so much for taking my question.

It's on how did ODP's market share trend across both the business solutions division as well as retail within not just the last quarter but over the last few quarters? Because it does seem like there is progressive weakness in the business driven in part by a loss of customers, and that is harder to ascribe to simply the macro environment. Thank you very much, and then I will follow up.

Hi, good morning, Michael. This is Jerry, and I'll let Adam and Max jump in as well. I would say we're holding our own. I mean, you saw the B2B win we just had. That's a very, very sizable win on the B2B space in the traditional office supply segment. That obviously will be extremely accretive to us as we ramp up that over a period of time. From a B2C perspective, definitely I would say we're holding our own. The hurricane impact and having three hurricanes in the quarter in our biggest markets in Florida and Texas, those weren't just a couple-day type of impact. We had distribution centers. We had B2B business all impacted by that impact. But I think I'll let Max and Adam jump in, but I don't think we're losing a huge amount of market share to a specific person.

Yeah, and I'll jump in as well. Hi, Michael. This is Adam Haggard. One of the nice things that we're seeing is that the trends moving forward are definitely more positive for us as we exit Q3 into Q4 and heading into next year. We're very optimistic. the new wins that we have, and we think that they're going to be really accretive to the business as we move forward, as time moves on. Obviously, those wins need to ramp up, and they'll take some time, and we need some near-term investment around them, which is great. It's a great problem to have for us, and we really are excited about the trajectory-changing new wins that we have underneath our belt.

And October and November has been stronger across, especially the B2C business compared to Q3.

Okay. My follow-up question is, obviously, there's a ton of moving parts with ODP Corps, you know, but the market's going to extrapolate some of the recent performance into next year. So, A, why is that wrong? Why should the market not just take what has been the performance of the last few quarters and think that's a reasonable basis? on how to look at 2025 from a profitability perspective, and B, how will the new distribution agreement as well as customer wins quantifiably impact ODP Corp's profitability next year? Thank you very much.

So I'll jump in first and the guys jump in over the top after. But the big difference is that the trajectory changing opportunities. I talked about that last time. There's three we're working on. We've delivered two. Obviously, the $1.5 billion over 10 years is very, very significant and working a lot of other pieces. So we think that plus the You know, continued progress we made in VAR from a revenue perspective are trajectory changing. There's other things we're working on also that is new business that we're not disclosing and discussing at this time. So, and I think we're seeing some stabilization from a market perspective that, you know, which has given us some optimism. The second piece, and I want to emphasize, is we're going to go look at the optimal operating model for our B2C business. And just at a high level, we addressed SG&A really well at this company over the last six or seven years. we're really going to start digging into the fixed asset structure cost of the business. And we think that is a significant driver for future profitability as we assess that. And we'll come back in the late February, early March when we do our earnings for 2024. And I think we'll have a very comprehensive strategy update for the market. And we're going to be able to address an exciting path to the future of how we get back to a profitable growth across the business. And again, and lastly, We do a really good job from an operating model perspective of driving cash, and we're going to continue to do that and driving costs across the business. But I want to use the three words, optimize for growth. That's going to be a rallying cry of what we've focused on strategy-wise as a board, and we think we have the right adjacency markets that are similar in size, Michael, to our office supply markets, and they're growing at a 4% to 6% CAGR depending on the market. And those markets... fit perfectly with what our capabilities and strengths are from a supply chain, customer base. Many of the customers are already customers of ours in some of these markets, and so we're going to go leverage the entrance in these markets as a way to grow as well. Optimize for growth, optimize the B2C structure, continue to look at the fixed cost structure, and the new shoots are all ways to get a different trajectory in the business in 2025.

one moment for our next question. Our next question comes from the line of Greg Burns of Sudoti. Your line is now open.

Thanks. I just wanted to maybe follow up on the new industry segments you're targeting. You gave us just a little bit of color, the size and the growth of some of those markets, but could you just help us understand how you're penetrating those markets, what the conversations are like trying to move into these new markets. Sounds like hospitality is maybe a little bit more developed than maybe some of the other areas that you're looking at. Any other kind of additional color on how you're approaching expanding into these non-traditional office categories?

Yeah, the key is it's leveraging our core strengths. And some of the customers in these markets are already existing customers. And honestly, the conversations really were created out of conversations with our Dave sales team and the customers. And so we found that our core strengths can be leveraged in some of the other segments they operate in. And what I like about these segments are, A, they're growing, unlike office supplies, which is great. It's a similar market size. We already have a number of the customers as customers. We already have trucks delivered to a lot of these locations as well. so you can leverage that supply chain infrastructure. And you need that competitive value we have of that same-day, next-day delivery, that complex delivery type of capability to locations, the ability to have visibility of inventory and tracking that. A lot of things you can't just get from a normal e-commerce type of play. And so it fits well from a competitive perspective, and we think there's a growth opportunity there. And we're well into conversations, and we're going to attack this market aggressively. I love the fact it's literally almost the same size as our current B2B office supply market as well. So getting into the growth market, same skill set, same supply chain, same customer footprint, same sales team, et cetera, et cetera.

Okay. And obviously you announced the large – $1.5 billion deal, but what does the pipeline look like in terms of maybe size of opportunities relative to maybe that $1.5 billion deal you announced and how far along maybe some of these conversations are where you maybe have line of sight on signing a couple of new kind of trajectory-changing deals in the first half of next year?

Yeah, so on the $1.5 billion deal, that deal is signed, and we're already working on the transition and implementation plans across that business. So you'll see that grow throughout. We'll start to ship a little bit this quarter and a lot more into 2025. And so super happy because that is obviously a tremendous number of basis points of growth for us as a company. A number of other deals are in the pipeline. Obviously, for competitive reasons, I'm not going to get a lot of detail. But we have some other trajectory-changing opportunities we're going to work on through Q4 and Q1. And we're very optimistic that I really want to emphasize that we think the B2B pivot is working. And this is the first stake in the sand on that, plus the VAIR supply chain opportunity is a significant opportunity. And as I said in the last earnings, it's as big as what 2023 revenue was for VAIR. And so that is the case and could be higher than that. And so we're going to continue to grow that opportunity because we think that can yield additional results for the bear business also. So we think our future is in B2B. We're going to go look for the optimal operating model for B2C. Again, I want to really focus, have an investor here, but we're really going to look at the fixed cost infrastructure around that business and find the optimal model that will put us in a more profitable and competitive position going forward.

okay um and then when we when we think about kind of the level of reinvestment that you're making you didn't talk too much about project core uh and your prepared remarks but how should we think about kind of what you've talked about targeting against 100 million you're targeting from project core versus maybe what's going back in the business is there a net number we should think about next year or for in total let me talk high level then i'll flip it over to max and adam but uh

I mean, Project Core is pretty much complete. We know $100 million for 2025 operating is the right number. And, again, as we look at the optimal operating model for our B2C business, we're going to continue to look at the fixed cost structure plus the SG&A structure across the businesses. And more to come in the late February, early March meeting. But, Max, Adam, anything to add?

Yeah, hi, Greg. This is Max. I just wanted to add quickly – progress on project core. We are right on track of where we want to be. The majority of actions are in this year and, and we're substantially complete with our spend. So right on track for what Jerry said for next year.

Okay. But just in terms of what you're now talking about, reinvesting back in the B2B so that you're, you're taking some of that a hundred and putting it back in the business. Is there like a net number maybe we should think about?

Now, yes, we're putting investment back into the business, but for competitive reasons, we want to make sure we can't disclose that. But we are investing in, obviously, inventory to ramp up the large new wind and obviously the infrastructure from a VAER perspective to ramp up the large customer we already have as well. So that we are making investments in those categories. And as we enter into Some of these other segments will make investments because those are new suppliers and new opportunities and new inventory also. But we think we did a great job of managing our inventory always, and we'll continue to do that. So we're not being disorderly from an investment inventory perspective. But it is taking some, in the short term, some of the cash. I do want to highlight we're not negative on cash. We're producing positive cash flow through the year. you know, we're just, because of these investments, it was hard to guide to the right, to the exact number. Adam, you want to add any color on that?

Yeah, no, it's a great point, Jerry, right? At the end of the day, we have a little bit of a near-term bubble of working capital investment that we expect between now and the end of the year, right? And we're highly focused on that return on invested capital and moving into these new green shoots that we see out there. So very exciting. Yes, we have a, a high degree of belief in our cash generation throughout the end of the year. We do believe we'll create positive cash between now and the end of Q4. So we'll be able to manage the near-term investment and creating a positive cash environment for ourselves. So exciting days ahead. We look forward to this opportunity to reinvest our capital as we move on.

All right. Thank you. Thank you so much.

One moment for our next question. Our next question comes from the line of Joe Gomes of Noble Capital. Your line is now open.

Good morning. Good morning, Joe. I was wondering, could you quantify the impact of the hurricanes for the quarter?

It's very difficult to do because, yes, we can quantify. A store was closed for this period of time. Here's the average store sales. But what it doesn't do is, and which we know is a much larger impact and harder to quantify, and I'm looking at my chief legal officer here because we've had that debate. We know it's a big number. But we had DCs, for example, closed after Helene and Milton in Florida, and that's Dave's B2B businesses. And we track – I sit in a daily retail B2C review with Kevin Moffitt every day, and we know – I mean, those regions were down substantially day after day. Haleen was probably the most impactful hurricane we've ever seen. And so hard to go quantify. As we compare that number to other regions, it was much, much lower. But it's hard to say this is the exact number, but it is – a big impact and, you know, three and three within the quarter. And we saw it leaning into Q4 as well, obviously with Milton. And so another reason why it's like, you know, you can't make up for hurricanes in a hundred plus days. And so, but it is a substantial impact, you know, and, but macroeconomic conditions are an impact as well. It's a competitive market as well. And so it, you know, all those things had an impact. So it's really hard for us to land on it on an exact number. But in my tenure here, it's the biggest impact we've seen.

Okay. And then on the adjacencies, I kind of want to tack that one more time. You mentioned hospitality. Maybe you can give us an idea of some of the other ones that you're looking at. Obviously, these people, these companies are getting the supplies that they need already. Is it similar competition, you know, some of the same on office supplies? Are you looking at and new competitors in that space? And if so, maybe, you know, give us some of the bigger competitors that you're going against in the new adjacent spaces.

Well, it's new competitors, new suppliers. And, for example, in hospitality, there are companies that we respect as competitors, but we also think they're, obviously, some of the conversations we're having, we think we have the ability to compete and to win and be effective there as well. We've got 40 years of experience in supply chain. We have a great supply chain. We've got great, you know, ability to go off and deliver that, you know, I'll say complicated type of delivery that's difficult to do from an e-commerce perspective or a different path. And it's really an adjacency segment. It's not a big step outside the core too far. And so we think we can compete. We think we can be cost competitive. I mean, the VAER business has ability to cost in a very unique way that very few people have. We built that tool internally. We have the ability to cost to a skew pick level, which very few 3PLs have. And so we know we can be competitive. We know we can do it at a competitive rate. And so we think it's a market we can compete in and put pressure on some of the competitors in space. Hey, but always respect competitors. I'm not going to go off and say, we think we can compete and be effective. Are we going to get 100% share? Heck no. But we're going to go off and we think we can compete into a growth market with the infrastructure we have, We do it – again, we deliver trucks to a lot of those customers already. So there's a fixed cost competitive infrastructure advantage. If that truck's already going there, it's incremental cost to add something else to the truck. And so we think there's a unique advantage that we have compared to others. And I think we're excited with that opportunity. And I think if you look at – beyond that, we think we can get into, for example, some of the same – suppliers that deliver into hospitality we think could deliver into some of the much larger healthcare areas. If you think how you fit out a hotel room, you can think similar to cruise ship lines, or you could think of hospitals or elder care homes, et cetera, et cetera. There's all kinds of opportunity. Again, leveraging the same delivery supply chain network, and again, to our core, a clear one-step adjacency at the most would But we think we can be competitive in all those areas. And Dave and his team and Tom and that team have done a great job of identifying this. And again, our customers helped identify some of these segments, which is fantastic. And so we're going to pivot hard to it. We're going to get into growth segments. And I think that's how we grow value in this business over the long term. Leverage our fixed cost infrastructure. Make sure it's optimal. Go get the B2B business growing and add value. Our capability is what we really do well at, and that's where we're going to go in. Okay, great. Thanks for taking my questions. Thank you. Appreciate it.

One moment for our next question. Our next question comes from the line of Michael Lasser of UBS. Your line is now open.

One quick follow-up question for you guys. When do you think you'll have enough visibility into your free cash flow generation to start providing guidance on that again? And is there a minimum that you would expect to be able to generate?

I'll let Adam and Max take that one.

So we know we'll have positive cash in Q4. That's going to be the key. The reason why we're not running with guidance right now on that metric is because there is a little uncertainty on the shifting of working capital needs that are warranted. Also, we're investing in people and processes. So we have a little bit of a technology investment that's going to be going on as well, which is going to utilize cash. So there's a little bit of a short-term bubble of volatility that we have to get through. But I can say that we do think that there will be a nice positive cash generation, just how much a little uncertain right now just because of all the opportunities we see in front of us and how we're allocating the capital in the right places at the right time to really propel ourselves into 2025. Thank you very much.

Thank you, Michael.

If there are no more questions, I will turn the call back over to Jerry Smith, ODP's CEO.

Thank you for our analysts as well as all our other listeners today for joining us. Again, we're not happy with Q3 performance, and we're doing our best to change that. We're seeing some stabilization here in the last three or four weeks and going into November. We are very excited about our harder pivot to B2B. We'll evaluate and find the optimized operating model for our BDC business. We'll come back to you in the next earnings piece of that. I've talked about trajectory changing opportunities. The last one, we delivered two big ones, and we're very pleased with that. And there's more to come, and we're going to continue to work on that. And we believe we have the right operating model. We have the right infrastructure. The supply chain was a huge asset for us. Our 5C culture, our low-cost model, and our ability. And we haven't talked about it at all. We have a strong balance sheet, and we continue to have a strong balance sheet, and we're liquid, and we're continuing to generate cash as a company. And so we're going to invest that cash into growing this B2B segment, both the 3PL supply chain segment as well as the B2B traditional segment, our federation, as well as our hospitality and other segments going forward. So thank you for your time today. Come back to you in 90 days with a fuller plan on the B2C optimal optimization plan. Thank you, team, for joining us today. Awesome.

Thank you for your participation. This concludes today's call. You may now disconnect.