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.